-----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, S/YaQA1ifeXZYi4B3UA7pgOIErTWoy3uuqvRVvxRRWFa3tylxHfFgJcCdDaqK4Pr +rEaxAdddilFOk6bZ9YIWA== 0001036050-00-000298.txt : 20000307 0001036050-00-000298.hdr.sgml : 20000307 ACCESSION NUMBER: 0001036050-00-000298 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PPL CORP CENTRAL INDEX KEY: 0000922224 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 232758192 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11459 FILM NUMBER: 559873 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 FORMER COMPANY: FORMER CONFORMED NAME: PP&L RESOURCES INC DATE OF NAME CHANGE: 19941123 10-K405 1 PPL CORPORATION FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _________ to ___________ Commission File Registrant; State of Incorporation; IRS Employer Number Address and Telephone Number Identification No. ------ ---------------------------- ------------------ 1-11459 PPL Corporation 23-2758192 (Exact name of Registrant as specified in its charter) (Pennsylvania) Two North Ninth Street Allentown, PA 18101 (610) 774-5151 1-905 PPL Electric Utilities Corporation 23-0959590 (Exact name of Registrant as specified in its charter) (Pennsylvania) Two North Ninth Street Allentown, PA 18101 (610) 774-5151 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - ------------------- ------------------------ Common Stock of PPL Corporation New York & Philadelphia Stock Exchanges Preferred Stock of PPL Electric Utilities Corporation 4-1/2% New York & Philadelphia Stock Exchanges 3.35% Series Philadelphia Stock Exchange 4.40% Series New York & Philadelphia Stock Exchanges 4.60% Series Philadelphia Stock Exchange Company-Obligated Mandatorily Redeemable Securities of PPL Electric Utilities Corporation 8.20% Series ($25 stated value)(a) New York Stock Exchange 8.10% Series ($25 stated value)(b) New York Stock Exchange (a) Issued by PP&L Capital Trust and guaranteed by PPL Electric Utilities Corporation (b) Issued by PP&L Capital Trust II and guaranteed by PPL Electric Utilities Corporation Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. PPL Corporation [ X ] PPL Electric Utilities Corporation [ X ] Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. PPL Corporation Yes X No _____ ----- PPL Electric Utilities Corporation Yes X No _____ ----- As of January 31, 2000, PPL Corporation had 143,696,625 shares of its $.01 par value Common Stock outstanding, excluding 30,993,637 shares held as treasury stock. The aggregate market value of these common shares (based upon the average of the high and low price of these shares on the New York Stock Exchange on that date) held by non-affiliates was $3,309,512,895. PPL Corporation held all 102,230,382 outstanding common shares, no par value, of PPL Electric Utilities Corporation, excluding 55,070,000 shares held as treasury stock. The aggregate market value of the voting preferred stock held by non- affiliates of PPL Electric Utilities Corporation at January 31, 2000 was $76,378,445. Documents incorporated by reference: Registrants have incorporated herein by reference certain sections of PPL Corporation's 2000 Notice of Annual Meeting and Proxy Statement, and PPL Electric Utilities Corporation's 2000 Notice of Annual Meeting and Information Statement, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1999. Such Statements will provide the information required by Part III of this Report. PPL CORPORATION PPL ELECTRIC UTILITIES CORPORATION FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 1999 ------------------------------------ TABLE OF CONTENTS ----------------- This combined Form 10-K is separately filed by PPL Corporation and PPL Electric Utilities Corporation. Information contained herein relating to PPL Electric Utilities Corporation is filed by PPL Corporation and separately by PPL Electric Utilities Corporation on its own behalf. PPL Electric Utilities Corporation makes no representation as to information relating to PPL Corporation or its subsidiaries, except as it may relate to PPL Electric Utilities Corporation.
Item Page PART I ------ 1. Business............................................................ x 2. Properties.......................................................... x 3. Legal Proceedings................................................... x 4. Submission of Matters to a Vote of Security Holders................. xx Executive Officers of the Registrants............................... xx PART II ------- 5. Market for the Registrant's Common Equity and Related Stockholder Matters............................................................. xx 6. Selected Financial and Operating Data............................... xx 7. Review of the Financial Condition and Results of Operations......... xx 7A. Quantitative and Qualitative Disclosures About Market Risk.......... xx Report of Independent Accountants................................ xx Management's Report on Responsibility for Financial Statements... xx 8. Financial Statements and Supplementary Data Financial Statements: PPL Corporation Consolidated Statement of Income for each of the Three Years Ended December 31, 1999, 1998 and 1997......................... xx Consolidated Statement of Cash Flows for each of the Three Years Ended December 31, 1999, 1998 and 1997......................... xx Consolidated Balance Sheet at December 31, 1999 and 1998......... xx Consolidated Statement of Shareowners' Common Equity for each of the Three Years Ended December 31, 1999, 1998 and 1997...... xx Consolidated Statement of Preferred Stock at December 31, 1999 and 1998....................................................... xx Consolidated Statement of Company-Obligated Mandatorily Redeemable Securities at December 31, 1999 and 1998............ xx Consolidated Statement of Long-Term Debt at December 31, 1999 and 1998....................................................... xx
PPL Electric Utilities Corporation Consolidated Statement of Income for each of the Three Years Ended December 31, 1999, 1998 and 1997......................... xx Consolidated Statement of Cash Flows for each of the Three Years Ended December 31, 1999, 1998 and 1997......................... xx Consolidated Balance Sheet at December 31, 1999 and 1998......... xx Consolidated Statement of Shareowner's Common Equity for each of the Three Years Ended December 31, 1999, 1998 and 1997......... xx Consolidated Statement of Preferred Stock at December 31, 1999 and 1998....................................................... xx Consolidated Statement of Long-Term Debt at December 31, 1999 and 1998....................................................... xx Notes to Financial Statements.................................... xx Supplemental Financial Statement Schedule: II - Valuation and Qualifying Accounts and Reserves for the Three Years Ended December 31, 1999......................... xx Quarterly Financial, Common Stock Price and Dividend Data........... xx 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................ xx PART III -------- 10. Directors and Executive Officers of the Registrants................. xx 11. Executive Compensation.............................................. xx 12. Security Ownership of Certain Beneficial Owners and Management...... xx 13. Certain Relationships and Related Transactions...................... xxx PART IV ------- 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... xxx Shareowner and Investor Information................................. xxx Signatures.......................................................... xxx Exhibit Index....................................................... xxx Computation of Ratio of Earnings to Fixed Charges................... xxx
GLOSSARY OF TERMS AND ABBREVIATIONS AFUDC (Allowance for Funds Used During Construction) - the cost of equity and debt funds used to finance construction projects that is capitalized as part of construction cost. Aguaytia - Aguaytia Energy, LLC, a consortium of energy companies involved in the development of gas pipeline and generating units in Peru. Atlantic - Atlantic City Electric Company. Bangor Hydro - Bangor Hydro-Electric Company. BG&E - Baltimore Gas & Electric Company. BGG - Bolivian Generating Group, LLC, an energy consortium with a 50% interest in an electric generating company in Bolivia. Burns Mechanical - Burns Mechanical, Inc., a PPL Spectrum unregulated subsidiary specializing in mechanical contracting and engineering. CERCLA - Comprehensive Environmental Response, Compensation and Liability Act. Clean Air Act (Federal Clean Air Act Amendments of 1990) - legislation enacted to address certain environmental issues including acid rain, ozone and toxic air emissions. CTC - competitive transition charge on customer bills to recover allowable transition costs under the Customer Choice Act. Customer Choice Act (Pennsylvania Electricity Generation Customer Choice and Competition Act) - legislation enacted to restructure the state's electric utility industry to create retail access to a competitive market for generation of electricity. DelSur - Distribuidora Electricidad del Sur S.A., an electric distribution company in El Salvador, a majority of which is owned by EC. DEP - Pennsylvania Department of Environmental Protection. DOE - Department of Energy. DRIP (Dividend Reinvestment Plan) - program available to shareowners of PPL common stock and PPL Electric Utilities preferred stock to reinvest dividends in PPL common stock instead of receiving dividend checks. DVY - DVY, Incorporated, a mechanical contracting and engineering firm acquired by Burns Mechanical in October 1999. EC - Electricidad de Centroamerica, S.A. de C.V, an El Salvadoran holding company and the majority owner of Del Sur. EC is jointly owned by PPL Global and Emel. ECR (Energy Cost Rate) - a tariff applied to PUC-jurisdictional customers to recover fuel and other energy costs. Effective January 1997, energy costs were rolled into base rates and the ECR was discontinued. EGS - electric generation supplier. EITF (Emerging Issues Task Force) - an organization that aids the FASB in identifying emerging issues that may require FASB action. Emel - Empresas Emel, S.A., a Chilean electric distribution holding company. EMF - electric and magnetic fields. Energy Act (Energy Policy Act of 1992) - federal legislation passed by Congress to promote competition in the electric energy market for bulk power. Energy Marketing Center - business unit within PPL Electric Utilities responsible for marketing and trading wholesale energy. EPA - Environmental Protection Agency. EPS - Earnings per share. ESOP - Employee Stock Ownership Plan. FASB (Financial Accounting Standards Board) - a rulemaking organization that establishes financial accounting and reporting standards. FERC (Federal Energy Regulatory Commission) - federal agency that regulates interstate transmission and wholesale sales of electricity and related matters. FGD - flue gas desulfurization equipment installed at coal-fired power plants to reduce sulfur dioxide emissions. H.T. Lyons - H.T. Lyons, Inc., a PPL unregulated subsidiary specializing in mechanical contracting and engineering. IBEW - International Brotherhood of Electrical Workers. ISO - Independent System Operator. ITC - intangible transition charge on customer bills to recover intangible transition costs associated with securitizing stranded costs under the Customer Choice Act. ITP - intangible transition property created under the Customer Choice Act, which represents the right to recover intangible transition costs through the ITC. JCP&L - Jersey Central Power & Light Company. LIBOR - London Interbank Offered Rate. McCarl's - McCarl's Inc., a PPL unregulated subsidiary specializing in mechanical contracting. McClure - McClure Company, a PPL unregulated subsidiary specializing in mechanical contracting and engineering. MOU - Memorandum of Understanding. MSHA - Mine Safety and Health Administration. NO\x\ - nitrogen oxide. NPDES - National Pollutant Discharge Elimination System. NRC (Nuclear Regulatory Commission) - federal agency that regulates operation of nuclear power facilities. NUG (Non-Utility Generator) - generating plants not owned by regulated utilities. If the NUG meets certain criteria, its electrical output must be purchased by public utilities under PURPA. OSM - United States Office of Surface Mining. OTR - Northeast Ozone Transport Region. PCB (Polychlorinated Biphenyl) - additive to oil used in certain electrical equipment up to the late-1970s. Now classified as a hazardous chemical. Penobscot Hydro - Penobscot Hydro Co., Inc., a PPL Global subsidiary which generates electricity for the New England market. PJM (PJM Interconnection, LLC) - operates the electric transmission network and electric energy market in the mid-Atlantic region of the U.S. PLR - Provider of last resort, referring to PPL Electric Utilities Corporation providing electricity to retail customers within its delivery territory who have chosen not to shop for electricity under the Electric Choice Program. PPL - PPL Corporation, the parent holding company of PPL Electric Utilities, PPL Global and other subsidiaries. PPL Capital Funding - PPL Capital Funding, Inc., a PPL financing subsidiary. PP&L Capital Funding Trust I - a Delaware statutory business trust created to issue Preferred Securities and Common Trust Securities. PP&L Capital Trust - a Delaware statutory business trust created to issue Preferred Securities, whose common stock is held by PPL Electric Utilities. PP&L Capital Trust II - a Delaware statutory business trust created to issue Preferred Securities, whose common stock is held by PPL Electric Utilities. PPL Electric Utilities - PPL Electric Utilities Corporation PPL Electric Utilities' Mortgage - PPL Electric Utilities Corporations' Mortgage and Deed of Trust, dated October 1, 1945, as supplemented. PPL EnergyPlus - PPL EnergyPlus, LLC, a PPL Electric Utilities unregulated subsidiary which supplies energy and energy services in newly deregulated markets. PPL Gas Utilities - PPL Gas Utilities Corporation, a PPL regulated subsidiary specializing in natural gas distribution, transmission and storage services, and the sale of propane. PPL Global - PPL Global, Inc., a PPL unregulated subsidiary which invests in and develops world-wide power projects. PPL Montana - PPL Montana Holdings LLC, a PPL subsidiary which generates electricity for wholesale and retail customers in Montana and the Northwest. PPL Spectrum - PPL Spectrum, Inc., a PPL unregulated subsidiary which offers energy-related products and services. PP&L Transition Bond Company - PP&L Transition Bond Company LLC, a wholly-owned subsidiary of PPL Electric Utilities formed to issue transition bonds under the Customer Choice Act. Preferred Securities - Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures (issued by two Delaware statutory business trusts). PRP - potentially responsible parties under Superfund. PUC (Pennsylvania Public Utility Commission) - state agency that regulates certain ratemaking, services, accounting, and operations of Pennsylvania utilities. PUC Final Order - final order issued by the PUC on August 27, 1998, approving the settlement of PPL Electric Utilities' restructuring proceeding. PUHCA - Public Utility Holding Company Act of 1935. PURPA (Public Utility Regulatory Policies Act of 1978) - legislation passed by Congress to encourage energy conservation, efficient use of resources, and equitable rates. PURTA - Public Utility Realty Tax Act. SBRCA - Special Base Rate Credit Adjustment. SCR - selective catalytic reduction. SEC - Securities and Exchange Commission. SER - Schuylkill Energy Resources, Inc. SFAS (Statement of Financial Accounting Standards) - accounting and financial reporting rules issued by the FASB. SIP - State Implementation Plan. SO\2\ - sulfur dioxide. Superfund - federal and state environmental legislation that addresses remediation of contaminated sites. SWEB - South Western Electricity plc, a British regional electric utility company. Following the sale of its supply business in 1999, SWEB was renamed Western Power Distribution. See WPD, below. Tolling - an arrangement whereby a third party power marketer supplies fuel to a power plant and receives the plant's electrical output in return for paying a pre-established tolling fee. UGI - UGI Corporation. U.K. - United Kingdom. VEBA (Voluntary Employee Benefit Association Trust) - trust accounts for health and welfare plans for future payments to employees, retirees or their beneficiaries. Western Mass. Holdings - Western Massachusetts Holdings, Inc., a PPL unregulated subsidiary specializing in mechanical contracting and engineering. WPD - Western Power Distribution, the new name for SWEB's remaining power distribution business. Year 2000 - a set of date-related problems that may be experienced by software systems or applications. (THIS PAGE LEFT BLANK INTENTIONALLY.) PART I ------ ITEM 1. BUSINESS ---------------- BACKGROUND On February 14, 2000, PP&L Resources, Inc. (incorporated in 1994) filed Articles of Amendment with the Pennsylvania Department of State to change its name to PPL Corporation effective immediately. In addition, several of PPL's direct and indirect subsidiaries changed their names, effective February 14, 2000, as follows: . PPL Electric Utilities Corporation, formerly known as PP&L, Inc. (incorporated in 1920), which provides electricity delivery service in eastern and central Pennsylvania, and markets wholesale energy in the United States and Canada; . PPL Global, Inc., formerly known as PP&L Global, Inc., an international independent power company which invests in and develops world-wide power projects; . PPL EnergyPlus, LLC, formerly known as PP&L EnergyPlus Co., LLC (currently a subsidiary of PPL Electric Utilities), which sells energy and energy services to deregulated markets; . PPL Spectrum, Inc., formerly known as PP&L Spectrum, Inc., which markets energy-related services and products; . PPL Gas Utilities Corporation, formerly known as Penn Fuel Gas, Inc., which, together with its subsidiaries, provides natural gas distribution, transmission and storage services and sells propane; . PPL Energy Funding Corporation, formerly known as CEP Group, Inc., which, together with its subsidiaries, engages principally in financing and cash management activities; . PPL Montana, LLC, formerly known as PP&L Montana, LLC, which generates electricity for wholesale and retail customers in Montana and the Northwest; . PPL Montana Holdings, LLC, formerly known as PP&L Montana Holdings, LLC, which holds, through subsidiaries, investments in electricity generation and related assets in Montana; and . PPL Capital Funding, Inc., formerly known as PP&L Capital Funding, Inc., which provides debt funding for PPL and its subsidiaries other than PPL Electric Utilities. Other PPL subsidiaries include: . PP&L Transition Bond Company (a special purpose subsidiary of PPL Electric Utilities), formed to issue transition bonds under the Pennsylvania Customer Choice Act; and . H.T. Lyons, McClure, McCarl's, Burns Mechanical and Western Mass. Holdings, which are mechanical contracting and engineering firms. Other subsidiaries may be formed by PPL to take advantage of new business opportunities. The financial condition and results of operations of PPL Electric Utilities and PPL Global are currently the principal factors affecting PPL's financial condition and results of operations. PPL Montana is also expected to provide a significant impact on future results of operations. The electric utility industry, including PPL Electric Utilities, has experienced and will continue to experience a significant increase in the level of competition in the energy supply market. The Energy Act amended the PUHCA to create a new class of independent power producers, and amended the Federal Power Act to provide open access to electric transmission systems for wholesale transactions. In addition, the Customer Choice Act was enacted in Pennsylvania to restructure the state's electric utility industry in order to create retail access to a competitive market for the generation of electricity. See "PUC Restructuring Proceeding" in Note 4 to Financial Statements and "Increasing Competition" in Review of Financial Condition and Results of Operations for a discussion of competition-related developments. PPL Electric Utilities is subject to regulation as a public utility by the PUC and is subject in certain of its activities to the jurisdiction of the FERC under Parts I, II and III of the Federal Power Act. PPL Electric Utilities is not a holding company under PUHCA, and PPL has been exempted by the SEC from the provisions of PUHCA applicable to it as a holding company. PPL Electric Utilities is subject to the jurisdiction of the NRC in connection with the operation of the two nuclear-fueled generating units at PPL Electric Utilities' Susquehanna station. PPL Electric Utilities owns a 90% undivided interest in each of the Susquehanna units and Allegheny Electric Cooperative, Inc. owns a 10% undivided interest in each of those units. PPL Electric Utilities also is subject to the jurisdiction of certain federal, regional, state and local regulatory agencies with respect to air and water quality, land use and other environmental matters. In addition, the domestic operations of PPL are subject to the Occupational Safety and Health Act of 1970. PPL Electric Utilities provides electricity delivery service to approximately 1.3 million customers in a 10,000 square mile territory in 29 counties of eastern and central Pennsylvania, with a population of approximately 2.6 million persons. This service area has 129 communities with populations over 5,000, the largest cities of which are Allentown, Bethlehem, Harrisburg, Hazleton, Lancaster, Scranton, Wilkes-Barre and Williamsport. In addition to delivery of its own generation or purchased power, PPL Electric Utilities is delivering power supplied by licensed EGS' pursuant to the Customer Choice Act. During 1999, nearly all of PPL Electric Utilities' operating revenue was derived from energy deliveries and supply, with 24% coming from residential customers, 21% from commercial customers, 17% from industrial customers, 36% from wholesale sales and 2% from others. PPL Electric Utilities operates its generation and transmission facilities as part of the PJM. The PJM operates the electric transmission network and electric energy market in the mid-Atlantic region of the United States. Bulk electricity is transmitted to wholesale users throughout a geographic area including all or part of Pennsylvania, New Jersey, Maryland, Delaware, Virginia and the District of Columbia. PPL Electric Utilities is also a party to the Mid-Atlantic Area Coordination Agreement, which provides for the coordinated planning of generation and transmission facilities by the companies included in the PJM. In November 1997, the FERC ordered the restructuring of the PJM into an ISO, in order to accommodate greater competition and broader participation in the power pool. The purpose of the ISO is to separate operation of, and access to, the transmission grid from the PJM electric utilities' generation interests. The electric utilities continue to own the transmission assets, but the ISO directs the control and operation of the transmission facilities. PPL Electric Utilities has an Energy Marketing Center to take advantage of opportunities in the competitive wholesale energy marketplace. The group operates a 24-hour a day trading floor and a marketing effort with responsibility for all PPL Electric Utilities wholesale power transactions. The Energy Marketing Center has allowed PPL Electric Utilities to buy and sell energy at the most competitive prices and to expand these activities beyond PPL Electric Utilities' traditional service territory. Pursuant to the Joint Settlement Petition in its PUC restructuring proceeding, PPL Electric Utilities transferred its retail marketing function to PPL EnergyPlus. PPL EnergyPlus has a PUC license to act as an EGS in Pennsylvania. This license permits PPL EnergyPlus to offer retail electric and gas supply to customers throughout Pennsylvania. In 1999, PPL EnergyPlus supplied energy to industrial and commercial customers in Pennsylvania, New Jersey and Delaware, and is also licensed to provide energy in Maine and Montana. At this time, PPL EnergyPlus has decided not to pursue residential customers in the competitive marketplace based on economic considerations. Other wholly-owned subsidiaries of PPL Electric Utilities are principally engaged in oil and gas pipeline operations, cash management and financing. PPL Global, PPL's second largest subsidiary after PPL Electric Utilities, is an international independent power company. PPL Global has ownership and operational interests in companies in the U.K., Chile, Bolivia and El Salvador that deliver electricity to more than 2 million customers. PPL Global also has investment interests in Argentina, Peru, Spain, Portugal, Brazil and the U.S. PPL has established growth in its generation capability, along with expansion of its energy marketing operations, as a key element of its domestic and international business strategy. In line with this strategy, PPL Global completed or announced several acquisitions in 1999. In May 1999, PPL Global acquired most of Bangor Hydro's generating assets and certain transmission rights, as well as its interest in an oil-fired generation facility. The generating assets acquired had a base load capacity of 83 megawatts. In August 1999, PPL Global purchased Bangor Hydro's 50% interest in the 20-megawatt West Enfield hydroelectric station. In July 1999, PPL Global reached an agreement with Duke Energy North America to jointly complete the Griffith Energy Project, a gas-fired, combined- cycle power plant near Kingman, Arizona. As part of the agreement, PPL Global transferred a 50% interest in the project to Duke. PPL Global will fund 50% of the capital cost of the project. The facility, expected to be in service in 2001, would have a nominal base-load capacity of 500 megawatts and a peak capacity of 600 megawatts. In 1998, PPL Global signed definitive agreements with the Montana Power Company ("Montana Power"), Portland General Electric Company ("Portland") and Puget Sound Energy, Inc. ("Puget") to acquire interests in 13 Montana power plants, with 2,372 gross megawatts of generating capacity, for a purchase price of $1.546 billion. The acquisition involves the Colstrip and Corette coal-fired plants, 11 hydroelectric facilities and a storage reservoir. The Puget and Portland agreements also provide for the acquisition of related transmission assets for an additional $126 million, subject to certain conditions. In December 1999, PPL Global completed the purchase of about 1,315 gross megawatts of generating assets from Montana Power for $757 million. This acquisition transferred to PPL Montana the 11 hydroelectric facilities, the storage reservoir, the Corette plant and Montana Power's ownership interest in three of the four units of the Colstrip plant, along with other generation- related assets. PPL Montana is now operating these facilities. PPL Montana also acquired the energy marketing and trading operation of Montana Power for an amount that was not significant. The Montana marketing and trading operation, which is now part of PPL EnergyPlus, is selling electricity in wholesale and retail markets in Montana and the Northwest. PPL Global's acquisition of the Colstrip interests of Portland and Puget, totaling 1,057 additional megawatts, is subject to several conditions, primarily the receipt of satisfactory regulatory approvals from the state utility commissions in Oregon and Washington. The Washington Utilities and Transportation Commission issued a decision in September 1999 with respect to Puget's 735-megawatt interest in Colstrip, which Puget is disputing in the state appellate court. On February 29, 2000, the Oregon Public Utility Commission denied Portland's application to sell its 322-megawatt interest in Colstrip, but stated that it would be willing to reconsider the decision if Portland could demonstrate sufficient additional benefits to Oregon ratepayers as a result of the sale. The interested parties are reviewing the regulatory decisions and evaluating possible actions to address the decisions. The acquisition agreements permit each party to terminate the respective agreements if closing does not occur by April 30, 2000. PPL cannot predict the outcome of these proceedings, whether the outcome will be satisfactory to the parties, or the effect of these proceedings on the timing or the ability to complete these acquisitions. In the second half of 1999, PPL Global also acquired additional ownership interests in Emel, a Chilean electric distribution company, increasing its ownership to 95.4%. Acquisition of the controlling interest in Emel also gave PPL Global a majority interest in EC, a holding company jointly owned by PPL Global and Emel. EC is the majority owner of DelSur, an electric distribution company in El Salvador. In addition, PPL Global currently has under development a 500 megawatt gas- fired generating plant in Lower Mt. Bethel, Pennsylvania, which is expected to be in service in 2002, and a 250 megawatt gas-fired generating plant in Wallingford, Connecticut, which is also expected to be in service in 2002. In 1999, PPL subsidiaries also divested certain investments and assets. In September 1999, PPL Global's U.K. investment, SWEB (subsequently renamed WPD), sold its electric supply business. In November 1999, PPL Electric Utilities sold its Sunbury fossil generating station and the related principal assets of its wholly-owned coal processing subsidiary, Lady Jane Collieries. See "Power Plant Operations" in Review of Financial Condition and Results of Operation. In September 1999, the Boards of Directors of PPL and PPL Electric Utilities approved the initiation of a corporate realignment, in order to better position PPL and its subsidiaries in the new competitive marketplace. See "Proposed Corporate Realignment" in the Review of Financial Condition and Results of Operations for an overview of this initiative. FINANCIAL CONDITION See "Earnings" and "Financial Indicators" in the Review of the Financial Condition and Results of Operations for this information. CAPITAL EXPENDITURE REQUIREMENTS See "Financial Condition - Capital Expenditure Requirements" in the Review of the Financial Condition and Results of Operations for information concerning PPL Electric Utilities' estimated capital expenditure requirements for the years 2000-2004. See Note 16 to Financial Statements for information concerning PPL Electric Utilities' estimate of the cost to comply with various environmental regulations. POWER SUPPLY PPL's system capacity (winter rating) at December 31, 1999 was as follows:
Net Megawatt Plant Capacity ----- -------- PPL Electric Utilities (Pennsylvania) ---------------------- Nuclear-fueled steam station Susquehanna 1,995 (a) Coal-fired steam stations Montour 1,525 Brunner Island 1,469 Martins Creek 300 Keystone 210 (b) Conemaugh 194 (c) ----- Total coal-fired 3,698 ----- Gas and oil-fired steam station Martins Creek 1,640 Combustion turbines and diesels 438 Hydroelectric 146 ----- Total generating capacity 7,917 ----- Firm purchases Hydroelectric 139 (d) Qualifying facilities 338 ----- Total firm purchases 477 ----- Total system capacity - PPL Electric Utilities 8,394 ----- PPL Montana (Montana) ----------- Coal-fired thermal stations Colstrip Units 1 & 2 308 (e) Colstrip Unit 3 222 (f) Coal-fired steam station Corette 154 ----- Total coal-fired 684 ----- Hydroelectric 474 ----- Total system capacity - PPL Montana 1,158 (g) ----- PPL Global (through subsidiaries)(Maine) ---------- Oil-fired generating station Wyman Unit 4 52 (h) Hydroelectric (Penobscot Hydro and West Enfield) 41 (i) ----- Total system capacity - PPL Global 93 ----- Total system capacity - PPL 9,645 =====
________________________ (a) PPL Electric Utilities' 90% undivided interest. (b) PPL Electric Utilities' 12.34% undivided interest. (c) PPL Electric Utilities' 11.39% undivided interest. (d) From Safe Harbor Water Power Corporation. (e) PPL Montana's 50% undivided interest acquired December 1999. (f) PPL Montana's 30% undivided interest acquired December 1999. (g) Represents PPL Montana's net capacity. Gross capacity equals 1,315 mWh. (h) PPL Global's 8.33% undivided interest acquired May 1999. (i) Includes PPL Global's 50% interest in the West Enfield Station. The capacity of generating units is based upon a number of factors, including the operating experience and physical condition of the units, and may be revised from time to time to reflect changed circumstances. The system capacity shown in the preceding tabulation does not reflect two- party sales and purchases, contractual bulk power sales to JCP&L and BG&E (as described in Note 7 to Financial Statements), or installed capacity credit sales and purchases with other utilities. The net effect of these transactions is to reduce PPL Electric Utilities' system capacity by 558,000 kilowatts at the end of December 1999, to 7,836,000 kilowatts. The net effect of Penobscot Hydro's committed sales to Bangor Hydro is to reduce PPL Global's system capacity by 41,000 kilowatts, to 52,000 kilowatts. The West Enfield facility's output will be sold to Bangor Hydro through the year 2024. The output from Penobscot Hydro's other hydroelectric stations will be sold to Bangor Hydro through March 2000. It has not yet been determined whether Bangor Hydro will purchase the output after this date. PPL Montana has two transition agreements to supply wholesale electricity to the Montana Power Company. One agreement provides for the sale of 200,000 kilowatts from PPL Montana's interest in Colstrip Unit 3 for two years. The other agreement covers Montana Power's remaining native load commitments and lasts until the remaining load is zero, but in no event later than June 2002. During 1999, PPL Electric Utilities generated about 39.5 billion kWh in plants it owned, with 57% of the energy generated by coal-fired stations, 38% from nuclear operations at the Susquehanna station, 4% from the Martins Creek gas and oil-fired station and 1% from hydroelectric stations. PPL Electric Utilities also purchased 26.9 billion kWh and had 29.6 billion kWh in non-system energy sales. For the six months ended December 1999, PPL Global (through subsidiaries) generated about 215 million kWh. Of this total, about 126 million kWh was from hydroelectric generation, with the balance from PPL Global's interest in the oil-fired Wyman Unit 4. The maximum one-hour demand recorded on PPL Electric Utilities' system was 6,939,000 kilowatts, which occurred on January 17, 2000. The maximum recorded one-hour summer demand was 6,387,000 kilowatts, which occurred on July 19, 1999. These peak demands do not include energy sold to BG&E or JCP&L. PPL Electric Utilities purchases energy from and sells energy to other utilities and FERC-certified power marketers at market-based rates under power purchase and sales agreements. PPL Electric Utilities enters into these transactions on an hourly, daily, weekly, monthly or longer-term basis. PPL Electric Utilities has FERC authorization to sell electric energy, capacity and ancillary services at market-based rates to wholesale customers located both inside and outside the PJM control area. As of the end of 1999, one hundred utilities and power marketers had signed service and power sales agreements under this tariff. Transactions under these agreements allow PPL Electric Utilities to make more efficient use of its generating resources and are intended to provide benefits to both PPL Electric Utilities and the other parties. Under the market-based tariff, PPL Electric Utilities may also sell power purchased from third parties. PPL Electric Utilities also has a FERC short-term capacity and/or energy sales tariff enabling PPL Electric Utilities to sell to other utilities and marketers at cost-based rates. Seventy parties have signed service agreements under this tariff. PPL Electric Utilities has an export license to sell capacity and/or energy to electric utilities in Canada. This export license allows PPL Electric Utilities to sell either its own capacity and energy not required to serve domestic obligations or power purchased from other utilities. In addition to the 338,000 kilowatts of qualifying facility generation included in the total system capacity table above, PPL Electric Utilities is purchasing about 57,600 kilowatts of output from various other non-utility generating companies. In an effort to reduce operating costs and position itself for the competitive marketplace, PPL Electric Utilities closed its Holtwood coal-fired generating station in April 1999. The adjacent hydroelectric plant continues to operate. In addition, PPL Electric Utilities sold its Sunbury coal-fired generating station in November 1999. See "Proposed Corporate Realignment" in the Review of Financial Condition and Results of Operations concerning PPL Electric Utilities' proposal to transfer all of its generating assets to affiliates. FUEL SUPPLY Coal - PPL Electric Utilities ----------------------------- During 1999, about 65% of the coal delivered to PPL Electric Utilities' generating stations was purchased under long-term contracts and 35% was obtained through open market purchases. These contracts provided PPL Electric Utilities with about 4.6 million tons of coal in 1999 and are expected to provide about 4.1 million tons in 2000. PPL Electric Utilities' requirements for additional coal are expected to be obtained by contracts and open market purchases. The amount of coal carried in inventory at PPL Electric Utilities' generating stations varies from time to time depending on market conditions and plant operations. At December 31, 1999, PPL Electric Utilities' coal supply was sufficient for at least 39 days of operations. The coal burned in PPL Electric Utilities' generating stations contains both organic and pyritic sulfur. Mechanical cleaning processes are utilized to reduce the pyritic sulfur content of the coal. The reduction of the pyritic sulfur content by either mechanical cleaning or blending has lowered the total sulfur content of the coal burned to levels which permit compliance with current sulfur dioxide emission regulations established by the DEP. PPL Electric Utilities owns a 12.34% undivided interest in the Keystone station and an 11.39% undivided interest in the Conemaugh station, both of which are generating stations located in western Pennsylvania. The owners of the Keystone station have a long-term contract with a coal supplier that provided at least two-thirds of that station's requirements through 1999 and declining amounts thereafter until the contract expires at the end of 2004. The balance of the Keystone station requirements are purchased in the open market. The coal supply requirements for the Conemaugh station are being met from several sources through a blend of long-term and short-term contracts and spot market purchases. Coal - PPL Montana - ------------------ PPL Montana has a 50% interest in Colstrip Units 1 & 2 and a 30% ownership interest in Colstrip Unit 3. The owners of the units have a contract to purchase sub-bituminous coal with defined quality characteristics and specifications. The contract for units 1 & 2 is in effect through December 31, 2009. The contract for unit 3 is in effect through December 31, 2019. PPL Montana also owns the JE Corette Steam Generation Plant. The plant has a one-year contract to purchase low sulfur coal with defined quality characteristics and specifications. Oil and Natural Gas - ------------------- PPL Electric Utilities' Martins Creek generating station units 3 and 4 burn both oil and natural gas. During 1999, 100% of the oil requirements for the Martins Creek units was purchased on the spot market. At December 31, 1999, PPL Electric Utilities had no long-term agreements for these requirements. During 1999, all of the natural gas consumed at Martins Creek was purchased under short-term agreements. PPL Electric Utilities has no long-term agreements to purchase gas. PPL Electric Utilities' oil and natural gas purchasing and sales functions are now performed by the Energy Marketing Center. The addition of oil and gas to the Energy Marketing Center's electricity marketing is intended to enhance wholesale and retail marketing opportunities and to provide a diversified energy portfolio to customers. Additionally, the new marketing and supply activities help PPL Electric Utilities to optimize electric generation efficiency and minimize fuel costs. Nuclear ------- PPL Electric Utilities has executed uranium supply and conversion agreements that satisfy 65% of the uranium requirements for the Susquehanna units in 2000, approximately 35% of the requirements for the period 2001-2002 and, including options, an additional 25% of the requirements for the period 2002-2005. Deliveries under these agreements are expected to provide sufficient uranium to permit Unit 1 to operate into the first quarter of 2002 and Unit 2 to operate into the first quarter of 2001. PPL Electric Utilities has executed an agreement that satisfies all of its enrichment requirements through 2004. Assuming that the other uranium components of the nuclear fuel cycle are satisfied, deliveries under this agreement are expected to provide sufficient enrichment to permit Unit 1 to operate into the first quarter of 2006 and Unit 2 to operate into the first quarter of 2007. PPL Electric Utilities has entered into an agreement that, including options, satisfies all of its fabrication requirements through 2006. Assuming that the uranium and other components of the nuclear fuel cycle are satisfied, deliveries under this agreement are expected to provide sufficient fabrication to permit Unit 1 to operate into the first quarter of 2008 and Unit 2 to operate into the first quarter of 2007. Federal law requires the federal government to provide for the permanent disposal of commercial spent nuclear fuel. Under the Nuclear Waste Policy Act the DOE initiated an analysis of a site in Nevada for a permanent nuclear waste repository. Progress on a proposed disposal facility has been slow, and the repository is not expected to be operational before 2010. Thus, expansion of Susquehanna's on-site spent fuel storage capacity was necessary. To support this expansion, PPL Electric Utilities contracted for the design and construction of a spent fuel storage facility employing dry cask fuel storage technology. The facility is modular, so that additional storage capacity can be added as needed. The new facility began receiving spent nuclear fuel in October 1999. PPL Electric Utilities estimates that there is sufficient storage capacity in the spent nuclear fuel pools and the on-site dry spent fuel storage facility at Susquehanna to accommodate discharged fuel through the life of the plant, if necessary. Federal law also provides that generators of spent fuel are responsible for certain costs of disposal. In January 1997, PPL Electric Utilities joined over 30 other utilities in a lawsuit in the U.S. Court of Appeals for the District of Columbia Circuit seeking assurance of the DOE's performance of its contractual obligation to accept spent nuclear fuel and suspension of payment to that agency pending such performance. In November 1997, the Court denied the utilities' requested relief and held that the contracts between the utilities and the DOE provide a potentially adequate remedy if the DOE failed to begin disposal of spent nuclear fuel by January 31, 1998. However, the Court also precluded the DOE from arguing that its delay in contract performance was "unavoidable". The U.S. Congress is currently considering amendments to the Nuclear Waste Policy Act to address certain of the issues which have arisen between the DOE and the nuclear power industry regarding disposal of spent nuclear fuel as well as the ongoing litigation against DOE. PPL Electric Utilities is unable to predict the ultimate outcome of this proposed legislation or litigation. YEAR 2000 See "Year 2000" in the Review of the Financial Condition and Results of Operations for information. ENVIRONMENTAL MATTERS Certain PPL subsidiaries, including PPL Electric Utilities, are subject to certain present and developing federal, regional, state and local laws and regulations with respect to air and water quality, land use and other environmental matters. See "Financial Condition - Capital Expenditure Requirements" in the Review of the Financial Condition and Results of Operations for information concerning environmental expenditures during 1999 and PPL's estimate of those expenditures during the years 2000-2004. PPL believes that its subsidiaries are in substantial compliance with applicable environmental laws and regulations. See "Environmental Matters" in Note 16 to Financial Statements for information concerning federal clean air legislation enacted in 1990, groundwater degradation and waste water control at facilities owned by PPL's subsidiaries, state solid waste disposal regulations, and PPL Electric Utilities' and PPL Gas Utilities' agreements with the DEP concerning remediation at certain sites. Other environmental laws, regulations and developments that may have a substantial impact on PPL's subsidiaries are discussed below. Air --- The Clean Air Act includes, among other things, provisions that: (a) require the prevention of significant deterioration of existing air quality in regions where air quality is better than applicable ambient standards; (b) restrict the construction of and revise the performance standards for new coal- fired and oil-fired generating stations; and (c) authorize the EPA to impose substantial noncompliance penalties of up to $25,000 per day of violation for each facility found to be in violation of the requirements of an applicable state implementation plan. The state agencies administer the EPA's air quality regulations through the state implementation plans and have concurrent authority to impose penalties for noncompliance. In December 1997, international negotiators reached agreement in Kyoto, Japan to strengthen the 1992 United Nations Global Climate Change Treaty by adding legally-binding greenhouse gas emission limits. This Agreement - formally called the Kyoto Protocol - if ratified by the U.S. Senate and implemented, would require the United States to reduce its greenhouse gas emissions to 7% below 1990 levels by 2008 - 2012. Compliance under the Agreement, if implemented, could result in increased capital and operating expenses for PPL Electric Utilities and PPL Montana in amounts which are not now determinable but which could be significant. Water ----- To implement the requirements of the Federal Water Pollution Control Act of 1972, as amended by the Clean Water Act of 1977 and the Water Quality Act of 1987, the EPA has adopted regulations on effluent standards for steam electric stations. The states administer the EPA's effluent standards through state laws and regulations relating, among other things, to effluent discharges and water quality. The standards adopted by the EPA pursuant to the Clean Water Act may have a significant impact on existing facilities of certain PPL subsidiaries, including PPL Electric Utilities, depending on the states' interpretation and future amendments to regulations. Pursuant to the Surface Mining and Reclamation Act of 1977, the OSM has adopted effluent guidelines which are applicable to PPL subsidiaries as a result of their past coal mining and coal processing activities. The EPA and the OSM limitations, guidelines and standards also are enforced through the issuance of NPDES permits. In accordance with the provisions of the Clean Water Act and the Reclamation Act of 1977, the EPA and the OSM have authorized the states to implement the NPDES program. Compliance with applicable water quality standards is assured by state review of NPDES permit conditions. Solid and Hazardous Waste ------------------------- The provisions of Superfund authorize the EPA to require past and present owners of contaminated sites and generators of any hazardous substance found at a site to clean-up the site or pay the EPA or the state for the costs of clean- up. The generators and past owners can be liable even if the generator contributed only a minute portion of the hazardous substances at the site. Present owners can be liable even if they contributed no hazardous substances to the site. State laws such as the Pennsylvania Superfund law also give state agencies broad authority to identify hazardous or contaminated sites and to order owners or responsible parties to clean-up the sites. If responsible parties cannot or will not perform the clean-up, the agency can hire contractors to clean-up the sites and then require reimbursement from the responsible parties after the clean-up is completed. Certain federal and state statutes, including Superfund and the Pennsylvania Hazardous Sites Cleanup Act, empower certain governmental agencies, such as the EPA and the DEP, to seek compensation from the responsible parties for the lost value of damaged natural resources. The EPA and the DEP may file such compensation claims against the parties held responsible for cleanup of such sites. Such natural resource damage claims could result in material additional liabilities for PPL subsidiaries. Low-Level Radioactive Waste --------------------------- Under federal law, each state is responsible for the disposal of low-level radioactive waste generated in that state. States may join in regional compacts to jointly fulfill their responsibilities. The states of Pennsylvania, Maryland, Delaware and West Virginia are members of the Appalachian States Low- Level Radioactive Waste Compact. Efforts to develop a regional disposal facility in Pennsylvania were suspended by the DEP in 1998. The Commonwealth retains the legal authority to resume the siting process should it be necessary. Low-level radioactive waste resulting from the operation of Susquehanna are currently being sent to Barnwell, South Carolina for disposal. In the event that this disposal option becomes unavailable or no longer cost-effective, the low-level radioactive waste will be stored on-site at Susquehanna. PPL Electric Utilities cannot predict the future availability of low-level waste disposal facilities or the cost of such disposal. General ------- Concerns have been expressed by some members of the scientific community and others regarding the potential health effects of EMFs. These fields are emitted by all devices carrying electricity, including electric transmission and distribution lines and substation equipment. Federal, state and local officials have focused attention on this issue. PPL Electric Utilities supports the current efforts to determine whether EMFs cause any human health problems and is taking low cost or no cost steps to reduce EMFs, where practical, in the design of new transmission and distribution facilities. PPL Electric Utilities is unable to predict what effect, if any, the EMF issue might have on PPL Electric Utilities' operations and facilities and the associated cost, or what, if any, liabilities PPL Electric Utilities might incur related to the EMF issue. PPL and its subsidiaries are unable to predict the ultimate effect of evolving environmental laws and regulations upon its existing and proposed facilities and operations. In complying with statutes, regulations and actions by regulatory bodies involving environmental matters, including the areas of water and air quality, hazardous and solid waste handling and disposal and toxic substances, PPL may be required to modify, replace or cease operating certain of its facilities. PPL may also incur significant capital expenditures and operating expenses in amounts which are not now determinable. FRANCHISES AND LICENSES PPL Electric Utilities is authorized to provide electric public utility service throughout its service area as a result of grants by the Commonwealth of Pennsylvania in corporate charters to PPL Electric Utilities and companies to which it has succeeded and as a result of certification by the PUC. PPL Electric Utilities is granted the right to enter the streets and highways by the Commonwealth subject to certain conditions. In general, such conditions have been met by ordinance, resolution, permit, acquiescence or other action by an appropriate local political subdivision or agency of the Commonwealth. PPL Electric Utilities also has an export license from the DOE to sell capacity and/or energy to electric utilities in Canada. PPL Electric Utilities operates Susquehanna Unit 1 and Unit 2 pursuant to NRC operating licenses, which expire in 2022 and 2024, respectively. It operates two hydroelectric projects pursuant to licenses renewed by the FERC in 1980: Wallenpaupack (44,000 kilowatts capacity) and Holtwood (102,000 kilowatts capacity). The Wallenpaupack license expires in 2004 and the Holtwood license expires in 2014. As part of the regulatory applications in the pending corporate realignment, PPL Electric Utilities has proposed to transfer these licenses to the respective affiliated generating companies. PPL Electric Utilities owns one-third of the capital stock of Safe Harbor Water Power Corporation (Safe Harbor), which holds a project license which extends the operation of its hydroelectric plant until 2030. The total capacity of the Safe Harbor plant is 417,500 kilowatts, and PPL Electric Utilities is entitled by contract to one-third of the total capacity (139,000 kilowatts). As part of the regulatory applications in the pending corporate realignment, PPL Electric Utilities has proposed that its interest in Safe Harbor be transferred to a new generating company affiliate. The eleven hydroelectric facilities and one storage reservoir recently purchased from the Montana Power Company are licensed by FERC under licenses which expire on varying dates through 2035. Prior to the December 1999 acquisition, the Montana Power Company had been in the process of the normal relicensing nine of the hydroelectric facilities and the storage reservoir, collectively known as Project 2188. A final FERC license order on Project 2188 is expected in the first quarter of 2000. The licenses for the other two hydroelectric facilities expire in 2009 and 2025. EMPLOYEE RELATIONS As of December 31, 1999, PPL and its subsidiaries had 9,166 employees, including 6,314 full-time PPL Electric Utilities employees and 470 full-time PPL Montana employees. Approximately 62 percent of PPL Electric Utilities' full- time employees are represented by the IBEW. Approximately 68 percent of PPL Montana employees are represented by the IBEW. PPL Electric Utilities reached a new labor agreement with the IBEW in 1998. This agreement expires in May 2002. PPL Montana's contract with the IBEW expires in 2001. ITEM 2. PROPERTIES ------------------ Refer to the "Utility Plant" section of Note 1 to Financial Statements and "Power Plant Operations" in the Review of the Financial Condition and Results of Operations for information concerning investments in property, plant and equipment. Substantially all of PPL Electric Utilities' electric utility plant is subject to the lien of PPL Electric Utilities' Mortgage. PPL Electric Utilities' generating facilities to be transferred to affiliates in the pending corporate realignment will be released from this Mortgage. In addition, PPL Electric Utilities has electric transmission and distribution lines in public streets and highways pursuant to franchises and on rights-of-way secured from property owners. For a description of PPL Electric Utilities' service territory and properties, see Item 1, "BUSINESS - Background," "BUSINESS - Power Supply" and "BUSINESS - Fuel Supply." See these same sections for discussions of PPL Global's investments and the property of PPL Montana. ITEM 3. LEGAL PROCEEDINGS ------------------------- See Item 1 "BUSINESS - Fuel Supply" for information concerning a lawsuit against the DOE for failure of that agency to perform certain contractual obligations. See "Proposed Corporate Realignment" in Review of Financial Condition and Results of Operation for information on pending regulatory proceedings related to the proposed corporate realignment. Pursuant to changes in the Pennsylvania Public Utility Realty Tax Act ("PURTA") enacted in 1999, PPL Electric Utilities has filed a number of tax assessment appeals in various counties throughout its service territory. These appeals challenge existing local tax assessments, which now furnish the basis for payment of the PURTA tax on PPL Electric Utilities properties. Also, as of January 1, 2000, generation facilities are no longer taxed under PURTA, and these local assessments will be used directly to determine local real estate tax liability for PPL Electric Utilities' power plants. PPL Electric Utilities has filed retroactive appeals for tax years 1998 and 1999, as permitted by the new law, as well as prospective appeals for 2000, as permitted under normal assessment procedures. Hearings on the appeals were held by the boards of assessment appeals in each county, and decisions have now been rendered by most counties. To the extent the appeals were denied or PPL Electric Utilities was not otherwise satisfied with the results, PPL Electric Utilities has filed further appeals from the board decisions with the appropriate county Courts of Common Pleas. Of all the pending proceedings, the most significant appeal concerns the assessed value of the Susquehanna nuclear station. The current county assessment of the Susquehanna station indicates a market value of $3.9 billion. However, based on Pennsylvania assessment law, PPL Electric Utilities contends that machinery and equipment used at the Susquehanna station are not part of the real estate subject to taxation. PPL Electric Utilities has estimated that the market value should be approximately $60 million. PPL Electric Utilities' appeal of the Susquehanna station assessment is currently pending in the Luzerne County Court of Common Pleas, and a trial date has been set for August 2000. As a result of these proceedings and potential appeals, a final determination of market value and the associated tax liability may not occur for several years. Based on the county market valuation of $3.9 billion, the Berwick Area School District (where the Susquehanna station is located) has issued a tax bill to PPL Electric Utilities for just under $25 million for the first six months of 2000. Within the next two months, PPL Electric Utilities expects to receive a joint tax bill from the county and municipality for another $20 million, which will cover the entire year. On the basis of PPL Electric Utilities' estimated valuation, the School District would be entitled to receive about $770,000 in local taxes annually ($385,000 for the first six months of 2000), and the county and township combined would receive about $350,000 annually. In the other assessment appeals pending in county courts, the local authorities have assessed PPL Electric Utilities' generating plants at an aggregate amount of about $330 million for tax year 2000, for a total tax liability of about $6.8 million. PPL Electric Utilities has estimated the aggregate market value of these plants at about $26 million for tax year 2000, for a total tax liability of about $454,000. As at the Susquehanna station, the school districts involved in these proceedings have issued interim tax bills at levels which are disputed by PPL Electric Utilities. Final determinations of market value and associated tax liability may not occur for several years. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ----------------------------------------------------------- There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of 1999. EXECUTIVE OFFICERS OF THE REGISTRANTS ------------------------------------- Officers of PPL and PPL Electric Utilities are elected annually by their Boards of Directors to serve at the pleasure of the respective Boards. There are no family relationships among any of the executive officers, or any arrangement or understanding between any executive officer and any other person pursuant to which the officer was selected. There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officer during the past five years. Listed below are the executive officers as of December 31, 1999: PPL Corporation: Effective Date of Election to Name Age Position Present Position ---- --- -------- ---------------- William F. Hecht 56 Chairman, President and Chief Executive Officer February 24, 1995 Frank A. Long 59 Executive Vice President February 24, 1995 Robert G. Byram* 54 Senior Vice President and Chief Nuclear Officer-PPL Electric Utilities April 1, 1997 John R. Biggar 55 Senior Vice President and Chief Financial Officer November 1, 1998 Paul T. Champagne* 41 President-PPL Global, Inc. May 24, 1999 Robert J. Grey 49 Senior Vice President, General Counsel and Secretary March 1, 1996 Terry H. Hunt 51 Senior Vice President- Strategic Planning October 1, 1998 Joseph J. McCabe 49 Vice President and Controller August 1, 1995 James E. Abel 48 Vice President-Finance and Treasurer June 1, 1999 * Mr. Byram and Mr. Champagne have been designated executive officers of PPL by virtue of their respective positions at PPL subsidiaries. PPL Electric Utilities Corporation: Effective Date of Election to Name Age Position Present Position ---- --- -------- ---------------- William F. Hecht 56 Chairman, President and Chief Executive Officer January 1, 1993 Frank A. Long 59 Executive Vice President and Chief Operating Officer January 1, 1993 Robert G. Byram 54 Senior Vice President and Chief Nuclear Officer April 1, 1997 John R. Biggar 55 Senior Vice President and Chief Financial Officer November 1, 1998 Robert J. Grey 49 Senior Vice President, General Counsel and Secretary March 1, 1996 Terry H. Hunt 51 Senior Vice President- Strategic Planning October 1, 1998 Joseph J. McCabe 49 Vice President and Controller August 1, 1995 James E. Abel 48 Vice President-Finance and Treasurer June 1, 1999 Each of the above officers, with the exception of Messrs. Champagne, Grey, and Hunt, has been employed by PPL Electric Utilities for more than five years as of December 31, 1999. Mr. Champagne joined PPL Global in January 1995. Prior to that time, he was Regional Manager - Business Development - Midwest at Mission Energy Company. Mr. Grey joined PPL Electric Utilities in March 1995. He had been General Counsel of Long Island Lighting Company since 1992. Mr. Hunt joined PPL Electric Utilities in October 1998. He had been President and CEO of PPL Gas Utilities. Prior to their election to the positions shown above, the following executive officers held other positions within PPL Electric Utilities since January 1, 1995: Mr. Byram was Senior Vice President - Nuclear and Senior Vice President - Generation and Chief Nuclear Officer; Mr. Biggar was Vice President- Finance, Vice President - Finance and Treasurer and Senior Vice President- Financial; Mr. Grey was Vice President, General Counsel and Secretary; Mr. McCabe was Controller; and Mr. Abel was Manager - Treasury, Manager - Auditing, and Treasurer. PART II ------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ------------------- Additional information for this item is set forth in the sections entitled "Quarterly Financial, Common Stock Price and Dividend Data" and "Shareowner and Investor Information" of this report. The number of common shareowners is set forth in the section entitled "Selected Financial and Operating Data" in Item 6. ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
1999 (a) 1998 (a) 1997 (a) 1996 1995 (a) PPL Corporation - -------------------------------------------------------------------------------------------------------------------------- Income Items -- millions Operating revenues..................................... $ 4,590 $ 3,786 $ 3,077 $ 2,926 $ 2,752 Operating income (f)................................... 872 827 800 810 836 Net Income (Loss)...................................... 432 (569) 296 329 323 Balance Sheet Items -- millions (b) Property, plant and equipment, net..................... 5,644 4,480 6,820 6,960 6,970 Recoverable transition costs........................... 2,647 2,819 Total assets........................................... 11,174 9,607 9,485 9,670 9,492 Long-term debt......................................... 4,157 2,984 2,735 2,832 2,859 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures.................... 250 250 250 Preferred stock With sinking fund requirements....................... 47 47 47 295 295 Without sinking fund requirements.................... 50 50 50 171 171 Common equity.......................................... 1,613 1,790 2,809 2,745 2,597 Short-term debt........................................ 857 636 135 144 89 Total capital provided by investors.................... 6,974 5,757 6,026 6,187 6,011 Capital lease obligations.............................. 125 168 171 247 220 Financial Ratios Return on average common equity -- % (e)............... 16.89 10.98 11.69 12.30 11.23 Embedded cost rates (b) Long-term debt -- %.................................. 6.95 7.40 7.88 7.89 7.95 Preferred stock -- %................................. 5.87 5.87 5.85 6.09 6.09 Preferred securities -- %............................ 8.43 8.43 8.43 Times interest earned before income taxes (e).......... 3.04 3.28 3.59 3.55 3.17 Ratio of earnings to fixed charges -- total enterprise basis (c), (e)............................ 2.86 3.10 3.40 3.45 3.08 Ratio of earnings to fixed charges and dividends on preferred stock --total enterprise basis (c), (e)................... 2.61 2.78 3.02 2.90 2.51 Common Stock Data Number of shares outstanding -- thousands Year-end............................................. 143,697 157,412 166,248 162,665 159,403 Average.............................................. 152,287 164,651 164,550 161,060 157,649 Number of record shareowners (b)....................... 91,553 100,458 117,293 123,290 128,075 Earnings (loss) per share - reported................... $ 2.84 ($3.46) $ 1.80 $ 2.05 $ 2.05 Earnings per share excluding one-time adjustments (e)...................................... $ 2.35 $ 1.87 $ 2.00 $ 2.05 $ 1.79 Dividends declared per share........................... $ 1.00 $ 1.335 $ 1.67 $ 1.67 $ 1.67 Book value per share (b)............................... $ 11.23 $ 11.37 $ 16.90 $ 16.87 $ 16.29 Market price per share (b)............................. $ 22.875 $ 27.875 $ 23.938 $ 23 $ 25 Dividend payout rate -- % (e).......................... 43 71 84 81 93 Dividend yield -- % (d)................................ 4.37 4.79 6.98 7.26 6.68 Price earnings ratio (e)............................... 9.73 14.91 11.97 11.22 13.97
(a) The earnings for each year, except for 1996, were affected by one-time adjustments. These adjustments affected net income and certain items under Financial Ratios and Common Stock Data. See "Earnings" in Review of Financial Condition and Results of Operations for a description of one-time adjustments in 1999, 1998 and 1997. (b) At year-end. (c) Computed using earnings and fixed charges of PPL and its subsidiaries. Fixed charges consist of interest on short- and long-term debt, other interest charges, interest on capital lease obligations and the estimated interest component of other rentals. (d) Based on year-end market prices. (e) Based on earnings excluding one-time adjustments. (f) Operating income of 1997 and earlier years restated to conform to the current presentation. SELECTED FINANCIAL AND OPERATING DATA
1999 (a) 1998 (a) 1997 (a) 1996 1995 (a) PPL Electric Utilities Corporation - ------------------------------------------------------------------------------------------------------------------------------- Income Items -- millions Operating revenues..................................... $ 3,952 $ 3,643 $ 3,049 $ 2,911 $ 2,752 Operating income (e)................................... 749 801 790 809 836 Earnings (loss) available to PPL....................... 398 (587) 308 329 324 Balance Sheet Items -- millions (b) Property, plant and equipment, net..................... 4,345 4,331 6,820 6,960 6,970 Recoverable transition costs........................... 2,647 2,819 Total assets........................................... 9,092 8,838 9,472 9,405 9,424 Long-term debt......................................... 3,505 2,569 2,633 2,832 2,859 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures............................ 250 250 250 Preferred stock With sinking fund requirements....................... 47 295 295 295 295 Without sinking fund requirements.................... 50 171 171 171 171 Common equity.......................................... 1,296 1,730 2,612 2,617 2,528 Short-term debt........................................ 183 91 45 10 89 Total capital provided by investors.................... 5,331 5,106 6,006 5,925 5,942 Capital lease obligations.............................. 125 168 171 247 220 Financial Ratios Return on average common equity -- % (d)............... 17.90 11.45 11.91 12.95 11.65 Embedded cost rates (b) Long-term debt -- %.................................. 6.97 7.56 7.91 7.89 7.95 Preferred stock -- %................................. 5.87 6.09 6.90 6.09 6.09 Preferred securities -- %............................ 8.43 8.43 8.43 Times interest earned before income taxes (d).......... 3.44 3.77 3.67 3.62 3.41 Ratio of earnings to fixed charges -- total enterprise basis (c), (d)............................ 3.09 3.52 3.47 3.50 3.09 Ratio of earnings to fixed charges and dividends on preferred stock --total enterprise basis (c), (d)................... 2.62 2.77 2.77 2.93 2.52 Sales Data Customers (thousands)(b)............................... 1,270 1,257 1,247 1,236 1,226 Electric energy sales delivered -- millions of kWh Residential.......................................... 11,704 11,156 11,434 11,849 11,300 Commercial........................................... 11,002 10,597 10,309 10,288 9,948 Industrial........................................... 10,179 10,227 10,078 10,016 9,845 Other................................................ 160 164 143 154 188 -------- -------- -------- -------- -------- Service area sales ................................ 33,045 32,144 31,964 32,307 31,281 Wholesale energy sales ............................ 31,683 36,706 21,454 14,341 11,424 -------- -------- -------- -------- -------- Total electric energy sales delivered.............. 64,728 68,850 53,418 46,648 42,705 -------- -------- -------- -------- -------- Number of Full-Time Employees (b)........................ 6,314 6,344 6,343 6,428 6,661
(a) The earnings for each year, except for 1996, were affected by one-time adjustments. These adjustments affected earnings available to PPL and certain items in Financial Ratios. See "Earnings" in Review of Financial Condition and Results of Operations for a description of one-time adjustments in 1999, 1998 and 1997. (b) At year-end. (c) Computed using earnings and fixed charges of PPL Electric Utilities and its subsidiaries. Fixed charges consist of interest on short- and long-term debt, other interest charges, interest on capital lease obligations and the estimated interest component of other rentals. (d) Based on earnings excluding one-time adjustments. (e) Operating income of 1997 and earlier years restated to conform to the current presentation. ITEM 7. REVIEW OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PPL CORPORATION AND PPL ELECTRIC UTILITIES CORPORATION PPL is a holding company with headquarters in Allentown, PA. See Item 1 "BUSINESS - Background" for descriptions of PPL's major subsidiaries. Other subsidiaries may be formed by PPL to take advantage of new business opportunities. The financial condition and results of operations of PPL Electric Utilities and PPL Global are currently the principal factors affecting the financial condition and results of operations of PPL. All fluctuations, unless specifically noted, are primarily due to activities of PPL Electric Utilities and PPL Global. Terms and abbreviations appearing in the Review of the Financial Condition and Results of Operations are explained in the glossary. Forward-looking Information Certain statements contained in this Form 10-K concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical facts are "forward-looking statements" within the meaning of the federal securities laws. Although PPL and PPL Electric Utilities believe that the expectations and assumptions reflected in these statements are reasonable, there can be no assurance that these expectations will prove to have been correct. These forward-looking statements involve a number of risks and uncertainties, and actual results may differ materially from the results discussed in the forward-looking statements. In addition to the specific factors discussed in this Review of Financial Condition and Results of Operations, the following are among the important factors that could cause actual results to differ materially from the forward-looking statements: state and federal regulatory developments; new state or federal legislation; national or regional economic conditions; market demand and prices for energy, capacity and fuel; weather variations affecting customer energy usage; competition in retail and wholesale power markets; the effect of any business or industry restructuring; PPL's and PPL Electric Utilities' profitability and liquidity; new accounting requirements or new interpretations or applications of existing requirements; operating performance of plants and other facilities; environmental conditions and requirements; system conditions and operating costs; performance of new ventures; political, regulatory or economic conditions in foreign countries where PPL Global makes investments; foreign exchange rates; and PPL's and PPL Electric Utilities' commitments and liabilities. Any such forward-looking statements should be considered in light of such important factors and in conjunction with PPL's and PPL Electric Utilities' other documents on file with the SEC. New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time to time, and it is not possible for PPL or PPL Electric Utilities to predict all of such factors, or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made, and neither PPL nor PPL Electric Utilities undertakes any obligation to update the information contained in such statement to reflect subsequent developments or information. Results of Operations --------------------- Earnings
1999 1998 1997 ---- ---- ---- Earnings per share - excluding one-time adjustments $2.35 $1.87 $2.00 One-time adjustments: Sale of Sunbury plant and related assets (Note 12) .28 Sale of SWEB supply business (Note 12) .42 Securitization (Note 5) .13 Write-down carrying value of investments (Note 12) (.34) PUC restructuring charge (Note 6) (5.56) FERC municipalities settlement (Note 6) (0.19) Windfall profits tax (.23) SER settlement .11 U.K. tax rate reduction .06 .06 PPL Gas Utilities acquisition costs .03 (.03) Other impacts of restructuring .22 ----- ------ ----- Earnings (loss) per share - actual $2.84 $(3.46) $1.80 ===== ====== =====
The earnings of PPL for 1999, 1998 and 1997 were impacted by several one- time adjustments. Refer to specific Notes to Financial Statements for discussion of certain of these one-time adjustments. The one-time adjustments without note references are discussed in "Other Income and (Deductions)." In addition, the PUC restructuring adjustments provided a favorable impact of about 22 cents per share on earnings in the second half of 1998. These adjustments included lower depreciation on impaired generation assets, reduced accruals for taxes other than income and a regulatory adjustment to unbilled revenues. These favorable impacts were partially offset by the immediate expensing of computer software costs identified as impaired in restructuring accounting adjustments. Excluding the effects of these one-time adjustments, 1999 earnings were $2.35 compared with adjusted earnings of $1.87 for 1998. (In 1999, PPL discontinued including the impact of weather in calculating adjusted earnings per share.) The adjusted earnings for 1999 represents a 48 cents per share improvement, or about 26%, compared with 1998. The earnings improvement was primarily due to higher margins on wholesale energy and marketing activities, an increase in electricity supplied to commercial and industrial customers, lower taxes, lower depreciation on generation assets, and increased earnings from unregulated operations. The earnings per share for 1999 also reflects the benefit of fewer common shares outstanding, resulting from stock repurchase programs. In addition, 1998 earnings were adversely impacted by the unusually mild winter weather. These earnings improvements in 1999 were partially offset by a four percent rate reduction for electric delivery customers in Pennsylvania and by the loss of customers who shopped for alternate electric generation suppliers. In addition, 1998 earnings benefited from certain regulatory treatments that did not carry over to 1999. The adjusted earnings of 1998 were 13 cents per share, or 7%, lower than the similarly adjusted earnings in 1997. Mild winter weather in 1998 adversely affected earnings by about 20 cents per share. On a weather-adjusted basis, PPL Electric Utilities' electric delivery sales were 2.9% higher in 1998 than 1997. Earnings in 1998 were also favorably impacted by higher wholesale electricity revenues. These earnings improvements were partially offset by higher operating expenses in 1998 from 1997. This includes higher costs associated with computer information systems, and additional payroll, consultant services and other expenses to meet the requirements of retail competition. Increased firm transmission costs related to the Energy Marketing Center activities and a higher provision for uncollectible customer accounts also increased operating expenses. Electric Energy Sales PPL Electric Utilities' electricity sales for 1999, 1998 and 1997 were as follows:
1999 1998 1997 ---- ---- ---- (Millions of kWh) Electricity delivered to retail customers by PPL Electric Utilities (a) 33,045 32,144 31,964 Less: Electricity supplied by others 9,621 1,999 65 ------ ------ ------ Electricity supplied to retail customers by PPL Electric Utilities 23,424 30,145 31,899 Electricity supplied to retail customers by PPL EnergyPlus 10,271 1,506 ------ ------ ------ Total electricity supplied to retail customers (a) 33,695 31,651 31,899 Wholesale electricity sales 31,683 36,708 21,454
(a) kWh for customers residing in PPL Electric Utilities' service territory who are receiving energy from PPL Electric Utilities or PPL EnergyPlus will be reflected in both of these categories. In 1998, there was a pilot of the Electric Choice Program under the Customer Choice Act. Beginning on January 1, 1999, customers were allowed to choose their electricity supplier. Customers making this choice continue to have their electricity delivered by the utility that serves their territory. Electricity delivered to retail customers increased by 901 million kWh, or 2.8%, in 1999 over 1998. This increase was primarily due to the mild winter in 1998. If normal weather had been experienced in both 1999 and 1998, deliveries would have increased by 0.6%. Industrial sales showed no growth in 1999. Electricity delivered in 1998 increased by 180 million kWh, or 0.6%, from 1997. However, if normal weather had been experienced in these years, deliveries would have increased by 2.9%. This increase reflected strong third and fourth quarter deliveries to all customer classes. Electricity supplied to retail customers increased by 2,044 million kWh, or 6.5%, in 1999 as compared to 1998. This increase was due to sales by PPL EnergyPlus in the competitive market, and the impact of mild winter weather in 1998. The slight decrease in electricity supplied in 1998 compared to 1997 was due to the impact of weather and the pilot Electric Choice Program. Wholesale electricity sales, which includes sales to other utilities and energy marketers through contracts, spot market transactions or power pool arrangements, decreased by 5,025 million kWh in 1999 when compared to 1998. This was primarily the result of decreased activity of the Energy Marketing Center in the electricity wholesale market, because of increased retail market needs and the decline of contract sales. See the following section for more information. Operating Revenues Electric - -------- The increase (decrease) in revenues from electric operations was attributable to the following:
1999 vs. 1998 1998 vs. 1997 ------------- ------------- (Millions of Dollars) Retail Electric Revenue PPL Electric Utilities - electric delivery and PLR load $(338) $ 7 PPL EnergyPlus - electric generation supply 415 PPL Global - Emel/EC - electric delivery 245 Other 26 6 ----- ----- $ 348 $ 13 ===== =====
Operating revenues from retail electric operations increased by $348 million in 1999 over 1998. PPL Electric Utilities and PPL EnergyPlus revenues increased by $77 million, or 3.3%, for the same period. This increase, in part, reflects the unfavorable impact of mild winter weather on 1998 sales. Also, PPL Electric Utilities and PPL EnergyPlus provided 6.5% more electricity to retail customers during 1999 as compared with 1998. These revenue gains were partially offset by a one-year 4% reduction in PPL Electric Utilities' regulated rates, effective January 1, 1999, in connection with the PUC Final Order in PPL Electric Utilities' restructuring proceeding. PPL Global consolidated the financial results of Emel and EC in the third quarter of 1999, effective from January 1, 1999. Accordingly, "Electric Operating Revenues" includes Emel and EC revenues from delivering electricity to their customers in Central America. See Note 1 to Financial Statements for additional information. Operating revenues for electric operations increased by $13 million in 1998 from 1997. PPL Electric Utilities' electricity deliveries increased by 2.9%, contributing to this revenue increase. Also, PPL Electric Utilities' revenues increased due to a change in the regulatory treatment of energy costs. These revenue gains were substantially offset by mild winter weather in 1998. Gas and Propane - --------------- PPL acquired PPL Gas Utilities in August 1998. The results of PPL Gas Utilities, including revenues and the associated costs from gas and propane operations, have been recorded subsequent to acquisition. Wholesale Energy Marketing and Trading - -------------------------------------- The increase (decrease) in revenues from wholesale energy marketing and trading activities was attributable to the following:
1999 vs. 1998 1998 vs. 1997 ------------- ------------- (Millions of Dollars) Electric Bilaterial Sales $ 62 $496 PJM 63 Cost-based contracts (69) (45) Oil & gas sales 229 62 Other 1 (3) ---- ---- $223 $573 ==== ====
Operating revenues from wholesale energy marketing and trading increased by $223 million in 1999 over 1998. This increase was predominately due to wholesale gas revenues, which increased nearly four-fold. This increase was, in part, due to a need for more supply to meet the greater demand for gas-fired generation and an increase in retail gas marketing activities. The decrease in revenues from cost-based contracts reflects the phase down of the capacity and energy agreement with JCP&L by 189,000 MW from 1998. The contract expired on December 31, 1999. Revenues in 1998 increased by $573 million over 1997, despite the phase- down of the capacity and energy agreement with JCP&L and the end of the capacity and energy agreement with Atlantic. The overall revenue increase reflected PPL Electric Utilities' continued emphasis on competing in wholesale markets and support of PPL EnergyPlus requirements. Energy purchases also increased to meet these increased sales. Refer to "Energy Purchases" for more information. PUC Restructuring Proceeding Refer to Note 4 to Financial Statements for information regarding the PUC restructuring proceeding. Energy-Related Businesses Energy-related businesses (see Note 1 to Financial Statements) contributed $60 million to the 1999 operating income of PPL, which was an increase of $35 million from 1998. The improvement reflected PPL Global's higher equity earnings from its additional investment in WPD and additional operating income provided by the mechanical contracting and engineering subsidiaries. Energy- related businesses are expected to provide an increasing share of PPL's future earnings. Energy-related business provided an additional $16 million to operating income in 1998 compared with 1997. This was primarily due to PPL Global's higher equity earnings from its additional investments in Emel, EC and WPD. With respect to PPL Global's investment in WPD, PPL Corporation is required to file audited financial statements of WPD, as an amendment to this 10-K , when such statements become available. WPD's fiscal year ends at March 31, 2000, and it is expected that such financial statements will become available on or prior to June 30, 2000. Electric Fuel Costs Electric fuel costs decreased by $44 million in 1999 when compared to 1998. The decrease resulted from lower generation by PPL Electric Utilities' coal- fired and oil/gas fired units, as well as lower fuel prices for coal. The lower coal-fired generation resulted from units being dispatched less during off-peak periods, as a result of NOx allowances affecting the unit costs from May to September of 1999. The Holtwood plant closing and the Sunbury plant sale (See "Power Plant Operations" discussion) also contributed to the decrease in generation. In addition, PPL Electric Utilities entered into a rail contract which lowered coal freight prices effective June 1999. These decreases were partially offset by higher fuel prices for nuclear and oil/gas fired stations. Electric fuel expense increased by $14 million in 1998 when compared to 1997. This increase reflects higher generation at the coal and oil/gas fired stations. These units, particularly Martins Creek, were needed as a result of increased wholesale energy marketing and trading by the Energy Marketing Center. This increase was partially offset by lower fuel prices for all units, especially oil/gas fired stations. Energy Purchases Excluding the purchases made by Emel and EC, which were consolidated by PPL Global effective January 1, 1999, energy purchases increased by $316 million in 1999 when compared to 1998. The increase was primarily due to increased gas purchases by the Energy Marketing Center, additional wholesale purchases to support PPL EnergyPlus, and higher wholesale prices for electricity. These increases were partially offset by a decrease in the volume of electricity purchases and the reduction of the liability for above-market NUG purchases. Energy purchases increased by $556 million in 1998 when compared to 1997. The increase was primarily due to greater quantities of energy purchased to meet the increased wholesale energy marketing and trading by the Energy Marketing Center, which includes increased purchases of natural gas and electric capacity for resale. The related sales are included in wholesale energy sales. In addition, the overall market price of purchased power was higher during 1998 compared to 1997 due to market volatility. Other Operation Expenses Other operation expenses increased by $91 million from 1998 to 1999. Operating expenses of acquired companies and certain regulatory impacts caused a substantial portion of this increase. These included: . PPL Global's consolidation of Emel and EC, effective January 1, 1999, which added about $25 million in operation expenses. PPL Global's acquisition of Penobscot Hydro in 1999 added another $4 million of operation expenses. . About $23 million of additional operation expenses of PPL Gas Utilities recorded in 1999 compared to 1998. PPL Gas Utilities was acquired in August 1998. . About $46 million of regulatory credits recorded in 1998. These credits were for the loss of revenue as a result of the pilot Electric Choice Program and the deferral of undercollected energy costs. No similar items were reflected in 1999, as the pilot program was completed and energy costs were no longer recoverable through the ECR. Eliminating the effects of the above amounts, the other operation expenses of PPL decreased by $7 million in 1999 compared with 1998. This decrease was primarily due to PPL Electric Utilities' cost-cutting initiatives to increase shareowner value, gains on the sale of emission allowances and decreased load dispatching activities for system control. These decreases were partially offset by additional expenses associated with customer choice, and additional marketing expenses by PPL EnergyPlus. Also, wages and employee benefits were higher in 1999 than 1998. Other operation expenses increased by $92 million from 1997 to 1998. This increase reflected higher costs associated with computer information systems, and additional payroll, consultant services and other expenses to meet the requirements of retail competition. This increase was also due to increased firm transmission costs related to the Energy Marketing Center activities, and higher provisions for uncollectible customer accounts. Operation costs of PPL Gas Utilities, which was acquired in 1998, also added to the increase. The increases in 1998 were partially offset by credits recorded in connection with the pilot Electric Choice Program. Maintenance Expenses Maintenance expenses increased by $33 million in 1999 from 1998. About half of the increase was due to the consolidation of Emel effective January 1, 1999 and the acquisition of PPL Gas Utilities in August 1998. The other half of this increase was due to higher costs of outage-related and other maintenance at PPL Electric Utilities' fossil and nuclear power plants, and additional expenses to maintain transmission and distribution facilities. Power Plant Operations In April 1999, PPL Electric Utilities closed its Holtwood coal-fired generating station. The closing was part of an effort to reduce operating costs and position PPL Electric Utilities for the competitive marketplace. The adjacent hydroelectric plant continues to operate. In November 1999, PPL Electric Utilities sold its Sunbury plant and the principal assets of its wholly-owned coal processing subsidiary, Lady Jane Collieries, to Sunbury Holdings, LLC. PPL Electric Utilities received cash proceeds of $107 million for the assets, including coal inventory, which resulted in a one-time contribution to earnings of about 28 cents per share. Depreciation and Amortization Depreciation and amortization expenses decreased by $81 million from 1998 to 1999. This decrease was mainly due to the write-down of generation-related assets in connection with the restructuring adjustments recorded in June 1998. The decrease was partially offset by depreciation associated with the acquisition of PPL Gas Utilities in August 1998 and the consolidation of Emel effective January 1, 1999. Depreciation and amortization expenses decreased by $47 million from 1997 to 1998. This decrease also reflected the write-down of impaired generation- related assets. Other Income and (Deductions) Other income of PPL increased by $31 million from 1998 to 1999. PPL Global's earnings for 1999 reflected a pre-U.S. tax gain of $78 million from the sale of SWEB's electricity supply business. Also, PPL Electric Utilities sold its Sunbury plant and the principal assets of its wholly owned subsidiary, Lady Jane Collieries, recognizing a $66 million pre-tax gain. These increases in 1999 were partially offset by a $51 million write-down of certain of PPL Global's international investments: WPD, Aguaytia and BGG. Other income in 1998 also included several favorable one-time adjustments: a $30 million recovery from SER to settle a suit over disputed purchase prices, a $9 million credit for a reduction in U.K. corporate tax rates, and a $6 million credit to earnings to reverse the prior expensing of PPL Gas Utilities acquisition costs. Other income in 1998 increased by $94 million from 1997. This increase was primarily due to the favorable one-time adjustments recorded in 1998, as noted above, and a windfall profits tax incurred by PPL Global in 1997. In July 1997, the U.K. imposed a windfall profits tax on privatized utilities. SWEB's tax was about $148 million, of which PPL Global's proportionate share was $37 million. Financing Costs PPL experienced higher financing costs associated with long-term debt during the past few years, primarily associated with the issuance of $2.42 billion of transition bonds by PP&L Transition Bond Company and the issuance of medium-term notes by PPL Capital Funding. Refer to "Financing Activities" for more information. Interest on long-term debt and dividends on preferred stock increased from $235 million in 1996 to $259 million in 1999, for a total increase of $24 million. Interest on short-term debt, net of capitalized interest and AFUDC borrowed funds, increased from $13 million in 1996 to $44 million in 1999. This increase reflects PPL Capital Funding's commercial paper program initiated in 1998, which added short-term debt. Income Taxes Income tax expense decreased by $85 million in 1999 from 1998. This was primarily due to deferred income taxes no longer required due to securitization. Income tax expense in 1998 increased by $22 million from 1997. This was primarily due to a $106 million increase in pre-tax book income. Financial Condition ------------------- Energy Marketing and Trading Activities PPL Electric Utilities purchases and sells wholesale electric capacity and energy under its FERC market-based tariff. PPL Electric Utilities has entered into agreements to sell firm capacity or energy under its market-based tariff to certain entities located inside and beyond the PJM power pool. PPL Electric Utilities enters into these agreements to market available energy and capacity from its generating assets and to profit from market price fluctuations. If PPL Electric Utilities were unable to deliver firm capacity and energy under these agreements, under certain circumstances it would be required to pay damages. These damages would be based on the difference between the market price to acquire replacement capacity or energy, and the contract price of the undelivered capacity or energy. Depending on price volatility in the wholesale energy markets, such damages could be significant. Extreme weather conditions, unplanned generating plant outages, transmission disruptions, non-performance by counterparties (or their counterparties) with which it has power contracts and other factors could affect PPL Electric Utilities' ability to meet its firm capacity or energy obligations, or cause significant increases in the market price of replacement capacity and energy. Although PPL Electric Utilities attempts to mitigate these risks, there can be no assurance that it will be able to fully meet its firm obligations, that it will not be required to pay damages for failure to perform, or that it will not experience counterparty non-performance in the future. PPL Electric Utilities attempts to mitigate risks associated with open contract positions by holding back generation capacity to deliver electricity to satisfy its net firm sales contracts and by purchasing firm transmission service. In addition, PPL Electric Utilities' Energy Marketing Center adheres to the Company's risk management policy and programs, including established credit policies to evaluate counterparty credit risk. To date, PPL Electric Utilities has not experienced any significant losses due to non-performance by counterparties. During 1999, PPL Electric Utilities entered into commodity forward and option contracts for the physical purchase and sale of energy, as well as energy related contracts that could be settled financially. On January 1, 1999, PPL Electric Utilities adopted mark-to-market accounting for energy contracts executed for trading purposes, in accordance with EITF 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." Under mark-to-market accounting, gains and losses from changes in market prices on contracts executed for trading purposes are reflected in current earnings. The earnings effect of mark-to-market accounting was not significant in 1999. Under EITF 98-10, energy trading activities refer to energy contracts executed with the objective of generating profits on, or from exposure to, shifts or changes in market prices. Risk management activities refer to energy contracts that are designated as (and effective as) hedges of non-trading activities (i.e., marketing available capacity and energy and purchasing fuel for consumption). PPL Electric Utilities will continue to use accrual accounting for energy contracts that are designated as non-trading activities until it adopts SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective January 1, 2001. SFAS 133, which expands the definition of a derivative to possibly include commodity contracts that require physical delivery, requires that an entity recognize all derivatives in the statement of financial position at fair value. The accounting for changes in the fair value of a derivative will depend on the intended use of the derivative and the resulting designation. PPL Electric Utilities has entered into an agreement to provide wholesale energy marketing, trading and energy portfolio management services for an energy cooperative organization that provides energy-related services to public power entities. The market risk associated with this type of activity is not significant. PPL Electric Utilities will terminate this agreement early in 2000. PPL Electric Utilities expects to expand its activities by entering into similar agreements with other counterparties. Market Risk Sensitive Instruments Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- PPL actively manages the market risk inherent in its commodity, debt, foreign currency and equity positions. The Board of Directors of PPL has adopted a risk management policy to manage the risk exposures related to energy prices, interest rates and foreign currency exchange rates. The policy establishes a Risk Management Committee comprised of certain executive officers which oversees the risk management function. Nonetheless, adverse changes in commodity prices, interest rates, foreign currency exchange rates and equity prices may result in losses in earnings, cash flows and/or fair values. The forward-looking information presented below only provides estimates of what may occur in the future, assuming certain adverse market conditions, due to reliance on model assumptions. As a result, actual future results may differ materially from those presented. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. See Note 10 to the Financial Statements for a discussion of forward starting interest rate swaps and treasury locks to hedge debt issuances and retirements during 1999. Note 10 also describes hedge positions at December 31, 1999 to manage exposures to interest rate risk for anticipated debt issuance in the first quarter of 2000. Commodity Price Risk - Energy Marketing Center ---------------------------------------------- PPL Electric Utilities' risk management program is designed to manage the risks associated with market fluctuations in the price of electricity, natural gas, oil and emission allowances. The Company's risk management policy and programs include risk identification and risk limits management, with measurement and controls for real time risk monitoring. In 1999, PPL Electric Utilities entered into fixed-price forward and option contracts that required physical delivery of the commodity, exchange-for-physical transactions and over- the-counter contracts (such as swap agreements where settlement is generally based on the difference between a fixed and index-based price for the underlying commodity). PPL Electric Utilities expects to continue using such contracts in 2000 as well as tolling agreements or other contractual arrangements. PPL Electric Utilities enters into contracts to hedge the impact of market fluctuations on its energy-related assets, liabilities and other contractual arrangements. In addition, as defined by EITF 98-10, it enters into these contracts for trading purposes to take advantage of market opportunities. PPL Electric Utilities may at times create a net open position in its portfolio that could result in significant losses if prices do not move in the manner or direction anticipated. PPL Electric Utilities uses various methodologies to simulate forward price curves in the energy markets to estimate the size and probability of changes in market value resulting from commodity price movements. The methodologies require several key assumptions, including selection of confidence levels, the holding period of the commodity positions, and the depth and applicability to future periods of historical commodity price information. At December 31, 1999, PPL Electric Utilities estimated that a 10% adverse movement in market prices across all geographic areas and time periods could have decreased the value of PPL Electric Utilities' trading portfolio by approximately $1 million, as compared to a $16 million decrease at December 31, 1998. For PPL Electric Utilities' non-trading portfolio, a 10% adverse movement in market prices across all geographic areas and time periods could have decreased the value of PPL Electric Utilities' non- trading portfolio by approximately $11 million at December 31, 1999, as compared to a $17 million decrease at December 31, 1998. However, this effect would have been offset by the change in the value of the underlying commodity, i.e., the electricity generated. In addition to commodity price risk, PPL Electric Utilities' commodity positions are also subject to operational and event risks including, among others, increases in load demand and forced outages at generating plants. Commodity Price Risk - PPL EnergyPlus ------------------------------------- During 1999, PPL EnergyPlus entered into various arrangements with retail customers who elected to shop for an energy provider. These contracts committed PPL EnergyPlus to the sale of electricity or natural gas without a specified firm volume. The sale contracts ranged in duration from five months to three years. To hedge the price risk of these transactions, PPL EnergyPlus has the ability to supply the electricity through a one-year option contract with the Energy Marketing Center. Therefore, the potential for short-term losses associated with PPL EnergyPlus' commodity position is not significant. PPL EnergyPlus also provides for the transportation and sale of excess electricity generated by PPL Montana. Changes in the prices of this commodity can affect PPL Montana's financial results. PPL EnergyPlus manages this exposure, in part, by using financial derivatives and physical instruments in hedged transactions to reduce earnings volatility and stabilize cash flows. PPL EnergyPlus may enter into derivative financial instruments from time to time for trading purposes. At December 31, 1999, PPL EnergyPlus estimated that a 10% adverse movement in market prices across all geographic areas and time periods would not have a significant impact on the financial statements. At December 31, 1999 PPL EnergyPlus had no trading transactions as defined under EITF 98-10. Interest Rate Risk ------------------ PPL and PPL Electric Utilities have issued debt to finance their operations. Also, PPL has issued debt to provide funds for unregulated energy investments, which also increases interest rate risk. PPL and PPL Electric Utilities manage their interest rate risk by using financial derivative products to adjust the mix of fixed and floating-rate interest rates in their debt portfolios, adjusting the duration of their debt portfolios and locking in U.S. treasury rates (and interest rate spreads over treasuries) in anticipation of future financing, when appropriate. Risk limits are designed to balance risk exposure to volatility in interest expense and losses in the fair value of PPL's and PPL Electric Utilities' debt portfolio due to changes in the absolute level of interest rates. See Note 10 to Financial Statements for a discussion of financial derivative instruments outstanding at December 31, 1999. PPL's potential annual exposure to increased interest expense due to a 10% increase in interest rates was estimated at a $4.9 million at December 31, 1999, and $6.3 million at December 31, 1998. PPL is also exposed to changes in the fair value of its debt portfolio. At December 31, 1999, PPL estimated that its potential exposure to a change in the fair value of its debt portfolio through a 10% adverse movement in interest rates was $61.3 million, compared with $118.8 million at December 31, 1998. PPL utilizes various risk management instruments to reduce its exposure to adverse interest rate movements for future anticipated financings. While PPL is exposed to changes in the fair value of these instruments, they are designed such that any economic loss in value should be offset by interest rate savings at the time the future anticipated financing is completed. At December 31, 1999, PPL estimated its potential exposure to a change in the fair value of these instruments through a 10% adverse movement in interest rates at $46.3 million. At December 31, 1998 PPL had no financial derivative instruments outstanding. Market events that are inconsistent with historical trends could cause actual results to exceed estimated levels. Foreign Operations Risk ----------------------- At December 31, 1999 and 1998, PPL Global had investments of $810 million and $671 million, respectively, the majority of which were international investments in energy-related distribution facilities. PPL Global is exposed to foreign currency risk primarily through investments in affiliates in Latin America and Europe. PPL has adopted a foreign currency risk management program designed to limit or hedge future cross-border cash flows for firm transactions and commitments, and to hedge economic exposures such as anticipated dividends and projected asset sales or acquisitions when there is a high degree of certainty that the exposure will be realized. As of December 31, 1999 and 1998, PPL did not have any outstanding significant foreign currency-based financing. Nuclear Decommissioning Fund - Securities Price Risk ---------------------------------------------------- PPL Electric Utilities maintains trust funds, as required by the NRC, to fund certain costs of decommissioning Susquehanna. At December 31, 1999, these funds were invested primarily in domestic equity securities and fixed rate, fixed income securities and are reflected at fair value on the Consolidated Balance Sheet. The mix of securities is designed to provide returns to be used to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs. However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the value of fixed rate, fixed income securities are exposed to changes in interest rates. PPL Electric Utilities actively monitors the investment performance and periodically reviews asset allocation in accordance with PPL Electric Utilities' nuclear decommissioning trust policy statement. A hypothetical 10% increase in interest rates and 10% decrease in equity prices would result in an $18.6 million reduction in the fair value of the trust assets at December 31, 1999, as compared to a $13.7 million reduction at December 31, 1998. PPL Electric Utilities' restructuring settlement agreement provides for the collection of authorized nuclear decommissioning costs through the CTC. Additionally, PPL Electric Utilities is permitted to seek recovery from customers of up to 96% of any increases in these costs. Therefore, PPL Electric Utilities' securities price risk is expected to remain insignificant. Capital Expenditure Requirements The schedule below shows PPL Electric Utilities' current capital expenditure projections for the years 2000-2004 and actual spending for the year 1999. PPL Electric Utilities' Capital Expenditure Requirements
Actual -----------Projected----------- 1999 2000 2001 2002 2003 2004 (Millions of Dollars) Construction expenditures Generating facilities $ 91 $ 69 $ 69 $ 123 $ 95 $ 61 Transmission and distribution facilities 111 115 114 119 119 123 Environmental 47 98 29 5 23 21 Other 15 22 18 18 16 16 ----- ----- ----- ----- ---- ---- Total Construction Expenditures 264 304 230 265 253 221 Nuclear fuel owned and leased 42 50 55 56 56 59 Operating leases 38 28 28 28 28 28 ----- ----- ----- ----- ---- ---- Total Capital Expenditures $ 344 $ 382 $ 313 $ 349 $337 $308 ===== ===== ===== ===== ==== ====
Construction expenditures include AFUDC and Capitalized Interest which are expected to be less than $19 million in each of the years 2000-2004. PPL Electric Utilities' capital expenditure projections for the years 2000- 2004 total about $1.7 billion. Capital expenditure plans are revised from time to time to reflect changes in conditions. Acquisitions and Divestitures Refer to Note 12 to the Financial Statements for information regarding Acquisitions and Divestitures. At December 31, 1999, PPL Global had investments in foreign and domestic facilities, including investments in Emel, DelSur, and Penobscot Hydro (that are consolidated in PPL Global's financial statements), but excluding PPL Montana. PPL Global continues to pursue opportunities to develop and acquire electric generation, transmission and distribution facilities in the U.S. and abroad. Financing and Liquidity Cash and cash equivalents decreased by $207 million more during the twelve months ended December 31, 1999, compared with the same period in 1998. The reasons for this change were: . A $7 million increase in cash provided by operating activities. . A $694 million increase in cash used in investing activities, primarily due to the acquisition of the Montana generating assets, partially offset by the sale of the Sunbury generating and related assets and the sale of SWEB's supply business. . A $480 million increase in cash provided by financing activities. This increase was due to a net increase in long-term debt and a decrease in payments of common dividends. These financing inflows were partially offset by lower funds from issuing common stock, and a smaller increase in short-term debt balances. From 1997 through 1999, PPL issued $3.2 billion of long-term debt (including $2.42 billion of securitized debt issued by PP&L Transition Bond Company). For the same period, PPL issued $146 million of common stock, excluding stock issued in conjunction with the PPL Gas Utilities acquisition. From 1997 through 1999, PPL retired $2.1 billion of long-term debt and purchased $836 million of common shares. During the years 1997 through 1999, PPL Electric Utilities also incurred $185 million of obligations under capital leases. Refer to Note 11 to the Financial Statements for additional information on credit arrangements and financing activities in 1999. In February 2000, PPL Capital Funding issued $500 million of medium-term notes in the form of 7.75% series due 2005. This issuance used $500 million of the $1.2 billion SEC shelf registration filed in September 1999. (See Note 11 to the Financial Statements.) At the time of issuance, PPL also settled a number of forward-starting swaps that had been entered into in a lower interest rate environment as a means to lock-in interest rates and limit exposure to increasing interest rates, all pursuant to PPL's interest rate risk management program. PPL received net proceeds of $15.8 million from the settlement of these contracts, which will be deferred on the balance sheet and subsequently amortized over the life of the medium-term notes. The effective interest rate on the medium-term notes was reduced by approximately 75 basis points as a result of this hedging activity. Also, in conjunction with this transaction, PPL swapped $350 million notional amount of these notes from fixed to floating-rate instruments, with an initial average rate of three-months LIBOR plus 45 basis points, to adjust the amount of floating-rate debt carried in its liability portfolio. In the first quarter of 2000, PPL Electric Utilities intends to call for redemption its remaining $28 million of First Mortgage Bonds, 9-1/4% Series due 2019, through the maintenance and replacement fund provisions of its mortgage. On February 25, 2000, the PPL Board of Directors declared a quarterly common stock dividend of $.265 per share, payable April 1, 2000 to shareowners of record on March 10, 2000. The amount of the April 1, 2000 dividend represents an increase of 6% from the amount of the quarterly dividend ($.25 per share) that had been paid since October 1, 1998. Future dividends, declared at the discretion of the Board of Directors, will be dependent upon future earnings, financial requirements and other factors. Financial Indicators Earnings for 1999, 1998 and 1997 were impacted by one-time adjustments. (See "Earnings" for additional information.) The following financial indicators for PPL reflect the elimination of these impacts from earnings, and provide an additional measure of the underlying earnings performance of PPL and its subsidiaries.
1999 1998 1997 ------ ------ ------ Earnings per share, as adjusted $ 2.35 $ 1.87 $ 2.00 Return on average common equity 16.89% 10.98% 11.69% Ratio of pre-tax income to interest charges 3.04 3.28 3.59 Dividends declared per share $ 1.00 $1.335 $ 1.67
See Item 6 "Selected Financial and Operating Data" for additional financial indicators. Environmental Matters See Note 16 to Financial Statements for a discussion of environmental matters. Increasing Competition The electric utility industry has experienced, and will continue to experience, a significant increase in the level of competition in the energy supply market at both the state and federal level. State Activities ---------------- Refer to Note 4 to the Financial Statements for a discussion of PPL Electric Utilities' PUC restructuring proceeding under the Customer Choice Act. Also refer to Note 4 regarding PPL Electric Utilities' transfer of its retail electric marketing function to PPL EnergyPlus. PPL EnergyPlus has a PUC license to act as a Pennsylvania EGS. This license permits PPL EnergyPlus to offer retail electric supply to participating customers in the service territory of PPL Electric Utilities and in the service territories of other Pennsylvania utilities. In 1999, PPL EnergyPlus served industrial and commercial customers in Pennsylvania, New Jersey and Delaware, and is also licensed to sell energy in Maine and Montana. Federal Activities ------------------ PPL Electric Utilities and PPL EnergyPlus have authority from the FERC to sell specified ancillary services at market-based rates in the following markets: the New England power pool, the New York power pool, the market administered by the California ISO, and the PJM. PPL Electric Utilities and PPL EnergyPlus have authority from the FERC to sell electric energy and capacity at market-based rates and to sell, assign or transfer transmission rights and associated ancillary services. PPL Electric Utilities has a FERC-filed code of conduct governing its relationship with such affiliates that engage in the sale and/or transmission of electric energy. Proposed Corporate Realignment In September 1999, the Boards of Directors of PPL and PPL Electric Utilities approved the initiation of a corporate realignment, in order to better position PPL and its subsidiaries in the new competitive marketplace. This realignment includes the following key features: . The transfer of all of PPL Electric Utilities' electric generating facilities and related assets to new generating subsidiaries of PPL, under a new unregulated generation company. In order to effect this transfer, these assets will be released from PPL Electric Utilities' Mortgage. . The transfer of PPL Electric Utilities' wholesale energy marketing business, to PPL EnergyPlus, which will be the wholesale and retail energy marketing subsidiary of PPL and will no longer be a subsidiary of PPL Electric Utilities. . The transfer of the U.S. electric generation subsidiaries of PPL Global to the new generating company. Upon completion of this corporate realignment, PPL Electric Utilities' principal business will be the transmission and distribution of electricity to serve retail customers in its franchised territory in eastern and central Pennsylvania. PPL Global's principal business will be the acquisition or development of both U.S. and international energy projects and the ownership of international energy projects. Other existing subsidiaries of PPL and PPL Electric Utilities will generally be aligned in the new corporate structure according to their principal business functions. The proposed corporate realignment is subject to approval from the PUC, the FERC and the NRC, as well as certain third-party consents. In December 1999, the company filed applications for these regulatory approvals. Several protests and petitions to intervene have been filed in these proceedings, raising a variety of issues associated with the corporate realignment. PPL currently expects to complete the corporate realignment in mid-2000. Year 2000 PPL successfully addressed the Year 2000 issue. The Year 2000 issue was the result of computer programs written using two digits rather than four to define the applicable year and other programming techniques which limited date calculations or assigned special meanings to some dates. All of PPL Electric Utilities' computer systems that had date-sensitive software or microprocessors could have recognized a date using "00" as the year 1900 rather than the year 2000. This could have resulted in a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to measure usage, read meters, process transactions, send bills, receive payments, distribute electricity or operate electric generation stations. In addition, the Year 2000 issue could have affected the ability of customers to receive bills sent by PPL Electric Utilities or to make payments on these bills. PPL Electric Utilities has not experienced any significant problems in this regard. Based upon present assessments, PPL Electric Utilities estimates that it incurred approximately $13 million in Year 2000 remediation costs. These costs have been expensed as incurred. Other PPL domestic and international affiliates successfully completed the Year 2000 rollover with no significant problems. PPL's electricity distribution companies in the U.K., Chile, Bolivia, and El Salvador all reported fewer than normal outages, which were unrelated to Year 2000. In addition, PPL Gas Utilities and generating facilities in Montana and Maine also successfully made the Year 2000 transition without incident. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to "Quantitative and Qualitative Disclosures About Market Risk," in Review of Financial Condition and Results of Operations, and Note 1 to the Financial Statements. (Address and phone number appears here) Thirty South Seventeenth Street Philadelphia, PA 19103-4094 Telephone 215 575 5000 (PricewaterhouseCoopers LLP logo appears here) Report of Independent Accountants - --------------------------------- To the Shareowners and Board of Directors of PPL Corporation and to the Shareowner and Board of Directors of PPL Electric Utilities Corporation In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 14(a)(1) present fairly, in all material respects, the consolidated financial position of PPL Corporation and its subsidiaries ("PPL") at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 and the consolidated financial position of PPL Electric Utilities Corporation and its subsidiaries ("PPL Electric Utilities") at December 31, 1999 and 1998 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of management of PPL and PPL Electric Utilities; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania January 31, 2000 (THIS PAGE LEFT BLANK INTENTIONALLY.) PPL Corporation --------------- Management's Report on Responsibility for Financial Statements -------------------------------------------------------------- The management of PPL Corporation is responsible for the preparation, integrity and objectivity of the consolidated financial statements and all other sections of this annual report. The financial statements were prepared in accordance with generally accepted accounting principles and the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission. In preparing the financial statements, management makes informed estimates and judgments of the expected effects of events and transactions based upon currently available facts and circumstances. Management believes that the financial statements are free of material misstatement and present fairly the financial position, results of operations and cash flows of PPL. PPL's consolidated financial statements have been audited by PricewaterhouseCoopers LLP (PricewaterhouseCoopers), independent certified public accountants. PricewaterhouseCoopers' appointment as auditors was previously ratified by the shareowners. Management has made available to PricewaterhouseCoopers all PPL's financial records and related data, as well as the minutes of shareowners' and directors' meetings. Management believes that all representations made to PricewaterhouseCoopers during its audit were valid and appropriate. PPL maintains a system of internal control designed to provide reasonable, but not absolute, assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition and the prevention and detection of fraudulent financial reporting. The concept of reasonable assurance recognizes that the cost of a system of internal control should not exceed the benefits derived and that there are inherent limitations in the effectiveness of any system of internal control. Fundamental to the control system is the selection and training of qualified personnel, an organizational structure that provides appropriate segregation of duties, the utilization of written policies and procedures and the continual monitoring of the system for compliance. In addition, PPL maintains an internal auditing program to evaluate PPL's system of internal control for adequacy, application and compliance. Management considers the internal auditors' and PricewaterhouseCoopers' recommendations concerning its system of internal control and has taken actions which are believed to be cost- effective in the circumstances to respond appropriately to these recommendations. Management believes that PPL's system of internal control is adequate to accomplish the objectives discussed in this report. The Board of Directors, acting through its Audit Committee, oversees management's responsibilities in the preparation of the financial statements. In performing this function, the Audit Committee, which is composed of four independent directors, meets periodically with management, the internal auditors and the independent certified public accountants to review the work of each. The independent certified public accountants and the internal auditors have free access to the Audit Committee and to the Board of Directors, without management present, to discuss internal accounting control, auditing and financial reporting matters. Management also recognizes its responsibility for fostering a strong ethical climate so that PPL's affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in the business policies and guidelines of PPL's operating subsidiaries. These policies and guidelines address: the necessity of ensuring open communication within PPL; potential conflicts of interest; proper procurement activities; compliance with all applicable laws, including those relating to financial disclosure; and the confidentiality of proprietary information. William F. Hecht Chairman, President and Chief Executive Officer John R. Biggar Senior Vice President and Chief Financial Officer PPL Electric Utilities Corporation ---------------------------------- Management's Report on Responsibility for Financial Statements -------------------------------------------------------------- The management of PPL Electric Utilities Corporation is responsible for the preparation, integrity and objectivity of the consolidated financial statements and all other sections of this annual report. The financial statements were prepared in accordance with generally accepted accounting principles and the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission. In preparing the financial statements, management makes informed estimates and judgments of the expected effects of events and transactions based upon currently available facts and circumstances. Management believes that the financial statements are free of material misstatement and present fairly the financial position, results of operations and cash flows of PPL Electric Utilities. PPL Electric Utilities' consolidated financial statements have been audited by PricewaterhouseCoopers LLP (PricewaterhouseCoopers) independent certified public accountants. PricewaterhouseCoopers' appointment as auditors was previously ratified by the shareowners of PPL. Management has made available to PricewaterhouseCoopers all PPL Electric Utilities' financial records and related data, as well as the minutes of shareowners' and directors' meetings. Management believes that all representations made to PricewaterhouseCoopers during its audit were valid and appropriate. PPL Electric Utilities maintains a system of internal control designed to provide reasonable, but not absolute, assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition and the prevention and detection of fraudulent financial reporting. The concept of reasonable assurance recognizes that the cost of a system of internal control should not exceed the benefits derived and that there are inherent limitations in the effectiveness of any system of internal control. Fundamental to the control system is the selection and training of qualified personnel, an organizational structure that provides appropriate segregation of duties, the utilization of written policies and procedures and the continual monitoring of the system for compliance. In addition, PPL Electric Utilities maintains an internal auditing program to evaluate PPL Electric Utilities' system of internal control for adequacy, application and compliance. Management considers the internal auditors' and PricewaterhouseCoopers' recommendations concerning its system of internal control and has taken actions which are believed to be cost-effective in the circumstances to respond appropriately to these recommendations. Management believes that PPL Electric Utilities' system of internal control is adequate to accomplish the objectives discussed in this report. The Board of Directors, acting through PPL Corporation's Audit Committee, oversees management's responsibilities in the preparation of the financial statements. In performing this function, the Audit Committee, which is composed of four independent directors, meets periodically with management, the internal auditors and the independent certified public accountants to review the work of each. The independent certified public accountants and the internal auditors have free access to PPL Corporation's Audit Committee and to the Board of Directors, without management present, to discuss internal accounting control, auditing and financial reporting matters. Management also recognizes its responsibility for fostering a strong ethical climate so that PPL Electric Utilities' affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in PPL Electric Utilities' business policies and guidelines. These policies and guidelines address: the necessity of ensuring open communication within PPL Electric Utilities; potential conflicts of interest; proper procurement activities; compliance with all applicable laws, including those relating to financial disclosure; and the confidentiality of proprietary information. William F. Hecht Chairman, President and Chief Executive Officer John R. Biggar Senior Vice President and Chief Financial Officer ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, PPL Corporation and Subsidiaries (Millions of Dollars, except per share data)
1999 1998 1997 Operating Revenues Electric.............................................................. $ 2,758 $ 2,410 $ 2,397 Natural gas and propane............................................... 109 35 Wholesale energy marketing and trading................................ 1,446 1,223 650 Energy related businesses............................................. 277 118 30 -------- -------- -------- Total................................................................. 4,590 3,786 3,077 -------- -------- -------- Operating Expenses Operation Electric fuel....................................................... 446 490 476 Natural gas and propane............................................. 46 13 Energy purchases for retail load and wholesale...................... 1,518 1,060 504 Other............................................................... 686 595 503 Amortization of recoverable transition costs........................ 172 Maintenance........................................................... 215 182 184 Depreciation and amortization (Note 1)................................ 257 338 385 Taxes, other than income (Note 8)..................................... 161 188 204 Energy related businesses............................................. 217 93 21 -------- -------- -------- Total................................................................. 3,718 2,959 2,277 -------- -------- -------- Operating Income........................................................ 872 827 800 -------- -------- -------- Other Income and (Deductions)........................................... 97 66 (28) -------- -------- -------- Income Before Interest, Income Taxes and Minority Interest.............. 969 893 772 Interest Expense........................................................ 277 230 215 -------- -------- -------- Income Before Income Taxes, Minority Interest and Extraordinary Items..................................................... 692 663 557 Income Taxes (Note 8)................................................... 174 259 237 Minority Interest (Note 1).............................................. 14 -------- -------- -------- Income Before Extraordinary Items....................................... 504 404 320 Extraordinary Items (net of income taxes) (Note 6)...................... (46) (948) -------- -------- -------- Income (Loss) Before Dividends on Preferred Stock....................... 458 (544) 320 Preferred Stock Dividend Requirements................................... 26 25 24 -------- -------- -------- Net Income (Loss)....................................................... $ 432 ($569) $ 296 ======== ======== ======== Earnings Per Share of Common Stock Basic and Diluted (Note 1): Income Before Extraordinary Items................................... $ 3.14 $ 2.29 $ 1.80 Extraordinary Items (net of tax).................................... (0.30) (5.75) -------- -------- -------- Net Income (Loss)....................................................... $ 2.84 ($3.46) $ 1.80 ======== ======== ======== Dividends Declared per Share of Common Stock............................ $ 1.00 $ 1.335 $ 1.67
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, PPL Corporation and Subsidiaries (Millions of Dollars)
1999 1998 1997 Cash Flows From Operating Activities Net income (loss).............................................. $ 432 ($569) $ 296 Extraordinary items (net of income taxes)...................... (46) (948) ------------ ------------ ------------ Net income before extraordinary items.......................... 478 379 296 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization................................ 257 338 385 Regulatory debits and credits................................ 194 (61) (36) Amortization of property under capital leases................ 59 58 68 Amortization of NUG above market liability................... (104) Gain on sale of generating assets and electric energy projects............................................. (146) Minority interest............................................ 14 Writedown of investments in electric energy projects......... 51 Preferred stock dividend requirement......................... 26 25 24 Equity in (earnings) loss of unconsolidated affiliates....... (59) (49) 2 Deferred income taxes and investment tax credits............. (43) 12 18 Change in current assets and current liabilities............... (82) (42) (2) Other operating activities - net............................... (1) (23) 22 ------------ ------------ ------------ Net cash provided by operating activities................. 644 637 777 ------------ ------------ ------------ Cash Flows From Investing Activities Expenditures for property plant and equipment.................. (318) (304) (310) Sale of generating assets and electric energy projects........ 221 Investment in generating assets and electric energy projects... (1,095) (306) (152) Sale of nuclear fuel to trust.................................. 14 54 60 Purchases of available-for-sale securities..................... (15) (72) Sales and maturities of available-for-sale securities.......... 70 111 Purchases and sales of other financial investments - net....... 4 76 Other investing activities - net............................... (1) 12 (4) ------------ ------------ ------------ Net cash used in investing activities..................... (1,179) (485) (291) ------------ ------------ ------------ Cash Flows From Financing Activities Issuance of long-term debt..................................... 2,620 495 111 Retirement of long-term debt................................... (1,644) (295) (210) Issuance of common stock....................................... 8 62 76 Purchase of treasury stock..................................... (416) (419) Issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely parent debentures.................................... 250 Purchase of subsidiary's preferred stock....................... (369) Payments on capital lease obligations.......................... (59) (58) (68) Payment of common and preferred dividends...................... (180) (278) (298) Net increase (decrease) in short-term debt..................... 215 487 (9) Other financing activities - net............................... (71) (1) (20) ------------ ------------ ------------ Net cash provided by (used in) financing activities....... 473 (7) (537) ------------ ------------ ------------ Net Increase (Decrease) In Cash and Cash Equivalents............. (62) 145 (51) Cash and Cash Equivalents at Beginning of Period............... 195 50 101 ------------ ------------ ------------ Cash and Cash Equivalents at End of Period..................... $ 133 $ 195 $ 50 ============ ============ ============ Supplemental Disclosures of Cash Flow Information Cash paid during the period for: Interest (net of amount capitalized)........................ $ 267 $ 237 $ 208 Income taxes................................................ $ 184 $ 248 $ 244
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements CONSOLIDATED BALANCE SHEET AT DECEMBER 31, PPL Corporation and Subsidiaries (Millions of Dollars)
Assets 1999 1998 Current Assets Cash and cash equivalents (Note 1)................................................ $ 133 $ 195 Accounts receivable (less reserve: 1999, $22; 1998, $16)......................... 399 298 Unbilled revenues................................................................. 310 170 Fuel, materials and supplies - at average cost.................................... 200 207 Prepayments....................................................................... 119 15 Unrealized energy trading gains................................................... 26 2 Other............................................................................. 106 61 ------------- ------------- 1,293 948 ------------- ------------- Investments Investment in unconsolidated affiliates at equity (Note 1)........................ 424 688 Nuclear plant decommissioning trust fund (Notes 1 and 9).......................... 255 206 Other (Note 10)................................................................... 16 12 ------------- ------------- 695 906 ------------- ------------- Property, Plant and Equipment Electric utility plant in service - net (Note 1) Transmission and distribution................................................ 2,462 2,179 Generation................................................................... 2,352 1,601 General...................................................................... 259 223 ------------- ------------- 5,073 4,003 Construction work in progress - at cost........................................... 181 117 Nuclear fuel owned and leased - net............................................... 139 162 ------------- ------------- Electric utility plant - net................................................. 5,393 4,282 Gas and oil utility plant - net................................................... 171 175 Other property - net.............................................................. 80 23 ------------- ------------- 5,644 4,480 ------------- ------------- Regulatory Assets and Other Noncurrent Assets (Note 6) Recoverable transition costs...................................................... 2,647 2,819 Other............................................................................. 895 454 ------------- ------------- 3,542 3,273 ------------- ------------- $11,174 $9,607 ============= =============
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
Liabilities and Equity 1999 1998 Current Liabilities Short-term debt (Note 11).......................................................... $ 857 $ 636 Long-term debt..................................................................... 468 1 Capital lease obligations.......................................................... 58 59 Above market NUG contracts (Note 6)................................................ 99 105 Accounts payable................................................................... 399 197 Taxes and interest accrued......................................................... 144 95 Dividends payable.................................................................. 43 46 Unrealized energy trading losses................................................... 28 9 Other.............................................................................. 184 128 ------------- ------------- 2,280 1,276 ------------- ------------- Long-term Debt.......................................................................... 3,689 2,983 ------------- ------------- Deferred Credits and Other Noncurrent Liabilities Deferred income taxes and investment tax credits (Note 8).......................... 1,548 1,574 Above market NUG purchases (Note 6) ............................................... 674 775 Capital lease obligations ......................................................... 67 109 Other (Notes 1 and 9) ............................................................ 892 753 ------------- ------------- 3,181 3,211 ------------- ------------- Commitments and Contingent Liabilities (Note 16)........................................ ------------- ------------- Minority Interest (Note 1).............................................................. 64 ------------- ------------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely company debentures................................. 250 250 ------------- ------------- Preferred Stock With sinking fund requirements..................................................... 47 47 Without sinking fund requirements.................................................. 50 50 ------------- ------------- 97 97 ------------- ------------- Shareowners' Common Equity Common stock....................................................................... 2 2 Capital in excess of par value..................................................... 1,860 1,866 Treasury stock (Note 1)............................................................ (836) (419) Earnings reinvested................................................................ 654 372 Accumulated other comprehensive income (Note 1).................................... (55) (4) Capital stock expense and other.................................................... (12) (27) ------------- ------------- 1,613 1,790 ------------- ------------- $11,174 $9,607 ============= =============
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. CONSOLIDATED STATEMENT OF SHAREOWNERS' COMMON EQUITY PPL Corporation and Subsidiaries (Millions of Dollars)
For the Years Ended December 31, --------------------------------------- 1999 1998 1997 ----------- ---------- ----------- Common stock at beginning of year........................................................ $ 2 $ 2 $ 2 Issuance of common stock........................................................... ----------- ---------- ----------- Common stock at end of year.............................................................. 2 2 2 ----------- ---------- ----------- Capital in excess of par value at beginning of year...................................... 1,866 1,669 1,590 Common stock issued through the ESOP and the DRIP (a)............................... 8 62 76 Common stock issued for purchase of PPL Gas Utilities............................... 135 Other............................................................................... (14) 3 ----------- ---------- ----------- Capital in excess of par value at end of year............................................ 1,860 1,866 1,669 ----------- ---------- ----------- Treasury stock at beginning of year...................................................... (419) Purchase of treasury stock.......................................................... (417) (419) ----------- ---------- ----------- Treasury stock at end of year............................................................ (836) (419) ----------- ---------- ----------- Earnings reinvested at beginning of year................................................. 372 1,164 1,143 Net income (loss) (b).............................................................. 432 (569) 296 Cash dividends declared on common stock............................................ (150) (223) (275) ----------- ---------- ----------- Earnings reinvested at end of year....................................................... 654 372 1,164 ----------- ---------- ----------- Accumulated other comprehensive income at beginning of year (c).......................... (4) 13 Foreign currency translation adjustments, net of tax benefit of $6, $3, $0 (b)...... (51) 1 (13) Unrealized gain (loss) on available-for-sale securities (b)......................... (2) 2 Minimum pension liability adjustment (b)............................................ (3) (2) ----------- ---------- ----------- Accumulated other comprehensive income at end of year.................................... (55) (4) - ----------- ---------- ----------- Capital stock expense at beginning of year (27) (26) (3) Other................................................................................ 15 (1) (23) ----------- ---------- ----------- Capital stock expense at end of year..................................................... (12) (27) (26) ----------- ---------- ----------- Total Shareowners' Common Equity......................................................... $ 1,613 $ 1,790 $ 2,809 =========== ========== =========== Common stock shares (thousands) at beginning of year (a)................................. 157,412 166,248 162,665 Common stock issued through ESOP and DRIP.......................................... 282 2,604 3,583 Common stock issued for purchase of PPL Gas Utilities............................... 5,556 Treasury stock purchased............................................................ (13,997) (16,996) ----------- ---------- ----------- Common stock shares at end of year....................................................... 143,697 157,412 166,248 =========== ========== =========== (a) $.01 par value, 390,000 thousand shares authorized. Each share entitles the holder to one vote on any question presented to any shareowners' meeting. (b) Statement of Comprehensive Income (Note 1): Net income (loss)................................................................... $ 432 ($569) $ 296 Other comprehensive income, net of tax: Foreign currency translation adjustments....................................... (51) 1 (13) Unrealized gain (loss) on available-for-sale securities........................ (2) 2 Minimum pension liability adjustment........................................... (3) (2) ----------- ---------- ----------- Total other comprehensive income.................................................... (51) (4) (13) ----------- ---------- ----------- Comprehensive income (loss)......................................................... $ 381 ($573) $ 283 =========== ========== ===========
(c) See Note 1 for disclosure of balances for each component of Accumulated Other Comprehensive Income. The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. CONSOLIDATED STATEMENT OF PREFERRED STOCK AT DECEMBER 31, PPL Corporation and Subsidiaries (a) (Millions of Dollars)
Shares Outstanding Outstanding Shares 1999 1998 (b) 1999 (b) Authorized PPL Electric Utilities Preferred Stock - $100 par, cumulative 4-1/2%........................... $ 25 $ 25 247,658 629,936 Series........................... 72 72 726,665 10,000,000 -------- -------- $ 97 $ 97 ======== ========
Details of Preferred Stock (c)
Sinking Fund Optional Provisions Shares Redemption Shares to be Outstanding Outstanding Price Per Redeemed Redemption 1999 (b) 1998 (b) 1999 (b) Share Annually Period With Sinking Fund Requirements Series Preferred 5.95%............................ $ 1 $ 1 10,000 (d) 10,000 April 2001 6.125%........................... 31 31 315,500 (d) (e) 2003-2008 6.15%............................ 10 10 97,500 (d) 97,500 April 2003 6.33%............................ 5 5 46,000 (d) 46,000 July 2003 -------- -------- $ 47 $ 47 ======== ======== Without Sinking Fund Requirements 4-1/2% Preferred................... $ 25 $ 25 247,658 $ 110.00 Series Preferred 3.35%............................ 2 2 20,605 103.50 4.40%............................ 11 11 117,676 102.00 4.60%............................ 3 3 28,614 103.00 6.75%............................ 9 9 90,770 (d) -------- -------- $ 50 $ 50 ======== ========
Increases (Decreases) in Preferred Stock There were no issuances or redemptions of preferred stock in 1999, 1998 or 1997. (a) Each share of PPL Electric Utilities' preferred stock entitles the holder to one vote on any question presented to PPL Electric Utilities' shareowners' meetings. There were also 10,000,000 shares of PPL's preferred stock and 5,000,000 shares of PPL Electric Utilities' preference stock authorized; none were outstanding at December 31, 1999 and 1998. (b) In 1997, PPL acquired 79.11% ($369 million par value) of the outstanding preferred stock of PPL Electric Utilities in a tender offer. PPL Electric Utilities repurchased these shares from PPL and cancelled them in August 1999, using the proceeds of securitization. (c) The involuntary liquidation price of the preferred stock is $100 per share. The optional voluntary liquidation price is the optional redemption price per share in effect, except for the 4-1/2% Preferred Stock for which such price is $100 per share (plus in each case any unpaid dividends). (d) These series of preferred stock are not redeemable prior to the following years: 5.95%, 2001; 6.125%, 6.15%, 6.33% and 6.75%, 2003. (e) Shares to be redeemed annually on October 1 as follows: 2003-2007, 57,500; 2008, 28,000. The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. CONSOLIDATED STATEMENT OF COMPANY-OBLIGATED MANDATORILY REDEEMABLE SECURITIES AT DECEMBER 31, PPL Corporation and Subsidiaries (a) PPL Electric Utilities Corporation and Subsidiaries (a) (Millions of Dollars)
Outstanding Outstanding 1999 1998 1999 Authorized Maturity (b) Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Company Debentures - $25 per security 8.10%.................. $ 150 $ 150 6,000,000 6,000,000 July 2027 8.20%.................. 100 100 4,000,000 4,000,000 April 2027 ------- -------- $ 250 $ 250 ======= ========
(a) In 1997, PPL Electric Utilities arranged for the issuance of a total of $250 million of company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures by PP&L Capital Trust and PP&L Capital Trust II, two Delaware statutory business trusts. These preferred securities are supported by a corresponding amount of junior subordinated deferrable interest debentures issued by PPL Electric Utilities to the trusts. PPL Electric Utilities owns all of the common securities, representing the remaining undivided beneficial ownership interest in the assets of the trusts. The proceeds derived from the issuance of the preferred securities and the common securities were used by PP&L Capital Trust and PP&L Capital Trust II to acquire $103 million and $155 million principal amount of Junior Subordinated Deferrable Interest Debentures, ("Subordinated Debentures") respectively. PPL Electric Utilities has guaranteed all of the trusts' obligations under the preferred securities. The proceeds of the sale of these preferred securities were loaned by PPL Electric Utilities to PPL for the tender offer for PPL Electric Utilities preferred stock. (b) The preferred securities are subject to mandatory redemption, in whole or in part, upon the repayment of the Subordinated Debentures at maturity or their earlier redemption. At the option of PPL Electric Utilities, the Subordinated Debentures are redeemable on and after April 1, 2002 (for the 8.20% securities) and July 1, 2002 (for the 8.10% securities) in whole at any time or in part from time to time. The amount of preferred securities subject to such mandatory redemption will be equal to the amount of related Subordinated Debentures maturing or being redeemed. The redemption price is $25 per security plus an amount equal to accumulated and unpaid distributions to the date of redemption. The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. CONSOLIDATED STATEMENT OF LONG-TERM DEBT AT DECEMBER 31, PPL Corporation and Subsidiaries (Millions of Dollars)
Outstanding 1999 1998 Maturity (b) First Mortgage Bonds (a) 6%.............................................. $ 125 $125 June 1, 2000 7 3/4%.......................................... 28 (c) 150 May 1, 2002 6 7/8%.......................................... 19 (c) 100 February 1, 2003 6 7/8%.......................................... 25 (c) 150 March 1, 2004 6 1/8% to 7.70%................................. 475 (c)(d) 675 2005-2009 7 3/8%.......................................... 10 (c) 100 2010-2014 9 1/4%.......................................... 28 (c) 215 2015-2019 9 3/8 to 7.30%.................................. 88 (c) 750 2020-2024 First Mortgage Pollution Control Bonds (a) 6.40% Series H.................................. 90 90 November 1, 2021 5.50% Series I.................................. 53 53 February 15, 2027 6.40% Series J.................................. 116 116 September 1, 2029 6.15% Series K.................................. 55 55 August 1, 2029 ----------- ----------- 1,112 2,579 Series 1999-1 Transition Bonds 6.08 to 7.15%................................... 2,390 (e) 2001-2008 Medium-Term Notes 5.75 to 7.7%..................................... 597 (f) 397 2000-2007 Pollution Control Revenue Bonds..................... 9 9 June 1, 2027 Unsecured Promissory Notes.......................... 17 18 2005-2022 Other Long-Term Debt................................ 38 (g) 2000-2015 ----------- ----------- 4,163 3,003 Unamortized (discount) and premium -- net........... (6) (19) ----------- ----------- 4,157 2,984 Less amount due within one year.................... (468) (1) ----------- ----------- Total long-term debt............................ $ 3,689 $ 2,983 =========== ===========
(a) Substantially all owned electric utility plant is subject to the lien of PPL Electric Utilities' Mortgage. (b) Aggregate long-term debt maturities through 2004 are (millions of dollars); 2000, $468; 2001, $315; 2002, $278; 2003, $364; 2004, $390. There are no bonds outstanding that have sinking fund requirements. (c) In August 1999, PPL Electric Utilities used a portion of the proceeds from securitization to repurchase $1.467 billion of its first mortgage bonds through tender offers and open market purchases. (d) In May 1998, PPL Electric Utilities issued $200 million First Mortgage Bonds, 6-1/8% Reset Put Securities Series due 2006. In connection with issuance, PPL Electric Utilities assigned to a third party the option to call the bonds from the holders on May 1, 2001. These bonds will mature on May 1, 2006, but will be required to be surrendered by the existing holders on May 1, 2001 either through the exercise of the call option by the callholder or, if such option is not exercised, through the automatic exercise of a mandatory put by the trustee on behalf of the bondholders. (e) In August 1999 PP&L Transition Bond Company issued $2.42 billion of transition bonds to securitize a portion of PPL Electric Utilities' stranded costs. The bonds were issued in eight different classes, with expected average lives of 1 to 8.7 years. On December 27, 1999, a $29.7 million bond principal payment was made on Class A-1 bonds. (f) In October 1999, PPL Capital Funding issued $200 million of medium-term notes in the form of 7.70% Reset Put Securities due in 2007. In connection with this issuance, PPL Capital Funding assigned to a third party an option to call the notes from the holders on November 15, 2002. These notes will mature on November 15, 2007, but will be required to be surrendered by the existing holders on November 15, 2002 either through the exercise of the call option by the callholder or, if such option is not exercised, through the automatic exercise of a mandatory put. (g) In 1999, PPL Global acquired additional interests in Emel and EC, resulting in majority ownership and control of these companies. As a result, in the third quarter PPL Global consolidated the financial statements of Emel and EC. The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. CONSOLIDATED STATEMENT OF INCOME FOR THE YEARS ENDED DECEMBER 31, PPL Electric Utilities Corporation and Subsidiaries (Millions of Dollars)
1999 1998 1997 Operating Revenues Electric.............................................. $ 2,513 $ 2,410 $ 2,397 Wholesale energy marketing and trading................ 1,420 1,223 650 Energy related businesses............................. 19 10 2 ---------- ---------- ---------- Total................................................. 3,952 3,643 3,049 ---------- ---------- ---------- Operating Expenses Operation Electric fuel....................................... 445 490 476 Energy purchases for retail load and wholesale...... 1,367 1,060 504 Other............................................... 621 584 503 Amortization of recoverable transition costs........ 172 Maintenance........................................... 195 180 184 Depreciation and amortization (Note 1)................ 233 335 385 Taxes, other than income (Note 8)..................... 153 185 204 Energy related businesses............................. 17 8 3 ---------- ---------- ---------- Total................................................. 3,203 2,842 2,259 ---------- ---------- ---------- Operating Income........................................ 749 801 790 Other Income............................................ 97 77 12 ---------- ---------- ---------- Income Before Interest and Income Taxes................. 846 878 802 Interest Expense........................................ 214 196 207 ---------- ---------- ---------- Income Before Income Taxes and Extraordinary Items...... 632 682 595 Income Taxes (Note 8)................................... 151 273 247 ---------- ---------- ---------- Income Before Extraordinary Items....................... 481 409 348 Extraordinary Item (net of income taxes) (Note 6)....... (46) (948) ---------- ---------- ---------- Net Income(Loss) Before Dividends on Preferred Stock....................................... 435 (539) 348 Dividends on Preferred Stock............................ 37 48 40 ---------- ---------- ---------- Earnings Available to PPL Corporation................... $ 398 ($587) $ 308 ========== ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, PPL Electric Utilities Corporation and Subsidiaries (Millions of Dollars)
1999 1998 1997 Cash Flows From Operating Activities Net income (loss)................................................... $ 435 ($539) $ 348 Extraordinary items (net of income taxes)........................... (46) (948) ---------- ---------- ---------- Net income before extraordinary items............................... 481 409 348 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization..................................... 233 335 385 Regulatory debts and credits...................................... 194 (61) (36) Amortization of property under capital leases..................... 59 58 68 Amortization of NUG above market liability........................ (104) Deferred income taxes and investment tax credits.................. (73) 12 20 Gain on sale of generating assets................................. (65) Change in current assets and current liabilities.................... (73) 8 (14) Other operating activities -- net................................... (7) (66) 15 ---------- ---------- ---------- Net cash provided by operating activities...................... 645 695 786 ---------- ---------- ---------- Cash Flows From Investing Activities Expenditures for property, plant and equipment...................... (300) (297) (310) Sales of nuclear fuel to trust...................................... 14 54 60 Sale of generating assets........................................... 99 Purchases of available-for-sale securities.......................... (15) (72) Sales and maturities of available-for-sale securities............... 69 88 Purchases and sales of other financial investments - net............ 76 Loan to parent...................................................... (60) (375) Other investing activities - net.................................... 1 6 (4) ---------- ---------- ---------- Net cash used in investing activities.......................... (246) (183) (537) ---------- ---------- ---------- Cash Flows From Financing Activities Issuance of long-term debt.......................................... 2,419 200 9 Retirement of long-term debt........................................ (1,497) (266) (210) Issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures.......................................... 250 Capital contribution from parent.................................... 6 7 Retirement of preferred and preference stock........................ (380) Purchase of treasury stock.......................................... (632) Payments on capital lease obligations............................... (59) (58) (67) Payment of common and preferred dividends........................... (231) (412) (344) Net increase (decrease) in short-term debt.......................... 92 35 35 Other financing activities - net.................................... (90) (1) (9) ---------- ---------- ---------- Net cash used in financing activities.......................... (378) (496) (329) ---------- ---------- ---------- Net Increase (Decrease) in Cash and Cash Equivalents.................. 21 16 (80) Cash and Cash Equivalents at Beginning of Period.................... 31 15 95 ---------- ---------- ---------- Cash and Cash Equivalents at End of Period.......................... $ 52 $ 31 $ 15 ========== ========== ========== Supplemental Disclosures of Cash Flow Information Cash paid during the period for: Interest (net of amount capitalized).............................. $ 202 $ 208 $ 201 Income taxes...................................................... $ 192 $ 261 $ 253
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. CONSOLIDATED BALANCE SHEET AT DECEMBER 31, PPL Electric Utilities Corporation and Subsidiaries (Millions of Dollars)
Assets 1999 1998 Current Assets Cash and cash equivalents (Note 1)......................... $ 52 $ 31 Accounts receivable (less reserve: 1999, $18; 1998, $16).. 274 230 Unbilled revenues.......................................... 275 163 Fuel, materials and supplies - at average cost............. 175 196 Prepayments................................................ 87 14 Unrealized energy trading gains............................ 26 2 Other...................................................... 78 58 -------- -------- 967 694 -------- -------- Investments Loan to parent and its affiliates.......................... 489 429 Nuclear plant decommissioning trust fund (Notes 1 and 9)... 255 206 Investment in unconsolidated affiliate at equity (Note 1).. 17 17 Other (Note 10)............................................ 15 13 -------- -------- 776 665 -------- -------- Property, Plant and Equipment Electric utility plant in service - net (Note 1) Transmission and distribution............................ 2,193 2,179 Generation............................................... 1,620 1,601 General.................................................. 208 223 -------- -------- 4,021 4,003 Construction work in progress - at cost.................... 139 117 Nuclear fuel owned and leased - net ....................... 139 162 -------- -------- Electric utility plant - net............................. 4,299 4,282 Gas and oil utility plant - net............................ 26 28 Other property - net....................................... 20 21 -------- -------- 4,345 4,331 -------- -------- Regulatory Assets and Other Noncurrent Assets (Note 6) Recoverable transition costs............................... 2,647 2,819 Other...................................................... 357 329 -------- -------- 3,004 3,148 -------- -------- $ 9,092 $ 8,838 ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
Liabilities and Equity 1999 1998 Current Liabilities Short-term debt (Note 11).......................................... $ 183 $ 91 Long-term debt..................................................... 352 Capital lease obligations.......................................... 58 59 Above market NUG contracts (Note 6)................................ 99 105 Accounts payable................................................... 284 178 Taxes and interest accrued......................................... 116 86 Dividends payable.................................................. 6 12 Unrealized energy trading losses................................... 28 9 Other.............................................................. 162 114 --------- --------- 1,288 654 --------- --------- Long-term debt....................................................... 3,153 2,569 --------- --------- Deferred Credits and Other Noncurrent Liabilities Deferred income taxes and investment tax credits (Note 8).......... 1,528 1,561 Above market NUG purchases (Note 6)................................ 674 775 Capital lease obligations.......................................... 67 109 Other (Notes 1 and 9).............................................. 739 724 --------- --------- 3,008 3,169 --------- --------- Commitments and Contingent Liabilities (Note 16).................. --------- --------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely company debentures................. 250 250 --------- --------- Preferred stock With sinking fund requirements..................................... 47 295 Without sinking fund requirements.................................. 50 171 --------- --------- 97 466 --------- --------- Shareowner's Common Equity Common stock....................................................... 1,476 1,476 Additional paid-in capital......................................... 55 70 Treasury stock (Note 1)............................................ (632) Earnings reinvested................................................ 419 210 Accumulated other comprehensive income (Note 1).................... (6) (6) Capital stock expense and other.................................... (16) (20) --------- --------- 1,296 1,730 --------- --------- $ 9,092 $ 8,838 ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. CONSOLIDATED STATEMENT OF SHAREOWNER'S COMMON EQUITY PPL Electric Utilities Corporation and Subsidiaries (Millions of Dollars)
For the Years Ended December 31, -------------------------------------------- 1999 1998 1997 ------------- ------------ ------------ Common stock at beginning of year.............................................. $1,476 $1,476 $1,476 Issuance of common stock.................................................. ------------- ------------ ------------ Common stock at end of year.................................................... 1,476 1,476 1,476 ------------- ------------ ------------ Additional paid-in capital at beginning of year ............................... 70 64 57 Capital contribution from PPL............................................. 6 7 Other..................................................................... (15) ------------- ------------ ------------ Additional paid-in capital at end of year...................................... 55 70 64 ------------- ------------ ------------ Treasury stock at beginning of year............................................ Purchase of treasury stock................................................ (632) ------------- ------------ ------------ Treasury stock at end of year.................................................. (632) ------------- ------------ ------------ Earnings reinvested at beginning of year....................................... 210 1,092 1,094 Net income (loss) (b)..................................................... 398 (587) 308 Cash dividends declared on common stock................................... (189) (295) (310) ------------- ------------ ------------ Earnings reinvested at end of year............................................. 419 210 1,092 ------------- ------------ ------------ Accumulated other comprehensive income at beginning of year (c)................ (6) Unrealized gain (loss) on available-for sale securities (b)............... (3) 2 Minimum pension liability adjustment (b)................................. (3) (2) ------------- ------------ ------------ Accumulated other comprehensive income at end of year.......................... (6) (6) - ------------- ------------ ------------ Capital stock expense at beginning of year..................................... (20) (20) (10) Other..................................................................... 4 (10) ------------- ------------ ------------ Capital stock expense at end of year........................................... (16) (20) (20) ------------- ------------ ------------ Total Shareowner's Common Equity............................................... $1,296 $1,730 $2,612 ============= ============ ============ Common stock shares (thousands) at beginning of year (a)....................... 157,300 157,300 157,300 Treasury stock purchased.................................................. (55,070) ------------- ------------ ------------ Common stock shares at end of year............................................. 102,230 157,300 157,300 ============= ============ ============ (a) No par value. 170,000 thousand shares authorized. All common shares of PPL Electric Utilities stock are owned by PPL. (b) Statement of Comprehensive Income (Note 1): Net income (loss)......................................................... $398 ($587) $308 Other comprehensive income, net of tax: Unrealized gain (loss) on available-for-sale securities.............. (3) 2 Minimum pension liability adjustment................................. (3) (2) ------------- ------------ ------------ Total other comprehensive income.......................................... (6) ------------- ------------ ------------ Comprehensive Income...................................................... $398 ($593) $308 ============= ============ ============
(c) See Note 1 for disclosure of balances for each component of Accumulated Other Comprehensive Income. The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. CONSOLIDATED STATEMENT OF PREFERRED STOCK AT DECEMBER 31, PPL Electric Utilities Corporation and Subsidiaries(a) (Millions of Dollars)
Shares Outstanding Outstanding Shares 1999 1998 1999 Authorized Preferred Stock -- $100 par, cumulative 4-1/2%........................... $ 25 $ 53 247,658 629,936 Series........................... 72 413 726,665 10,000,000 -------- -------- $ 97 $ 466 ======== ========
Details of Preferred Stock (b)
Sinking Fund Optional Provisions Shares Redemption Shares to be Outstanding Outstanding Price Per Redeemed Redemption 1999 1998 1999 Share Annually Period With Sinking Fund Requirements Series Preferred 5.95% ........................... $ 1 $ 30 10,000 (c) 10,000 April 2001 6.05%............................ 25 6.125% .......................... 31 115 315,500 (c) (d) 2003-2008 6.15%............................ 10 25 97,500 (c) 97,500 April 2003 6.33% ........................... 5 100 46,000 (c) 46,000 July 2003 ------- -------- $ 47 $ 295 ======= ======== Without Sinking Fund Requirements 4-1/2% Preferred................... $ 25 $ 53 247,658 $110.00 Series Preferred 3.35%............................ 2 4 20,605 103.50 4.40%............................ 11 23 117,676 102.00 4.60%............................ 3 6 28,614 103.00 6.75%............................ 9 85 90,770 (c) ------- -------- $ 50 $ 171 ======= ========
Increases (Decreases) in Preferred Stock
1999 Shares Amount 4-1/2% Preferred..................... (282,531) $ (28) Series Preferred 3.35%........................... (21,178) (2) 4.40%........................... (111,097) (12) 4.60%........................... (34,386) (3) 5.95%........................... (290,000) (29) 6.05%........................... (250,000) (25) 6.125%.......................... (834,500) (84) 6.15%........................... (152,500) (15) 6.33%........................... (954,000) (95) 6.75%........................... (759,230) (76)
Decreases in Preferred Stock normally represent: (i) the redemption of stock pursuant to sinking fund requirements; or (ii) shares redeemed pursuant to optional redemption provisions. There were no issuances or redemptions of preferred stock in 1998 through these provisions. The decreases in 1999 indicated above represent PPL Electric Utilities' purchase and cancellation of its preferred stock which had been held by PPL. PPL Electric Utilities used $380 million of securitization proceeds to effect this repurchase. (a) Each share of PPL Electric Utilities' preferred stock entitles the holder to one vote on any question presented to PPL Electric Utilities' shareowners' meetings. There were 5,000,000 shares of PPL Electric Utilities' preference stock authorized; none were outstanding at December 31, 1999 and 1998, respectively. (b) The involuntary liquidation price of the preferred stock is $100 per share. The optional voluntary liquidation price is the optional redemption price per share in effect, except for the 4-1/2% Preferred Stock for which such price is $100 per share (plus in each case any unpaid dividends). (c) These series of preferred stock are not redeemable prior to the following years: 5.95%, 2001; 6.125%, 6.15%, 6.33% and 6.75%, 2003. (d) Shares to be redeemed annually on October 1 as follows: 2003-2007, 57,500; 2008, 28,000 The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. CONSOLIDATED STATEMENT OF LONG-TERM DEBT AT DECEMBER 31, PPL Electric Utilities Corporation and Subsidiaries (Millions of Dollars)
Outstanding 1999 1998 Maturity (b) First Mortgage Bonds (a) 6% ................................................... $ 125 $ 125 June 1, 2000 7 3/4%................................................ 28 (c) 150 May 1, 2002 6 7/8%................................................ 19 (c) 100 February 1, 2003 6 7/8%................................................ 25 (c) 150 March 1, 2004 6 1/8% to 7.70%....................................... 475 (c)(d) 675 2005-2009 7 3/8%................................................ 10 (c) 100 2010-2014 9 1/4%................................................ 28 (c) 215 2015-2019 9 3/8 to 7.30%........................................ 88 (c) 750 2020-2024 First Mortgage Pollution Control Bonds (a) 6.40% Series H...................................... 90 90 November 1, 2021 5.50% Series I...................................... 53 53 February 15, 2027 6.40% Series J...................................... 116 116 September 1, 2029 6.15% Series K...................................... 55 55 August 1, 2029 ------ ------ 1,112 2,579 Series 1999-1 Transition Bonds 6.08 to 7.15%....................................... 2,390 (e) 2001-2008 Pollution Control Revenue Bonds....................... 9 9 June 1, 2027 ------ ------ 3,511 2,588 Unamortized (discount) and premium -- net ............ (6) (19) ------ ------ 3,505 2,569 Less amount due within one year....................... (352) ------ ------ Total Long-term debt................................ $3,153 $2,569 ====== ======
(a) Substantially all owned electric utility plant is subject to the lien of PPL Electric Utilities' Mortgage. (b) Aggregate long-term debt maturities through 2004 are (millions of dollars); 2000, $352; 2001, $240; 2002, $274; 2003, $275; 2004, $288. There are no bonds outstanding that have sinking fund requirements. (c) In August 1999, PPL Electric Utilities used a portion of the proceeds from securitization to repurchase $1.467 billion of its first mortgage bonds through tender offers and open market purchases. (d) In May 1998, PPL Electric Utilities issued $200 million First Mortgage Bonds, 6-1/8% Reset Put Securities Series due 2006. In connection with issuance, PPL Electric Utilities assigned to a third party the option to call the bonds from the holders on May 1, 2001. These bonds will mature on May 1, 2006, but will be required to be surrendered by the existing holders on May 1, 2001 either through the exercise of the call option by the callholder or, if such option is not exercised, through the automatic exercise of a mandatory put by the trustee on behalf of the bondholders. (e) In August 1999 PP&L Transition Bond Company issued $2.42 billion of transition bonds to securitize a portion of PPL Electric Utilities' stranded costs. The bonds were issued in eight different classes, with expected average lives of 1 to 8.7 years. On December 27, 1999, a $29.7 million bond principal payment was made on Class A-1 bonds. The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. NOTES TO FINANCIAL STATEMENTS Terms and abbreviations appearing in Notes to Financial Statements are explained in the glossary. 1. Summary of Significant Accounting Policies Business and Consolidation At December 31, 1999, PPL was the parent holding company of PPL Electric Utilities, PPL Global, PPL Montana, PPL Gas Utilities, PPL Capital Funding, PPL Spectrum, H.T. Lyons, McClure, McCarl's and Western Mass. Holdings. The financial condition and results of operations of PPL Electric Utilities (including its subsidiary PPL EnergyPlus) and PPL Global are currently the principal factors affecting PPL's financial condition and results of operations. PPL Electric Utilities generates electricity, provides electricity delivery service in eastern and central Pennsylvania, sells retail electricity throughout Pennsylvania and deregulated markets, and trades or markets wholesale energy in the United States and Canada. PPL Global develops electricity generation and delivery projects worldwide. PPL consolidates the financial statements of its affiliates when it has majority ownership and control. All significant intercompany transactions have been eliminated. Minority interests in operating results and equity ownership are reflected in the consolidated financial statements. The consolidated financial statements reflect the accounts of all controlled affiliates on a current basis, with the exception of PPL Global's investments in Emel and EC, which are included on a one-month lag. PPL Global's investment in WPD (formerly SWEB) is accounted for using the equity method and reported on a one-month lag. PPL Global has a 51% equity ownership interest in WPD but lacks voting control. (See Note 3.) Less than 50% owned affiliates are accounted for using the equity method, reported on a one-quarter lag. These reporting lags are required because financial statements from these investments are not timely for PPL Global to apply the equity method currently. When ownership interest in an affiliate increases through a series of acquisitions and subsequently results in control, as was the case for PPL Global's investments in Emel and EC, the equity method of accounting ceases to apply. In accordance with Accounting Research Bulletin 51, "Consolidated Financial Statements," the affiliate's results are included in the consolidated financial statements as though it were acquired at the beginning of the year. The portion of the affiliate's earnings owned by outside shareowners prior to PPL achieving control is included in "Minority Interest" on the Consolidated Statement of Income. Reclassification Certain amounts in the 1998 and 1997 financial statements have been reclassified to conform to the current presentation. The Consolidated Balance Sheet has been reclassified, with components presented in order of liquidity. This change recognizes the increasing significance of PPL's unregulated activities. The Consolidated Statement of Shareowner's Common Equity has also been reclassified in connection with SFAS 130, "Reporting Comprehensive Income." Earnings Per Share SFAS 128, "Earnings Per Share," requires the disclosure of basic and diluted EPS. Basic EPS is calculated by dividing earnings available to common shareowners ("Net Income" on the PPL's Consolidated Statement of Income) by the weighted average number of common shares outstanding during the period. In the calculation of diluted EPS, weighted average shares outstanding are increased for additional shares that would be outstanding if potentially dilutive securities were converted to common stock. In April 1999, PPL made its initial award of stock options under its Incentive Compensation Plan. (See Note 13 to Financial Statements.) Stock options are the only potentially dilutive securities outstanding, but had no impact on 1999 EPS. For the twelve months ended December 31, 1999 and 1998, the weighted average shares outstanding (in thousands) were 152,287 and 164,651, respectively. Management's Estimates These financial statements were prepared using management's best estimates of existing conditions. Actual results could differ from these estimates. Accounting Records The accounting records for PPL Electric Utilities and PPL Gas Utilities are maintained in accordance with the Uniform System of Accounts prescribed by the FERC and adopted by the PUC. Regulation Historically, PPL Electric Utilities accounted for its operations in accordance with the provisions of SFAS 71, which requires rate-regulated entities to reflect the effects of regulatory decisions in their financial statements. PPL Electric Utilities discontinued application of SFAS 71 for the generation portion of its business, effective June 30, 1998. PPL Gas Utilities continues to be subject to SFAS 71. Electric Utility Plant in Service Following are the classes of PPL's Electric Utility Plant in Service with associated accumulated depreciation reserves, at December 31, 1999 and 1998 (millions of dollars):
Transmission and Distribution Generation General Total ------------ ---------- ------- ----- December 31, 1999: Basis $ 3,836 $ 6,837 $ 415 $11,088 Accumulated Depreciation (1,374) (4,485) (156) (6,015) ------- ------- ------- ------- $2,462 $ 2,352 $ 259 $ 5,073 ======= ======= ======= ======= December 31, 1998: Basis $ 3,395 $ 6,351 $ 383 $10,129 Accumulated Depreciation (1,216) (4,750) (160) (6,126) ------- ------- ------- ------- $2,179 $ 1,601 $ 223 $ 4,003 ======= ======= ======= =======
Electric Utility Plant in Service is recorded at original cost, unless impaired, in which case the plant's basis is reduced to its estimated fair value. Property, plant and equipment acquired is recorded at the fair market value at acquisition date. Generation plant is reflected at the lower of cost or market value, as these assets are no longer subject to the provisions of SFAS 71. The other classes of Electric Utility Plant in Service, as well as items capitalized subsequent to an acquisition, are recorded at historical cost. AFUDC is capitalized as part of the construction costs for regulated projects. Capitalized interest is recorded for generation-related projects. The cost of repairs and replacements are charged to expense as incurred for non-regulated projects. When regulated property, plant and equipment is retired, the original cost plus the cost of retirement, less salvage, is charged to accumulated depreciation. When entire regulated operating units are sold or non-regulated plant is retired or sold, the costs of such assets and the related accumulated depreciation are removed from the balance sheet and the gain or loss, if any, is included in income, unless otherwise required by the FERC. Depreciation is computed over the estimated useful lives of property using various methods including the straight-line, composite, and group methods. PPL Electric Utilities' provisions for depreciation, as a percent of average gross depreciable property, approximated 2.1% in 1999, 3.7% in 1998 and 3.8% in 1997. Amortization of Goodwill Goodwill, which is included in "Regulatory Assets and Other Non-Current Assets" on the Consolidated Balance Sheet, is amortized on a straight-line basis over a 40-year period. Goodwill capitalized as part of PPL Global's investments in unconsolidated affiliates is also being amortized over a 40-year period. Nuclear Decommissioning and Fuel Disposal An annual provision for PPL Electric Utilities' share of the future cost to decommission the Susquehanna station, equal to the amount allowed for ratemaking purposes, is charged to depreciation expense. Such amounts are invested in external trust funds which can be used only for future decommissioning costs. See Note 9. Recoverable Transition Costs Based on the PUC Final Order, PPL Electric Utilities was amortizing its competitive transition (or stranded) costs over an eleven-year transition period beginning January 1, 1999 and ending December 31, 2009. In August 1999, competitive transition costs of $2.402 billion were converted to intangible transition costs when securitized by the issuance of transition bonds. The intangible transition costs are being amortized over the life of the transition bonds - August 1999 through December 2008, in accordance with an amortization schedule filed with the PUC. The remaining competitive transition costs are also being amortized based on an amortization schedule previously filed with the PUC, adjusted for those competitive transition costs that were converted to intangible transition costs. As a result of the conversion of a significant portion of the competitive transition costs into intangible transition costs, amortization of substantially all of the remaining competitive transition costs will occur in 2009. Liability for Above Market NUG Contracts At June 30, 1998, PPL Electric Utilities recorded an estimated liability for above market contracts with NUGS. Effective January 1999, PPL Electric Utilities began reducing this liability as an offset to "Energy Purchases" on the Consolidated Statement of Income. This reduction is based on the estimated timing of the purchases from the NUGs and projected market prices for this generation. This accounting will continue through 2014, when the last of the existing NUG contracts expires. Accounting for Price Risk Management PPL engages in price risk management activities for both energy trading and non-trading activities as defined by EITF 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." In 1999, PPL entered into commodity forward and financial contracts for the physical purchase and sale of energy as well as energy contracts that can be settled financially. In 1998, these instruments were reflected in the financial statements using the accrual method of accounting. As of January 1, 1999, PPL adopted mark-to-market accounting for energy trading contracts, in accordance with EITF 98-10, and gains and losses from changes in market prices are reflected in "Energy Purchases" on the Consolidated Statement of Income. PPL will continue to use EITF 98-10 to account for its commodity forward and financial contracts until it adopts SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" effective on January 1, 2001. At that time, PPL will change the accounting for any of its outstanding contracts that qualify as derivatives under SFAS 133. PPL and PPL Electric Utilities entered into forward starting swaps and treasury locks to hedge the interest rate risk associated with debt issuances. The gains or losses on these swaps have been deferred and are being recognized over the life of the debt, in accordance with SFAS 80, "Accounting for Futures Contracts." PPL or its subsidiaries also enter into foreign currency exchange contracts to hedge future cash flows for firm transactions and commitments and to hedge economic exposures such as anticipated dividends and projected asset sales or acquisitions when there is a high degree of certainty that the exposure will be realized. Until PPL adopts SFAS 133, market gains and losses are recognized in accordance with SFAS 52, "Foreign Currency Translation," and are included in accumulated other comprehensive income on the Consolidated Balance Sheet. Leases Leased property of PPL Electric Utilities capitalized on the Consolidated Balance Sheet consists solely of nuclear fuel. Future lease payments for nuclear fuel are based on the quantity of electricity produced at the Susquehanna station. These payments are expected to approximate $50 to $59 million per year through 2004. The maximum amount of nuclear fuel available for lease under current arrangements is $200 million. Payments on other leased property, which are classified as operating leases, are projected at $28 million per year through 2004. These leases included vehicles, personal computers and other equipment. Revenue Recognition "Electric," "Natural Gas and Propane," and "Wholesale Energy Marketing and Trading" revenues are recorded based on deliveries through the end of the calendar month. "Energy-Related Businesses" revenue includes PPL Global, PPL Spectrum, and the mechanical contracting and engineering subsidiaries. PPL Global's revenue reflects its proportionate share of affiliate earnings under the equity method of accounting, as described in the Business and Consolidation section of this Note 1. PPL Spectrum and the mechanical contracting and engineering subsidiaries record profits from construction contracts on the percentage-of- completion method of accounting. Under the percentage-of-completion method, the relationship of actual costs incurred to total estimated costs of the contracts is applied to total income to be derived from the contracts. Income from time and material contracts is recognized currently as the work is performed. Costs include all direct material and labor costs and job-related overhead. Provisions for estimated loss on uncompleted contacts, if any, are made in the period in which such losses are determined. Income Taxes The provision for PPL Electric Utilities' deferred income taxes for regulated assets is based upon the ratemaking principles reflected in rates established by the PUC and FERC. The difference in the provision for deferred income taxes for regulated assets and the amount that otherwise would be recorded under generally accepted accounting principles is deferred and included in taxes recoverable through future rates on the Consolidated Balance Sheet. See Note 8. PPL Electric Utilities deferred the investment tax credits when utilized, and is amortizing the deferrals over the average lives of the related assets. PPL and its subsidiaries file a consolidated federal income tax return. Pensions and Other Postretirement and Postemployment Benefits The subsidiaries of PPL have noncontributory pension plans covering substantially all employees. Funding is based on actuarially determined computations that consider the amount deductible for income tax purposes and the minimum contribution required under the Employee Retirement Income Security Act of 1974. The company also provides for certain health care and life insurance benefits for retired employees and inactive employees covered by disability plans. See Note 14 for details presented in conformity with SFAS 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits." Cash Equivalents All highly liquid debt instruments purchased with original maturities of three months or less are considered to be cash equivalents. Comprehensive Income Comprehensive income consists of net income and other comprehensive income, defined as changes in common equity from transactions not related to shareowners. For PPL Electric Utilities, other comprehensive income consists of unrealized gains or losses on available-for-sale securities and the excess of additional pension liability over unamortized prior service costs. The other comprehensive income of PPL consists of the foregoing as well as foreign currency translation adjustments recorded by PPL Global. In accordance with SFAS 130, comprehensive income is reflected on the Consolidated Statement of Shareowners' Common Equity, and "Accumulated Other Comprehensive Income" is presented on the Consolidated Balance Sheet. The accumulated other comprehensive income of PPL at December 31, 1999 consists of (in millions): foreign currency translation adjustments, ($50); unrealized gains on available-for-sale securities, $1; and adjustments to minimum pension liability, ($6). Accumulated other comprehensive income was not significant at December 31, 1998. Treasury Stock Treasury shares are reflected on the Consolidated Balance Sheet as an offset to common equity under the cost method of accounting. Management has no definitive plans for the future use of these shares. Treasury shares are not considered outstanding in calculating earnings per share. Foreign Currency Translation All assets and liabilities of foreign subsidiaries are translated at period-end exchange rates. Income and expense items are translated at average exchange rates prevailing during the relevant periods. The resulting translation adjustments are recorded as a component of "Accumulated Other Comprehensive Income." Gains or losses related to foreign currency transactions are recognized in income currently. 2. Segment and Related Information PPL's principal business segment is PPL Electric Utilities, which (in conjunction with PPL EnergyPlus) provides electricity delivery service in eastern and central Pennsylvania, sells retail electricity throughout Pennsylvania and deregulated electricity markets, and markets wholesale electricity in the United States and Canada. PPL's other reportable business segment, PPL Global (excluding the Montana generating assets acquired in 1999, which are owned by PPL Montana and not consolidated with PPL Global for financial reporting purposes), invests in and develops worldwide power projects, with the majority of its international investments located in the U.K., Chile, and El Salvador. PPL Global also owns and operates generating facilities in the United States. PPL Global's revenue represents equity earnings in unconsolidated investments, revenues from the sale of generation to wholesale customers, and revenue from the delivery of electricity to retail customers. Other operating revenues of PPL represent gas distribution, unregulated generating activities (including PPL Montana), mechanical contracting and engineering, and unregulated energy services. Financial data for PPL's business segments were as follows (millions of dollars):
1999 1998 1997 ---- ---- ---- Income Statement data Operating revenues PPL Electric Utilities $3,952 $3,643 $3,049 PPL Global 330 47 32 Other and Eliminations 308 96 (4) ------ ------ ------ 4,590 3,786 3,077 Depreciation and amortization PPL Electric Utilities 233 335 385 PPL Global 18 Other and Eliminations 6 3 ------ ------ ------ 257 338 385 Interest expense PPL Electric Utilities 214 196 207 PPL Global 44 22 8 Other and Eliminations 19 12 ------ ------ ------ 277 230 215 Income taxes PPL Electric Utilities 151 273 247 PPL Global 29 (4) (3) Other and Eliminations (6) (10) (7) ------ ------ ------ 174 259 237 Extraordinary items, net of taxes PPL Electric Utilities (46) (948) PPL Global Other and Eliminations ------ ------ ------ (46) (948) Net income (loss) - actual PPL Electric Utilities 398 (587) 308 PPL Global 37 15 (17) Other and Eliminations (3) 3 5 ------ ------ ------ 432 (569) 296 Net income (loss)- excluding one-time adjustments (a) PPL Electric Utilities 337 304 308 PPL Global 24 6 10 Other and Eliminations (3) 10 ------ ------ ------ $ 358 $ 310 $ 328 (a) One-time adjustments: additions to (deductions from) net income 1999 1998 1997 ---- ---- ---- PPL Electric Utilities Sale of Sunbury plant and related assets $ 42 Securitization 19 PUC restructuring charge (915) FERC municipality settlement (32) SER settlement 18 Other impacts of restructuring 38 ------ ------ ------ 61 (891)
PPL Global SWEB sale of supply business 64 Writedown of carrying value of certain investments (51) U.K. income tax rate reduction 9 10 Windfall profits tax (37) ------ ------ ------ 13 9 (27) Other and Eliminations PPL Gas Utilities acquisition costs 3 (5) ------ ------ ------ $ 3 $ (5)
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1999 1998 1997 ---- ---- ---- Cash Flow data Expenditures for property, plant & equipment PPL Electric Utilities $ 300 $ 297 $ 310 PPL Global 4 Other and Eliminations 14 7 ------ ------ ------ 318 304 310 Investment in generating assets and electric energy projects PPL Electric Utilities PPL Global 315 306 152 Other and Eliminations 780 ------ ------ ------ $1,095 $ 306 $ 152 - ----------------------------------------------------------------- 1999 1998 ---- ---- Balance Sheet data Cumulative net investment in unconsolidated affiliates PPL Electric Utilities $ 17 $ 17 PPL Global 407 671 Other and Eliminations ------ ------ 424 688 Total assets PPL Electric Utilities 9,092 8,838 PPL Global 1,424 757 Other and Eliminations 658 12 ------ ------ $11,174 $9,607
3. Investments in Unconsolidated Affiliates PPL's investments in unconsolidated affiliates were $424 million and $688 million at December 31, 1999 and 1998, respectively. The most significant investment was PPL Global's investment in WPD, which was $303 million at December 31, 1999 and $373 million at December 31, 1998. At December 31, 1999 PPL Global had a 51% equity ownership interest in WPD but lacked voting control. Accordingly, PPL Global accounts for its investment in WPD (and other investments where it has majority ownership but lacks voting control), under the equity method of accounting. The December 31, 1998 balance included PPL Global's $243 million investment in Emel and EC. In 1999 PPL Global acquired a controlling interest in these affiliates, and consolidated their financial results. See Note 1 for additional information regarding consolidation. Investments in unconsolidated affiliates at December 31, 1999, and the effective equity ownership percentages, are as follows: Bolivian Generating Group, LLC - 29.3% Latin American Energy & Electricity Fund I, LP - 16.6% Aguaytia Energy, LLC - 11.4% WPD Holdings UK - 51% Hidrocentrais Reunidas, LDA - 50% Hidro Iberica, B. V. - 50% Bangor Pacific Hydro Associates - 50% Southwest Power Partners, LLC - 50% PPLG Lux Finance, S.a.r.l. - 53.4% Safe Harbor Water Power Corporation - 33.3% Summarized below is financial information from the financial statements of these affiliates, as comprehended in the PPL consolidated financial statements for the periods noted: (for purpose of comparability, the summarized information of Emel and EC is excluded from all periods.) (in millions of dollars) Balance Sheet Data - ------------------
December 31 1999 1998 ---- ---- Current Assets $ 389 $ 236 Noncurrent Assets 3,340 3,227 Current Liabilities 367 409 Noncurrent Liabilities 1,890 2,044
Income Statement Data - --------------------- 1999 1998 1997 ---- ---- ---- Revenues $1,130 $1,206 $1,292 Operating Income 212 188 181 Net Income (Loss) 427 137 (14)
4. PUC Restructuring Proceeding In August 1998, the PUC entered its Final Order approving the settlement of PPL Electric Utilities' restructuring proceeding under Pennsylvania's Customer Choice Act. Among other things, that Order: . permitted PPL Electric Utilities to recover $2.97 billion (on a net present value basis) in stranded costs over 11 years - i.e., from January 1, 1999 through December 31, 2009. PPL Electric Utilities' stranded costs are those which would have been recoverable under traditional rate regulation, but may not be recoverable in the competitive marketplace. PPL Electric Utilities was permitted a return of 10.86% on the unamortized balance of these stranded costs. . authorized PPL Electric Utilities to issue transition bonds to securitize up to $2.85 billion of its stranded costs. In August 1999, PP&L Transition Bond Company issued $2.42 billion of transition bonds. . required PPL Electric Utilities to reduce rates to all retail customers by four percent effective January 1, 1999 through December 31, 1999. . required PPL Electric Utilities to unbundle its retail electric rates beginning on January 1, 1999, to reflect separate prices for the transmission and distribution charges, the CTC, the ITC, and the generation charge. The CTC is a charge paid by all customers who receive delivery service from PPL Electric Utilities, to recover PPL Electric Utilities' stranded costs. The ITC, which offsets the CTC on customer bills, is a charge paid by delivery customers to reflect the securitization of stranded costs. . required PPL Electric Utilities to transfer its retail marketing function to a new subsidiary, PPL EnergyPlus. PPL EnergyPlus has a PUC license to act as a Pennsylvania EGS. This license permits PPL EnergyPlus to offer retail electric supply to participating customers in PPL Electric Utilities' service territory and in the service territories of other Pennsylvania utilities. In 1999, PPL EnergyPlus offered energy to industrial and commercial customers in Pennsylvania and in other states that have opened their markets to competitive suppliers. . permitted, but did not require, PPL Electric Utilities to transfer ownership and operation of its generating facilities to a separate corporate entity at book value. 5. Securitization In August 1999, PP&L Transition Bond Company issued $2.42 billion of transition bonds to securitize a portion of PPL Electric Utilities' stranded costs. The bonds were issued in eight different classes, with expected average lives of 1 to 8.7 years. PP&L Transition Bond Company, a special purpose Delaware limited liability company, was formed for the purpose of purchasing and owning ITP, and pledging its interest in ITP to a trustee to collateralize transition bonds. The assets of PP&L Transition Bond Company, including the ITP, are not available to creditors of PPL or PPL Electric Utilities. The transition bonds are obligations of PP&L Transition Bond Company and are non- recourse to PPL and PPL Electric Utilities. PPL Electric Utilities used a portion of the securitization proceeds to acquire equity held by PPL, including $380 million of preferred stock and $481 million of common stock. In addition, PPL Electric Utilities used a portion of the proceeds to repurchase $1.467 billion of its first mortgage bonds through tender offers and open market purchases. In August 1999, PPL Electric Utilities recorded an extraordinary charge of $59 million for the premiums and related expenses to extinguish this first mortgage debt. See Note 6 for additional information. PPL used $417 million of the proceeds it received from PPL Electric Utilities to purchase 14 million shares of its common stock. PPL Electric Utilities' customers will benefit from securitization through an expected average rate reduction of approximately one percent for the period the transition bonds are outstanding. With securitization, a substantial portion of the CTC has been replaced with an ITC, which passes 75% of the net financing savings back to customers. The actual reduction will vary by year, by customer class and by level of use. In December 1999, the PUC approved PPL Electric Utilities' calculation of ITC under-recoveries for the period from August through November 1999. PPL Electric Utilities calculated ITC under-recoveries of $14.5 million for this period. The PUC accepted rates proposed by PPL Electric Utilities to implement new ITC rates to collect these under-recoveries in 2000. 6. Extraordinary Items PUC Restructuring and FERC Settlement Historically, PPL Electric Utilities prepared its financial statements for its regulated operations in accordance with SFAS 71, which requires rate- regulated companies to reflect the effects of regulatory decisions in their financial statements. PPL Electric Utilities deferred certain costs pursuant to rate actions of the PUC and the FERC and recovered, or expected to recover, such costs in electric rates charged to customers. The EITF addressed the appropriateness of the continued application of SFAS 71 by entities in states that have enacted restructuring legislation similar to Pennsylvania's Customer Choice Act. The EITF came to a consensus on Issue No. 97-4, "Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements 71 and 101," which concluded that an entity should cease to apply SFAS 71 when a deregulation plan is in place and its terms are known. For PPL Electric Utilities, with respect to the generation portion of its business, this occurred effective June 30, 1998 based upon the outcome of the PUC restructuring proceeding. PPL Electric Utilities adopted SFAS 101 for the generation side of its business. SFAS 101 required a determination of impairment of plant assets performed in accordance with SFAS 121, and the elimination of all effects of rate regulation that were recognized as assets and liabilities under SFAS 71. PPL Electric Utilities performed impairment tests of its electric generation assets on a plant specific basis and determined that $2.388 billion of its generation plant was impaired at June 30, 1998. Impaired plant was the excess of the net plant investment at June 30, 1998 over the present value of the net cash flows during the remaining lives of the plants. Annual net cash flows were determined by comparing estimated generation sustenance costs to estimated regulated revenues for the remainder of 1998, market revenues for 1999 and beyond, and revenues from bulk power contracts. The net cash flows were then discounted to present value. In addition to the impaired generation plant, PPL Electric Utilities estimated that there were other stranded costs totaling $1.989 billion at June 30, 1998. This primarily included generation-related regulatory assets and liabilities and an estimated liability for above-market purchases under NUG contracts. The total estimated impairment described above was $4.377 billion. The PUC's Final Order in the restructuring proceeding, entered on August 27, 1998, permitted the recovery of $2.819 billion through the CTC on a present value basis, excluding amounts for nuclear decommissioning and consumer education, resulting in a net under-recovery of $1.558 billion. PPL Electric Utilities recorded an extraordinary charge for this under-recovery in June 1998. Under FERC Order 888, 16 small utilities which had power supply agreements with PPL Electric Utilities signed before July 11, 1994, requested and were provided with PPL Electric Utilities' current estimate of its stranded costs applicable to these customers if they were to terminate their agreements in 1999. Subject to certain conditions, FERC-approved settlement agreements executed with 15 of these customers provide for continued power supply by PPL Electric Utilities through January 2004. As a result of these settlements, PPL Electric Utilities, in the second quarter of 1998, recorded an extraordinary charge in the amount of $56 million. The extraordinary items related to the PUC restructuring proceeding and the FERC settlement are reflected on the Consolidated Statement of Income, net of income taxes. Details of amounts written-off in June 1998 were as follows (millions of dollars): Impaired generation-related assets $ 2,388 Above-market NUG contracts 854 Generation-related regulatory assets and other 1,135 ------- Total 4,377 Recoverable transition costs (a) (2,819) ------- Extraordinary item pre-tax - PUC 1,558 - FERC 56 ------- 1,614 Tax effects (666) ------- Extraordinary items $ 948 =======
(a) Excluding recoveries for nuclear decommissioning and consumer education expenditures. PPL Electric Utilities believes that the electric transmission and distribution operations continue to meet the requirements of SFAS 71 and that regulatory assets associated with these operations will continue to be recovered through rates from customers. At December 31, 1999, $309 million of net regulatory assets, other than the recoverable transition costs, remain on PPL Electric Utilities' books. These regulatory assets will continue to be recovered through regulated transmission and distribution rates over periods ranging from one to 30 years. Extinguishment of Debt SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt," requires that a material aggregate gain or loss from the extinguishment of debt be classified as an extraordinary item, net of the related income tax effect. As explained in Note 5, PPL Electric Utilities repurchased $1.467 billion of first mortgage bonds in August 1999, using the proceeds from the issuance of transition bonds. PPL Electric Utilities recorded an extraordinary charge of $59 million for the premiums and related expenses to reacquire these first mortgage bonds. Details of this extraordinary charge were as follows (millions of dollars):
Reacquisition cost of debt $ 1,554 Net carrying amount of debt (1,454) ------- Extraordinary charge pre-tax 100 Tax effects (41) ------- Extraordinary charge $ 59 =======
The extraordinary charge related to extinguishment of debt was partially offset in December 1999 with a credit relating to wholesale power activity. 7. Sales to Other Electric Utilities PPL Electric Utilities provided JCP&L with 189,000 kilowatts of capacity and related energy from all of its generating units during 1999. This agreement terminated on December 31, 1999. PPL Electric Utilities is reselling the returning capacity and energy through its Energy Marketing Center. Under a separate agreement, PPL Electric Utilities is providing additional capacity and energy to JCP&L. This capacity and energy sale increased from 200,000 kilowatts to 300,000 kilowatts in June 1999 and continues at this level through May 2004. Prices for this capacity and energy are market-based. In August 1999, the FERC approved new interconnection and power supply agreements between PPL Electric Utilities and UGI. Under the new power supply agreement, effective August 1999, UGI purchases capacity from PPL Electric Utilities equal to UGI's PJM capacity obligation less the capacity reserve value of UGI's owned generation and an existing power purchase agreement. In 2000, UGI will purchase a firm block of energy in addition to the capacity. The agreement terminates in February 2001. PPL Electric Utilities provides BG&E with 129,000 kilowatts, or 6.6%, of its share of capacity and related energy from the Susquehanna station. Sales to BG&E will continue through May 2001. 8. Income and Other Taxes For 1999, 1998 and 1997 the corporate federal income tax rate was 35%, and the PA corporate net income tax rate was 9.99%. The tax effects of significant temporary differences comprising PPL's net deferred income tax liability were as follows (millions of dollars):
PPL Electric PPL Utilities --- ---------------- 1999 1998 1999 1998 ------- ------- ------- ------- Deferred Tax Assets Deferred investment tax credits $ 71 $ 78 $ 71 $ 78 Purchase contracts 360 389 337 389 Accrued pension costs 108 99 106 99 Contribution in aid of construction 28 22 27 22 Other 153 128 138 124 Valuation allowance (6) (6) (4) (4) ------ ------ ------ ------ 714 710 675 708 ------ ------ ------ ------ Deferred Tax Liabilities Electric utility plant - net 813 743 811 743 Restructuring - CTC/ITP 1,026 1,169 1,026 1,169 Taxes recoverable through future rates 107 100 107 100 Reacquired debt costs 14 13 13 13 Other 82 40 31 26 ------ ------ ------ ------ 2,042 2,065 1,988 2,051 ------ ------ ------ ------ Net deferred tax liability $1,328 $1,355 $1,313 $1,343 ====== ====== ====== ======
Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax rates applied to income from continuing operations for accounting purposes, and details of taxes other than income are as follows (millions of dollars): Income Tax Expense
PPL PPL Electric Utilities ------ ---------------------- 1999 1998 1997 1999 1998 1997 ------ ------ ------ ------ ------ ------ Income Tax Expense Provision-Federal $ 188 $ 183 $ 162 $ 190 $ 198 $ 170 Provision-State 36 64 57 35 64 58 ----- ----- ----- ----- ----- ----- 224 247 219 225 262 228 ----- ----- ----- ----- ----- ----- Deferred-Federal 76 19 19 53 18 20 Deferred-State (109) 3 9 (110) 3 9 ----- ----- ----- ----- ----- ----- (33) 22 28 (57) 21 29 ----- ----- ----- ----- ----- ----- Investment tax credit, net-federal (17) (10) (10) (17) (10) (10) ----- ----- ----- ----- ----- ----- Total $ 174 $ 259 $ 237 $ 151 $ 273 $ 247 ===== ===== ===== ===== ===== ===== Federal 247 192 171 226 206 180 State (73) 67 66 (75) 67 67 ----- ----- ----- ----- ----- ----- $ 174 $ 259 $ 237 $ 151 $ 273 $ 247 ===== ===== ===== ===== ===== =====
Reconciliation of Income Tax Expense
PPL PPL Electric Utilities --- ---------------------- 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- Reconciliation of Income Tax Expense Indicated federal income tax on pre-tax income before extraordinary items at statutory tax rate - 35% $242 $232 $195 $221 $230 $209 Increase/(decrease) due to: State income taxes (50) 43 40 (51) 43 40 Flow through of depreciation differences not previously normalized 3 9 22 3 9 22 Amortization of investment tax credit (12) (10) (10) (12) (10) (10) Research & experimentation income tax credits 0 (1) (1) 0 (1) (1) Other (9) (14) (9) (10) 2 (13) ---- ---- ---- ---- ---- ---- (68) 27 42 (70) 43 38 ---- ---- ---- ---- ---- ---- Total income tax expense $174 $259 $237 $151 $273 $247 ==== ==== ==== ==== ==== ==== Effective income tax rate 25.1% 39.1% 42.5% 23.9% 40.0% 41.5%
In August 1999, PPL Electric Utilities released approximately $78 million of deferred income taxes associated with the CTC that were no longer required because of securitization.
Taxes Other than Income PPL PPL Electric Utilities --- ---------------------- 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- State gross receipts $108 $105 $104 $105 $104 $104 State utility realty 13 41 46 12 41 46 State capital stock 13 18 34 11 17 34 Social security and other 27 24 20 25 23 20 ---- ---- ---- ---- ---- ---- $161 $188 $204 $153 $185 $204 ==== ==== ==== ==== ==== ====
9. Nuclear Decommissioning Costs PPL Electric Utilities' most recent estimate of the cost to decommission the Susquehanna station was completed in 1993 and was a site-specific study, based on immediate dismantlement and decommissioning of each unit following final shutdown. The study indicated that PPL Electric Utilities' 90% share of the total estimated cost of decommissioning the Susquehanna station is approximately $724 million in 1993 dollars. The estimated cost includes decommissioning the radiological portions of the station and the cost of removal of nonradiological structures and materials. The operating licenses for Units 1 and 2 expire in 2022 and 2024, respectively. Decommissioning costs have been historically charged to operating expense and have been based upon amounts included in customer rates. Beginning in 1998, decommissioning costs have been reclassified as a component of depreciation expense. Beginning in January 1999, in accordance with the PUC Final Order, decommissioning costs will be recovered from customers through the CTC over the 11 year life of the CTC rather than the remaining life of Susquehanna. The recovery will include a return on unamortized decommissioning costs. Decommissioning charges were $27 million in 1999 and $12 million in 1998 and 1997. Amounts collected from customers for decommissioning, less applicable taxes, are deposited in external trust funds for investment and can be used only for future decommissioning costs. The market value of securities held and accrued income in the trust funds at December 31, 1999 and 1998 were approximately $255 million and $206 million, respectively. The trust funds experienced, on a fair market value basis, a $26 million net gain in 1999, which included net unrealized appreciation of $21 million, and a net gain in 1998 of $31 million, which included net unrealized appreciation of $26 million. The trust fund activity is reflected in the nuclear plant decommissioning trust fund and in other noncurrent liabilities on the Consolidated Balance Sheet. Accrued nuclear decommissioning costs were $260 million and $209 million at December 31, 1999 and 1998, respectively. In February 2000, the FASB issued another exposure draft on the accounting for liabilities related to closure and removal of long-lived assets, including decommissioning of nuclear power plants. As a result, current industry accounting practices for decommissioning may change, including the possibility that the estimated cost for decommissioning could be recorded as a liability at the present value of the estimated future cash outflows that will be required to satisfy those obligations. 10. Financial Instruments During 1999, PPL and PPL Electric Utilities entered into forward starting interest rate swaps and treasury locks with various counterparties to hedge the interest rate risk associated with anticipated debt issuances, including the issuance of transition bonds in August 1999. All financial instruments associated with hedging the interest rate risk of the transition bonds were settled at the end of July. Proceeds of $24.8 million were received and deferred on the balance sheet in August, and will subsequently be amortized over the life of the transition bonds using the effective interest rate method. Seventy-five percent of these savings are being passed back to customers. On the same day that PPL Electric Utilities priced its transition bonds, it entered into short- dated treasury lock transactions with a notional amount of $1.07 billion to lock in the treasury rate related to its offer to purchase any or all of $1.66 billion of selected series of its first mortgage bonds. These contracts were settled one week later for an amount that was not significant. See Note 5 for additional information about transition bonds. In October 1999, PPL settled $170 million of notional amount of swaps in connection with the issuance of medium-term notes (as described in Note 11). PPL received net proceeds from these settlements of about $9 million. This amount has been deferred on the balance sheet and will subsequently be amortized over the life of the medium- term notes using the effective interest rate method. At December 31, 1999, PPL had also entered into forward-starting interest rate swap agreements with various counterparties to hedge the interest rate risk associated with debt issuances expected in the first quarter of 2000. These interest rate swap agreements involve the future exchange of floating rate interest payments for fixed rate interest payments over the life of the agreements. PPL agreed to pay fixed rates between 5.88% - 7.06% on notional amounts of $1.05 billion, with maturity dates between February 15, 2005 and March 31, 2030. PPL will receive a variable rate interest payment based on either a 3-month or 6-month LIBOR rate through the maturity dates of these agreements. The estimated fair value of the forward interest rate swaps, which represents the estimated amount PPL would receive if it had terminated these agreements at December 31, 1999, was $32.5 million. In the fourth quarter, PPL Electric Utilities also entered into $171 million notional amount of interest rate swaps whereby the company agreed to pay a floating interest rate and receive a fixed interest rate payment. These swaps were executed with the intent of adjusting the amount of floating-rate debt carried in its liability portfolio. At December 31, 1999 the estimated fair value of these contracts, representing the amount PPL Electric Utilities would pay if it terminated these agreements at December 31, 1999 was $4.9 million. During the fourth quarter of 1999, PPL also executed forward currency agreements with various counterparties to hedge a portion of its currency risk associated with its net investment in a foreign subsidiary. These agreements were settled in December 1999 with a realized gain of $1.9 million. This gain was recorded in "Accumulated Other Comprehensive Income" on the Consolidated Balance Sheet. At December 31, 1999 there were no forward currency agreements outstanding. The carrying amount on the Consolidated Balance Sheet and the estimated fair value of PPL's financial instruments are as follows (millions of dollars):
December 31, 1999 December 31, 1998 ----------------- ----------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Assets Nuclear plant decommis- sioning trust fund (a) $ 255 $ 255 $ 206 $ 206 Financial investments (a) 1 1 1 1 Other investments (a) 15 15 11 11 Cash and cash equivalents (a) 133 133 195 195 Other financial instru- ments included in other current assets (a) 4 4 5 5
Liabilities Preferred stock with sinking fund requirements (b) 47 45 47 50 Company-obligated mandatorily redeemable preferred secur- ities of subsidiary trusts holding solely company debentures (b) 250 217 250 259 Long-term debt (b) 4,157 4,189 2,984 3,176 Commercial paper and bank loans (a) 857 857 636 636
(a) The carrying value of these financial instruments generally is based on established market prices and approximates fair value. (b) The fair value generally is based on quoted market prices for the securities where available and estimates based on current rates offered to PPL where quoted market prices are not available. 11. Credit Arrangements & Financing Activities PPL Electric Utilities issues commercial paper and, from time to time, borrows from banks to provide short-term funds for general corporate purposes. Bank borrowings generally bear interest at rates negotiated at the time of the borrowing. At December 31, 1999, PPL Electric Utilities had $183 million of commercial paper outstanding. PPL Capital Funding, whose purpose is to provide debt funding for PPL and its subsidiaries other than PPL Electric Utilities, also issues commercial paper. As with all PPL Capital Funding debt, this commercial paper is guaranteed by PPL. At December 31, 1999, PPL Capital Funding had $298 million of commercial paper outstanding. In July 1999, PPL Electric Utilities, PPL Capital Funding and PPL (as guarantor for PPL Capital Funding) entered into a new 364-day $750 million credit facility with a group of banks. This facility replaced a $350 million 364-day revolving credit facility shared by PPL Electric Utilities and PPL Capital Funding and five separate $80 million 364-day credit facilities maintained by PPL Capital Funding. No borrowings are outstanding under this new facility. In June 1999, PPL Electric Utilities instituted a short-term bond program in order to meet short-term working capital requirements and to increase financing flexibility. Under this program, a total of $600 million of short-term bonds were issued, with no more than $200 million of such bonds outstanding at any one time. This program was completed in August 1999, and no such bonds were outstanding at December 31, 1999. In August 1999, PPL purchased 14 million shares of common stock for $417 million, under forward purchase agreements with third parties. Also in August 1999, PPL Electric Utilities repurchased and subsequently retired $1.467 billion of first mortgage bonds through tender offers and open market purchases. See Note 5 for additional information on the issuance of $2.42 billion of transition bonds to securitize stranded costs, some of the proceeds of which were used to fund this purchase of common stock and tendered debt. In January 1999, PPL and PPL Capital Funding filed a $400 million shelf registration with the SEC for the registration of debt securities. In October 1999, PPL Capital Funding used this shelf registration to issue $200 million of medium-term notes in the form of 7.70% Reset Put Securities Series due 2007. In connection with this issuance, PPL Capital Funding assigned to a third party the option to call the notes from the holders on November 15, 2002. These notes will mature on November 15, 2007, but will be required to be surrendered by the existing holders on November 15, 2002 either through the exercise of the call option or, if such option is not exercised, through the automatic exercise of a mandatory put. If the call option is exercised, the notes will be remarketed and the interest rate will be reset for the remainder of their term to the maturity date. If the call option is not exercised, the mandatory put will be exercised and PPL Capital Funding will be required to repurchase the notes at 100% of their principal amount on November 15, 2002. PPL, PPL Capital Funding and PP&L Capital Funding Trust I filed a $1.2 billion shelf registration with the SEC in September 1999 for the registration of debt and equity securities. It is expected that such securities will be issued from time to time to provide funding for general corporate purposes, including making loans to the unregulated subsidiaries of PPL and reducing commercial paper balances. In November 1999, PPL Montana entered into $950 million of credit facilities, non-recourse to PPL, with a group of banks, including a $675 million 364-day facility and two revolving credit facilities totaling $275 million which mature in 2002. The purpose of these facilities is to provide bridge loan financing for the acquisition of the Montana assets and to fund PPL Montana's working capital needs. At December 31, 1999, $370 million of borrowings were outstanding under these facilities. In December 1999, Emel repaid $145 million of outstanding bank loans with proceeds from a borrowing from CEP Reserves, Inc., a PPL Electric Utilities indirect subsidiary. A $145 million demand note was established for the repayment of funds from Emel to CEP Reserves. Emel will pay a market-based rate of interest on the outstanding loan. 12. Acquisitions and Divestitures In August 1998 PPL acquired PPL Gas Utilities. The transaction was treated as a purchase for accounting and financial reporting purposes. PPL issued approximately 5.6 million shares of common stock with a value of approximately $135 million, to acquire all PPL Gas Utilities' common and preferred stock. Under the terms of the merger agreement, shareowners of PPL Gas Utilities received 6.968 common shares of PPL for each common share of PPL Gas Utilities that they owned and 0.682 common shares of PPL for each preferred share of PPL Gas Utilities that they owned. In February 1999, PPL acquired McCarl's; in April 1999, PPL Spectrum acquired Burns Mechanical; and in September 1999, PPL acquired Western Mass. Holdings. In October 1999, Burns Mechanical merged with DVY. The purchase prices for these mechanical contractor and engineering firms were not individually significant. In 1998 PPL had acquired H.T. Lyons and McClure. In May 1999, PPL Global acquired most of Bangor Hydro's generating assets and certain transmission rights, as well as its interest in an oil-fired generation facility, for $79 million. In August 1999, PPL Global purchased Bangor Hydro's 50% interest in the 20-megawatt West Enfield hydroelectric station for $10 million. In July 1999, PPL Global acquired an additional 29.4% interest in Emel for $95 million, resulting in majority ownership and control of the company. In August 1999, PPL Global acquired an additional 18.5% interest in Emel for $44 million. During October and November 1999, PPL Global acquired another 10% interest in Emel for $23 million and acquired interests in four of Emel's subsidiaries at a cost of $48 million. As a result of these acquisitions, PPL Global's ownership of Emel increased to 95.4%. Acquisition of the controlling interest in Emel in July 1999 also gave PPL Global a majority interest in EC, a holding company jointly owned by PPL Global and Emel. As a result, PPL Global consolidated the financial statements of Emel and EC effective January 1, 1999. In July 1999, PPL Global reached an agreement with Duke Energy North America to jointly complete the Griffith Energy Project, a gas-fired, combined- cycle power plant near Kingman, Arizona. As part of the agreement, PPL Global transferred a 50% interest in the project to Duke. PPL Global will fund 50% of the capital cost of the project. The facility, expected to be in service in 2001, will have a nominal base-load capacity of 500 megawatts and a peak capacity of 600 megawatts. The project cost is anticipated to be about $300 million. In September 1999, PPL Global's U.K. subsidiary, SWEB, sold its electricity supply business to London Electricity for about $264 million. PPL Global recorded an after tax gain from the sale of $64 million. The supply business provided about 15% of SWEB's annual earnings. PPL Global and Southern Energy will continue joint ownership of the electric delivery business, which has been renamed Western Power Distribution (WPD). WPD will continue to own and operate an extensive power network in southwest Britain, transporting and delivering electricity to 1.4 million customers. In November 1999, PPL Electric Utilities sold its Sunbury plant and the principal assets of its wholly-owned coal processing subsidiary, Lady Jane Collieries, to Sunbury Holdings, LLC. PPL Electric Utilities received cash proceeds of $107 million for these assets, which resulted in an after tax gain of about $42 million. In 1998, PPL Global signed definitive agreements with the Montana Power Company ("Montana Power"), Portland General Electric Company ("Portland") and Puget Sound Energy, Inc. ("Puget") to acquire interests in 13 Montana power plants, with 2,372 gross megawatts of generating capacity, for a purchase price of $1.546 billion. The acquisition involves the Colstrip and Corette coal-fired plants, 11 hydroelectric facilities and a storage reservoir. The Puget and Portland agreements also provide for the acquisition of related transmission assets for an additional $126 million, subject to certain conditions. In December 1999, PPL Global completed the purchase of about 1,315 gross megawatts of generating assets from Montana Power for $757 million. PPL Montana used $365 million of credit facilities, and PPL contributed approximately $392 million of project equity funds, through the issuance of PPL Capital Funding commercial paper and the redemption of investments, to acquire these assets. PPL Montana applied purchase accounting to record the transaction, and the assets acquired and the liabilities assumed were recorded at estimated fair value. The excess of the purchase price over the recorded assets and liabilities was about $71 million at December 31, 1999, and was allocated as goodwill. This acquisition transferred to PPL Montana the 11 hydroelectric facilities, the storage reservoir, the Corette plant and Montana Power's ownership interest in three of the four units of the Colstrip plant, along with other generation-related assets. PPL Montana is now operating these facilities. PPL Montana also acquired the energy marketing and trading operation of Montana Power for an amount that was not significant. The Montana marketing and trading operation, which is now part of PPL EnergyPlus, is selling electricity in wholesale and retail markets in Montana and the Northwest. PPL Global's acquisition of the Colstrip interests of Portland and Puget, totaling 1,057 additional megawatts, is subject to several conditions, primarily the receipt of satisfactory regulatory approvals from the state utility commissions in Oregon and Washington. The Washington Utilities and Transportation Commission issued a decision in September 1999 with respect to Puget's 735-megawatt interest in Colstrip, which Puget is disputing in the state appellate court. On February 29, 2000, the Oregon Public Utility Commission denied Portland's application to sell its 322-megawatt interest in Colstrip, but stated that it would be willing to reconsider the decision if Portland could demonstrate sufficient additional benefits to Oregon ratepayers as a result of the sale. The interested parties are reviewing the regulatory decisions and evaluating possible actions to address the decisions. The acquisition agreements permit each party to terminate the respective agreements if closing does not occur by April 30, 2000. PPL cannot predict the outcome of these proceedings, whether the outcome will be satisfactory to the parties, or the effect of these proceedings on the timing or the ability to complete these acquisitions. In December 1999, the U.K.'s Office of Gas and Electricity Markets, the regulatory authority for electricity and natural gas distribution, announced the final price review for the electric distribution companies, including WPD. In this final price review, WPD was given a one-time rate cut of 19%, the lowest rate among distribution companies in the U.K. The price cut will be effective for five years starting in April 2000. As a result of this action, PPL Global evaluated the carrying value of its investment in WPD and the investment was written down by $36 million. In unrelated transactions, PPL Global wrote down the carrying value of two other international investments by a total of $16 million. 13. Stock-Based Compensation Under the PPL Incentive Compensation Plan ("ICP") and the Incentive Compensation Plan for Key Employees ("ICPKE") (together, the "Plans"), restricted shares of common stock as well as stock options may be granted to officers and other key employees of PPL, PPL Electric Utilities and other affiliated companies. Awards under the Plans are made in the common stock of PPL by the Compensation and Corporate Governance Committee of the Board of Directors in the case of the ICP, and by the PPL Corporate Leadership Council in the case of the ICPKE. Each Plan limits the number of shares available for awards to two percent of the outstanding common stock of PPL on the first day of each calendar year. The maximum number of options which can be awarded under each Plan to any single eligible employee in any calendar year is 1.5 million shares. Any portion of these shares that has not been granted may be carried over and used in any subsequent year. If any award lapses or is forfeited or the rights to the participant terminate, any shares of common stock are again available for grant. Shares delivered under the Plans may be in the form of authorized and unissued common stock, common stock held in treasury by PPL or common stock purchased on the open market (including private purchases) in accordance with applicable securities laws. Restricted Stock - ---------------- Restricted shares of common stock are outstanding shares with full voting and dividend rights. However, the shares are subject to forfeiture or accelerated payout under Plan provisions for termination, retirement, disability and death. Restricted shares vest fully if control of PPL changes, as defined by the Plans. Restricted stock awards of 108,890, 107,198 and 39,011 shares, with per share weighted-average fair values of $26.74, $22.74, and $23.39, were granted in 1999, 1998 and 1997, respectively. Compensation expense for these three years was less than $2 million annually. At December 31, 1999, there were 224,903 restricted shares outstanding. These awards currently vest three years from the date of grant. Stock Options - ------------- Under the Plans, stock options may also be granted with an option exercise price per share not less than the fair market value of PPL's common stock on the date of grant. The options are exercisable beginning one year after the date of grant, assuming the individual is still employed by PPL or a subsidiary, in installments as determined by the Compensation and Corporate Governance Committee of the Board of Directors in the case of the ICP, and the Corporate Leadership Council in the case of the ICPKE. The Committee (or the Corporate Leadership Council, in the case of the ICPKE) has discretion to accelerate the exercisability of the options. All options expire ten years from the grant date. The options become exercisable if control of PPL changes, as defined by the Plans. At December 31, 1999, there were 626,020 stock options outstanding, with a fair value of $2.37 per option. Fair value was determined using a modified Black-Scholes model with the following assumptions: Risk-free interest rate - 5.61%; Expected stock volatility - 16.19%; Expected dividend yield rate - 6.60%; and Expected Option life (years) - 10. PPL applies Accounting Principles Board Opinion 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for stock options. Since stock options are granted at market price, no compensation cost has been recognized. Compensation calculated in accordance with the disclosure requirements of FASB 123, "Accounting for Stock-Based Compensation," was not significant and had no impact on earnings per share. (See Note 1). In April 1999, PPL made its initial award of stock options under the Plan. A summary of the stock option activity for 1999 follows:
Shares Weighted Average Price -------- ---------------------- Outstanding December 31, 1998 0 Granted 704,800 $26.8465 Exercised 0 Forfeited (78,780) $26.8438 Outstanding December 31, 1999 626,020 $26.8468 Exercisable December 31, 1999 13,570 $26.8438
Outstanding options had a weighted-average remaining life of 9.2 years at December 31, 1999. 14. Retirement and Postemployment Benefits Pension and Other Postretirement Benefits PPL and its subsidiaries sponsor various pension and other postretirement and postemployment benefit plans. PPL Electric Utilities, PPL Montana, Penobscot Hydro, and PPL Gas Utilities have funded, noncontributory defined benefit plans covering substantially all employees. PPL and its subsidiaries also provide supplemental retirement benefits to directors, executives, and other key management employees through nonqualified retirement plans. Substantially all employees of PPL's subsidiaries will become eligible for certain health care and life insurance benefits upon retirement through contributory plans. The employees of North Penn Gas, a subsidiary of PPL Gas Utilities, are eligible for certain health care and life insurance benefits upon retirement through a noncontributory plan. Benefits for the PPL Electric Utilities and North Penn Gas postretirement benefits are paid from funded VEBA trusts sponsored by each company. PPL Electric Utilities and North Penn Gas made contributions to the VEBA trusts of $29 million and $1 million, respectively, during 1999. At December 31, 1999, PPL Electric Utilities had a regulatory asset of $7 million relating to postretirement benefits that is being amortized and recovered in rates with a remaining life of 13 years. Net pension and postretirement medical benefit costs were (millions of dollars):
Postretirement Pension Benefits Medical Benefits ---------------- ---------------- 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- Service cost $ 42 $ 35 $ 32 $ 5 $ 4 $ 4 Interest cost 78 69 64 19 16 17 Expected return on plan assets (99) (87) (77) (7) (4) (2) Net amortization and deferral (9) (13) (11) 12 9 10 ---- ---- ---- ---- ---- ---- Net periodic pension and postretirement benefit cost $ 12 $ 4 $ 8 $ 29 $ 25 $ 29 ==== ==== ==== ==== ==== ====
The net periodic pension cost charged to operating expenses was $9 million in 1999, $2 million in 1998 and $5 million in 1997. Retiree health and benefits costs charged to operating expenses were approximately $20 million in 1999, $19 million in 1998 and $23 million in 1997. Costs in excess of the amounts charged to expense were charged to construction and other accounts. Postretirement medical costs at December 31, 1999 were based on the assumption that costs would increase 7.5% in 1999, then the rate of increase would decline gradually to 6% in 2006 and thereafter. A one-percentage point change in the assumed health care cost trend assumption would have the following effects (in millions):
One Percentage Point One Percentage Point Increase Decrease -------------------- -------------------- Effect on service cost and interest cost components $ 1 $ (1) Effect on postretirement benefit obligation 12 (10)
The following assumptions were used in the valuation of the benefit obligations:
Postretirement Pension Benefits Medical Benefits ---------------- ---------------- 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- Discount rate 7.0% 6.25% 6.75% 7.0% 6.25% 6.75% Expected return on plan assets 8.0% 8.0% 8.0% 6.35% 6.35% 6.5% Rate of compensation increase 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
The funded status of the combined plans was as follows (millions of dollars):
Postretirement Pension Benefits Medical Benefits ---------------- ---------------- 1999 1998 1999 1998 ---- ---- ---- ---- Change in Benefit Obligation - ---------------------------- Benefit Obligation, January 1 $1,232 $1,022 $ 303 $ 244 Service cost 42 35 5 4 Interest cost 78 69 19 16 Plan amendments 2 67 18 10 Actuarial (gain)/loss (127) 77 (15) 42 Acquisitions/Divestitures 25* 2* Special termination benefits 3 9 Actual expense paid (3) (3) Net benefits paid (46) (44) (15) (13) ------ ------ ----- ----- Benefit Obligation, December 31 1,206 1,232 317 303 Change in Plan Assets - --------------------- Plan assets at fair value, January 1 1,627 1,429 104 66 Actual return on plan assets 201 244 9 13 Employer contributions 1 1 33 Acquisitions/Divestitures 19* Actual expense paid (3) (3) 38 Net benefits paid (46) (44) (16) (13) ------ ------ ----- ----- Plan assets at fair value, December 31 1,799 1,627 130 104 Funded Status - ------------- Funded Status of Plan 593 395 (187) (199) Unrecognized transition assets (45) (49) 113 122 Unrecognized prior service cost 110 115 33 14 Unrecognized net (gain)/loss (906) (691) 23 44 ------ ------ ----- ----- Asset/(liability) recognized (248) (230) (18) (19)
Amounts recognized in the Consolidated Balance Sheet consist of: Prepaid benefit cost 1 1 Accrued benefit liability (250) (231) (18) (19) Intangible asset 1 1 Additional minimum liability (11) (13) Accumulated other comprehensive income 11 12 ------- ------ ----- ----- Net Amount Recognized $ (248) $ (230) $ (18) $ (19)
*Acquisition of PPL Montana & Penobscot Hydro net of Sunbury divestiture. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were (in millions) $41, $34 and $6 respectively, as of December 31, 1999, and $40, $34 and $6 respectively, as of December 31, 1998. PPL Electric Utilities and its subsidiaries formerly engaged in coal mining accrued an additional liability for the cost of health care of their retired miners. At December 31, 1999, the liability was $19 million. The liability is net of $50 million of estimated future benefit payments offset by $31 million of available assets in PPL Electric Utilities funded VEBA trusts. Savings Plans Substantially all employees of PPL's subsidiaries are eligible to participate in deferred savings plans (401k's). Company contributions to the plans approximated $6 million in 1999, $4 million in 1998, and $2 million in 1997. Increasing contributions were the result of company acquisitions and a 1999 enhanced matching formula for the PPL Electric Utilities plans. Postemployment Benefits PPL Electric Utilities provides health and life insurance benefits to disabled employees and income benefits to eligible spouses of deceased employees. Postemployment benefits charged to operating expenses were not significant in 1999, 1998 or 1997. 15. Jointly Owned Facilities At December 31, 1999, subsidiaries of PPL owned undivided interests in the following facilities (millions of dollars):
Electric Utility Construction Ownership Plant in Other Accumulated Work in Interest Service Property Depreciation Progress --------- ------- -------- ------------ -------- PPL Electric Utilities - ---------------------- Generating Stations Susquehanna 90.00% $ 4,133 $ 3,408 $ 26 Keystone 12.34% 69 43 1 Conemaugh 11.39% 104 50 2 Merrill Creek Reservoir 8.37% $ 22 11 PPL Montana - ----------- Generating Stations Colstrip Units 1 & 2 50.00% 192 4 4 Colstrip Unit 3 30.00% 160 3 2 PPL Global - ---------- Generating Station Wyman 8.33% 15
Each participant, either on its own behalf or through another PPL affiliate, provided its own financing for its share of the facility. Each of the participants received a portion of the total output of the generating stations equal to its percentage ownership. The participant's share of fuel and other operating costs associated with the stations is reflected on the Consolidated Statement of Income. 16. Commitments and Contingent Liabilities Construction Expenditures PPL Electric Utilities' construction expenditures for the period 2000-2004 are estimated to aggregate $1.7 billion, including AFUDC and capitalized interest. For discussion pertaining to construction expenditures, see Review of Financial Condition and Results of Operations under the caption "Financial Condition - Capital Expenditure Requirements." Nuclear Insurance PPL Electric Utilities is a member of certain insurance programs which provide coverage for property damage to members' nuclear generating stations. Facilities at the Susquehanna station are insured against property damage losses up to $2.75 billion under these programs. PPL Electric Utilities is also a member of an insurance program which provides insurance coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specified conditions. Under the property and replacement power insurance programs, PPL Electric Utilities could be assessed retroactive premiums in the event of the insurers' adverse loss experience. At December 31, 1999, the maximum amount PPL Electric Utilities could be assessed under these programs was about $24 million. PPL Electric Utilities' public liability for claims resulting from a nuclear incident at the Susquehanna station is limited to about $9.7 billion under provisions of The Price Anderson Amendments Act of 1988. PPL Electric Utilities is protected against this liability by a combination of commercial insurance and an industry assessment program. In the event of a nuclear incident at any of the reactors covered by The Price Anderson Amendments Act of 1988, PPL Electric Utilities could be assessed up to $168 million per incident, payable at a rate of $20 million per year, plus an additional 5% surcharge, if applicable. Environmental Matters Air --- The Clean Air Act deals, in part, with acid rain, attainment of federal ambient ozone standards and toxic air emissions. PPL subsidiaries are in compliance with the 1995 Phase I acid rain provisions and have taken steps to comply with the year 2000 Phase II acid rain provisions. PPL Electric Utilities has met the 1995 ambient ozone requirements of the Clean Air Act by reducing its rate of NOx emissions by nearly 50% through the use of low NOx burners. During 1999, further seasonal (May-June) NOx reductions to 55% from 1990 levels were achieved in response to PA DEP's rule implementing the Northeast Ozone Transport Region's Memorandum of Understanding (OTR MOU). These reductions were achieved with operational initiatives that rely, to a large extent, on the low NOx burners. The PA DEP has proposed further seasonal (May-June) NOx reductions to 80% from 1990 levels starting in 2003. These further reductions are based on the requirements of the OTR MOU and two EPA ambient ozone initiatives: the September, 1998, EPA SIP-call issued under Section 110 of the Clean Air Act, requiring reductions from 22 eastern states, including Pennsylvania; and the Northeastern states, requiring reductions from sources in 12 northeastern states and D.C., including PPL Electric Utilities' sources. Despite various court challenges to the EPA initiatives, the PA DEP is expected to move forward with the 2003 NOx reductions based on the OTR MOU. PPL Electric Utilities estimates that the 2003 NOx reductions will be achieved with the installation of SCR (selective catalytic reduction) technology on PPL Electric Utilities' three largest units. EPA has also developed new standards for ambient levels of fine particulates. These standards were challenged and remanded to EPA by the D.C. Circuit Court in 1999. The new particulates standard, if finalized, may require further reductions in SO2 for certain PPL subsidiaries and may expand the planned seasonal NOx reductions at PPL Electric Utilities to year-round commencing in 2010-2012. Under the Clean Air Act, the EPA has been studying the health effects of hazardous air emissions from power plants and other sources, in order to determine what should be regulated. The EPA has concluded that mercury is the power plant air toxin of greatest concern, but that more evaluation is needed before it can determine whether it must be regulated. The EPA is now seeking mercury and chlorine sampling and other data from electric generating units, including those operated by PPL Electric Utilities and PPL Montana. The EPA recently initiated enforcement actions against eight utilities, asserting that older, coal-fired power plants operated by those utilities have, over the years, been modified in ways that subject them to more stringent "New Source" requirements under the Clean Air Act. The EPA also has threatened similar enforcement action with respect to plants operated by other, unnamed utilities, as well as facilities in other industries. PPL and PPL Electric Utilities at this time are unable to predict whether such EPA enforcement actions will be brought with respect to any PPL Electric Utilities or PPL Montana plants and the scope, outcome or ultimate financial impact of any potential EPA actions. Compliance with any such EPA enforcement actions could result in additional capital and operating expenses in amounts which are not now determinable but which could be significant. The EPA is also proposing to revise its regulations in a way that will require power plants to meet new source performance standards and/or undergo new source review for many maintenance and repair activities that are currently exempted as routine. Expenditures to meet the 2000 acid rain and 2003 NOx reduction requirements are included in the table of projected construction expenditures in the section entitled "Financial Condition - Capital Expenditure Requirements" in the Review of the Financial Condition and Results of Operations. PPL currently estimates that additional capital expenditures and operating costs for environmental compliance under the Clean Air Act will be incurred beyond 2002 in amounts which are not now determinable, but which could be significant. Water and Residual Waste ------------------------ The final NPDES permit for PPL Electric Utilities' Montour plant contains stringent limits for iron and chlorine discharges. Depending on the results of a toxic reduction study, additional water treatment facilities or operational changes may be needed at this plant. Capital expenditures through the year 2003 to correct groundwater degradation at fossil-fueled generating stations, and to address waste water control at PPL Electric Utilities' facilities are included in the table of construction expenditures in the section entitled "Financial Condition - Capital Expenditure Requirements" in the Review of the Financial Condition and Results of Operations. In this regard, PPL Electric Utilities currently estimates that about $6 million of additional capital expenditures may be required in the next four years to close some of the ash basins and address other ash basin issues at various generating plants. Additional capital expenditures could be required beyond the year 2003 in amounts which are not now determinable but which could be material. Actions taken to correct groundwater degradation, to comply with the DEP's regulations and to address waste water control, are also expected to result in increased operating costs in amounts which are not now determinable but which could be material. Superfund and Other Remediation ------------------------------- In 1995, PPL Electric Utilities entered into a consent order with the DEP to address a number of sites where PPL Electric Utilities may be liable for remediation or contamination. This may include potential PCB contamination at certain PPL Electric Utilities substations and pole sites; potential contamination at a number of coal gas manufacturing facilities formerly owned and operated by PPL Electric Utilities; and oil or other contamination which may exist at some of PPL Electric Utilities' former generating facilities. As of December 31, 1999, PPL Electric Utilities has completed work on approximately two-thirds of the sites included in the consent order. In 1996, PPL Gas Utilities entered into a similar consent order with the DEP to address a number of its sites where PPL Gas Utilities may be liable for remediation of contamination. The sites primarily include former coal gas manufacturing facilities. Prior to PPL acquiring PPL Gas Utilities in August of 1998 PPL Gas Utilities had obtained a "no further action" determination from the DEP for two of the 20 sites covered by the order. At December 31, 1999, PPL Electric Utilities and PPL Gas Utilities had accrued approximately $6 million and $16 million, respectively, representing the amounts they can reasonably estimate they will have to spend for site remediation, including those sites covered by each company's consent orders mentioned above. In October 1999, the Montana Supreme Court held in favor of several citizens' groups that the right to a clean and healthful environment is a fundamental right guaranteed by the Montana Constitution. The Court's ruling could result in significantly more stringent environmental laws and regulations as well as an increase in citizens' suits under Montana's environmental laws. The effect on PPL Montana of any such changes in laws or regulations or any such increase in citizen suits is not currently determinable but could be significant. Future cleanup or remediation work at sites currently under review, or at sites not currently identified, may result in material additional operating costs for PPL subsidiaries that cannot be estimated at this time. PPL Montana has been indemnified by the Montana Power Company for any preacquisition environmental liability. However, this indemnification is conditioned on certain circumstances that can result in PPL Montana and the Montana Power Company sharing in certain costs within limits set forth in the Asset Purchase Agreement. General ------- Due to the environmental issues discussed above or other environmental matters, PPL Electric Utilities may be required to modify, replace or cease operating certain facilities to comply with statutes, regulations and actions by regulatory bodies or courts. In this regard, PPL Electric Utilities also may incur capital expenditures, operating expenses and other costs in amounts which are not now determinable but which could be material. Loan Guarantees of Affiliated Companies PPL provides certain guarantees for its subsidiaries. Specifically, PPL guarantees all of the debt of PPL Capital Funding. As of December 31, 1999, PPL guaranteed $597 million of medium-term notes and $298 million of commercial paper issued by PPL Capital Funding. At December 31, 1998 PPL had guaranteed $397 million of PPL Capital Funding's medium-term notes, and $552 million of its commercial paper. PPL also provided loan guarantees to PPL Global subsidiaries, totaling $118 million in 1999 and $13 million in 1998. Also, PPL guaranteed notes of a subsidiary of PPL Gas Utilities, amounting to $18 million and $19 million at the end of 1999 and 1998, respectively. Additionally, PPL has guaranteed certain obligations of PPL EnergyPlus for up to $271 million under power purchase and sales agreements. These guarantees amounted to $31 million in 1998. At December 31, 1999 and 1998, PPL Electric Utilities provided a guarantee in the amount of $12 million in support of one of its subsidiaries. Source of Labor Supply As of December 31, 1999, PPL and its subsidiaries had 9,166 employees, including 6,314 full-time PPL Electric Utilities employees and 470 full-time PPL Montana employees. Approximately 62 percent of PPL Electric Utilities' full-time employees are represented by the IBEW. Approximately 68 percent of PPL Montana employees are represented by the IBEW. PPL Electric Utilities reached a new labor agreement with the IBEW in 1998. This agreement expires in May 2002. PPL Montana's contract with the IBEW expires in 2001. 17. New Accounting Standards In June 1999, the FASB issued SFAS 137 which defers the effective date of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," to fiscal years beginning after June 15, 2000. PPL and PPL Electric Utilities intend to adopt SFAS 133 as of January 1, 2001. The impact of adopting this statement on the net income and financial position of PPL and PPL Electric Utilities is not expected to be material. 18. Subsequent Events In February 2000, PPL Capital Funding issued $500 million of medium-term notes in the form of 7.75% series due 2005. This issuance used $500 million of the $1.2 billion SEC shelf registration filed in September 1999. At the time of issuance, PPL also settled a number of forward-starting swaps that had been entered into in a lower interest rate environment as a means to lock-in interest rates and limit exposure to increasing interest rates, all pursuant to PPL's Interest Rate Risk Management Program. The Company received net proceeds of $15.8 million from the settlement of these contracts, which will be deferred on the balance sheet and subsequently amortized over the life of the medium-term notes. The effective interest rate on the medium-term notes was reduced by approximately 75 basis points as a result of this hedging activity. Also, in conjunction with this transaction, PPL swapped $350 million notional amount of these notes from fixed to floating-rate instruments with an initial average rate of three-months LIBOR plus 45 basis points to adjust the amount of floating-rate debt carried in its liability portfolio.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Deductions from Balance Additions Reserves - --------------------- at Charged Losses or Balance at Beginning Charged to Other Expenses End of Description of Period to Income Accounts Applicable Period --------- --------- -------- ---------- ---------- (Millions of Dollars) PPL Corporation - --------------- Year Ended December 31, 1999 - ---------------------------- Reserves deducted from assets in the Balance Sheet Uncollectible accounts............................ $16 $22 $16 $22 Obsolete inventory - Materials and supplies....... 11 3 11 3 Year Ended December 31, 1998 - ---------------------------- Reserves deducted from assets in the Balance Sheet Uncollectible accounts............................ 16 24 24 16 Obsolete inventory - Materials and supplies....... 12 1 11 Year Ended December 31, 1997 - ---------------------------- Reserves deducted from assets in the Balance Sheet Uncollectible accounts ........................... 25 17 26 16 PPL Electric Utilities Corporation - ---------------------------------- Year Ended December 31, 1999 - ---------------------------- Reserves deducted from assets in the Balance Sheet Uncollectible accounts ........................... 15 22 19 18 Obsolete inventory - Materials and supplies....... 11 11 Year Ended December 31, 1998 - ---------------------------- Reserves deducted from assets in the Balance Sheet Uncollectible accounts ........................... 16 20 21 15 Obsolete inventory - Materials and supplies....... 12 1 11 Year Ended December 31, 1997 - ---------------------------- Reserves deducted from assets in the Balance Sheet Uncollectible accounts ........................... 26 15 25 16
QUARTERLY FINANCIAL, COMMON STOCK PRICE AND DIVIDEND DATA (Unaudited) PPL Corporation and Subsidiaries (Millions of Dollars, except per share data)
For the Quarters Ended (a) March 31 June 30 Sept. 30 Dec. 31 1999 Operating revenues........................................ $ 1,067 $ 1,004 $1,386 $ 1,133 Operating income.......................................... 262 164 238 208 Net income before extraordinary items..................... 120 63 161 134 Net income................................................ 120 63 102 147 Earnings per common share (b)............................. 0.76 0.40 0.68 1.02 Dividends declared per common share (c)................... 0.25 0.25 0.25 0.25 Price per common share High.................................................... 28-1/2 31-7/8 32 28-1/2 Low..................................................... 24-3/4 24-1/8 25-3/8 20-3/8 1998 Operating revenues........................................ $ 880 $ 838 $1,166 $ 902 Operating income.......................................... 236 148 262 181 Net income before extraordinary items..................... 101 54 136 88 Net income (loss)......................................... 101 (894) 136 88 Earnings per common share (b)............................. 0.60 (5.34) 0.81 0.56 Dividends declared per common share (c)................... 0.4175 0.4175 0.25 0.25 Price per common share High.................................................... 24-1/4 24-3/8 26-3/8 28-15/16 Low..................................................... 21-11/16 20-7/8 22 24-15/16
(a) PPL's electric and gas utility businesses are seasonal in nature with peak sales periods generally occurring in the winter months. In addition, earnings in 1999 and 1998 were affected by one-time adjustments. Accordingly, comparisons among quarters of a year may not be indicative of overall trends and changes in operations. (b) The sum of the quarterly amounts may not equal annual earnings per share due to changes in the number of common shares outstanding during the year or rounding. (c) PPL has paid quarterly cash dividends on its common stock in every year since 1946. The dividends paid per share in 1998 were $1.50 and in 1999 were $1.00. The most recent regular quarterly dividend paid by PPL was 25 cents per share (equivalent to $1.00 per annum) paid January 1, 2000. Future dividends, declared at the discretion of the Board of Directors, will be dependent upon future earnings, financial requirements and other factors. QUARTERLY FINANCIAL DATA (Unaudited) PPL Electric Utilities Corporation and Subsidiaries (Millions of Dollars)
For the Quarters Ended (a) March 31 June 30 Sept. 30 Dec. 31 1999 Operating revenues........................................ $ 968 $ 923 $1,128 $ 933 Operating income.......................................... 237 148 190 174 Net income before extraordinary items..................... 120 73 166 122 Net income................................................ 120 73 107 135 Earnings available to PPL................................. 108 61 101 128 1998 Operating revenues........................................ $ 861 $ 818 $1,131 $ 833 Operating income.......................................... 231 143 259 168 Net income before extraordinary items..................... 109 63 137 100 Net income (loss)......................................... 109 (885) 137 100 Earnings available to PPL................................. 97 (897) 125 88
(a) PPL Electric Utilities Corporation's electric utility business is seasonal in nature with peak sales periods generally occurring in the winter months. In addition, earnings in several quarters were affected by several one-time adjustments. Accordingly, comparisons among quarters of a year may not be indicative of overall trends and changes in operations. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ------------------------ None. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS - ------------------------------------------------------------ Information for this item concerning directors of PPL will be set forth in the sections entitled "Nominees for Directors," "Directors Continuing in Office" and "Retiring Directors" in PPL's 2000 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 1999, and which information is incorporated herein by reference. Information required by this item concerning the executive officers of PPL is set forth at the end of Part I of this report. Information for this item concerning directors of PPL Electric Utilities will be set forth in the sections entitled "Nominees for Directors," "Directors Continuing in Office" and "Retiring Directors" in PPL Electric Utilities' 2000 Notice of Annual Meeting and Information Statement, which will be filed with the SEC not later than 120 days after December 31, 1999, and which information is incorporated herein by reference. Information required by this item concerning the executive officers of PPL Electric Utilities is set forth at the end of Part I of this report. ITEM 11. EXECUTIVE COMPENSATION ------------------------------- Information for this item for PPL will be set forth in the sections entitled "Compensation of Directors," "Summary Compensation Table," "Option Grants in Last Fiscal Year" and "Retirement Plans for Executive Officers" in PPL's 2000 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 1999, and which information is incorporated herein by reference. Information for this item for PPL Electric Utilities will be set forth in the sections entitled "Compensation of Directors," "Summary Compensation Table," "Option Grants in Last Fiscal Year" and "Retirement Plans for Executive Officers" in PPL Electric Utilities' 2000 Notice of Annual Meeting and Information Statement, which will be filed with the SEC not later than 120 days after December 31, 1999, and which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------- Information for this item for PPL will be set forth in the section entitled "Stock Ownership" in PPL's 2000 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 1999, and which information is incorporated herein by reference. Information for this item for PPL Electric Utilities will be set forth in the section entitled "Stock Ownership" in PPL Electric Utilities' 2000 Notice of Annual Meeting and Information Statement, which will be filed with the SEC not later than 120 days after December 31, 1999, and which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ------------------------------------------------------- Information for this item for PPL will be set forth in the section entitled "Certain Transactions Involving Directors or Executive Officers" in PPL's 2000 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 1999, and which information is incorporated herein by reference. Information for this item for PPL Electric Utilities will be set forth in the section entitled "Certain Transactions Involving Directors or Executive Officers" in PPL Electric Utilities' 2000 Notice of Annual Meeting and Information Statement, which will be filed with the SEC not later than 120 days after December 31, 1999, and which information is incorporated herein by reference. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ---------------------------------- (a) The following documents are filed as part of this report: 1. Financial Statements - included in response to Item 8. PPL Corporation Report of Independent Accountants Consolidated Statement of Income for each of the Three Years Ended December 31, 1999, 1998 and 1997 Consolidated Statement of Cash Flows for each of the Three Years Ended December 31, 1999, 1998 and 1997 Consolidated Balance Sheet at December 31, 1999 and 1998 Consolidated Statement of Shareowners' Common Equity for each of the Three Years Ended December 31, 1999, 1998 and 1997 Consolidated Statement of Preferred Stock at December 31, 1999 and 1998 Consolidated Statement of Company-Obligated Mandatorily Redeemable Securities at December 31, 1999 and 1998 Consolidated Statement of Long-Term Debt at December 31, 1999 and 1998 Notes to Financial Statements PPL Electric Utilities Corporation Report of Independent Accountants Consolidated Statement of Income for each of the Three Years Ended December 31, 1999, 1998 and 1997 Consolidated Statement of Cash Flows for each of the Three Years Ended December 31, 1999, 1998 and 1997 Consolidated Balance Sheet at December 31, 1999 and 1998 Consolidated Statement of Shareowner's Common Equity for each of the Three Years Ended December 31, 1999, 1998 and 1997 Consolidated Statement of Preferred Stock at December 31, 1999 and 1998 Consolidated Statement of Company-Obligated Mandatorily Redeemable Securities at December 31, 1999 and 1998 Consolidated Statement of Long-Term Debt at December 31, 1999 and 1998 Notes to Financial Statements 2. Supplementary Data and Supplemental Financial Statement Schedule - included in response to Item 8. Schedule II - Valuation and Qualifying Accounts and Reserves for the Three Years Ended December 31, 1999 All other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or notes thereto. 3. Exhibits Exhibit Index on page xxx. (b) Reports on Form 8-K: The following Reports on Form 8-K were filed during the three months ended December 31, 1999: Report dated October 27, 1999 ----------------------------- Item 5. Other Events Information regarding PPL Corporation's third quarter earnings. Item 7. Financial Statements and Exhibits Press Release dated October 27, 1999, regarding PPL Corporation's third quarter earnings. Report dated December 16, 1999 ------------------------------ Item 5. Other Events Information regarding PPL Corporation's revised earnings forecasts for 1999 and 2000. Report dated December 17, 1999 ------------------------------ Item 5. Other Events Information regarding PPL Global's acquisition of certain generation assets from Montana Power through an indirect subsidiary, PPL Montana LLC, for a purchase price of $757 million. SHAREOWNER AND INVESTOR INFORMATION ----------------------------------- Annual Meetings: The annual meetings of shareowners of PPL Corporation and PPL Electric Utilities Corporation are held each year on the fourth Friday of April. The 2000 annual meetings will be held on Friday, April 28, 2000, at Lehigh University's Stabler Arena, at the Goodman Campus Complex located in Lower Saucon Township, outside Bethlehem, PA. Proxy and Information Statement Material: A proxy statement and information statement and notice of PPL's and PPL Electric Utilities' annual meetings are mailed to all shareowners of record as of February 29, 2000. Dividends: The 2000 dates for consideration of the declaration of dividends on PPL common stock and PPL Electric Utilities preferred stock by the Board of Directors or its Executive Committee are February 25, May 26, August 25 and November 17. Subject to the declaration, such dividends are paid on the first day of April, July, October and January. Dividend checks are mailed in advance of those dates with the intention that they arrive as close as possible to the payment dates. The 2000 record dates for dividends are expected to be March 10, June 9, September 8, and December 8. Direct Deposit of Dividends: Shareowners may choose to have their dividend checks deposited directly into their checking or savings account. Quarterly dividend payments are electronically credited on the dividend date, or the first business day thereafter. Dividend Reinvestment Plan: Shareowners may choose to have dividends on their PPL common stock or PPL Electric Utilities preferred stock reinvested in PPL common stock instead of receiving the dividend by check. Certificate Safekeeping: Shareowners participating in the Dividend Reinvestment Plan may choose to have their common stock certificates forwarded to PPL Electric Utilities for safekeeping. Lost Dividend or Interest Checks: Dividend or interest checks lost by investors, or those that may be lost in the mail, will be replaced if the check has not been located by the 10th business day following the payment date. Transfer of Stock or Bonds: Stock or bonds may be transferred from one name to another or to a new account in the name of another person. Please contact Investor Services regarding transfer instructions. Bondholder Information: Much of the information and many of the procedures detailed here for shareowners also apply to bondholders. Questions related to bondholder accounts should be directed to Investor Services. Lost Stock or Bond Certificates: Please contact Investor Services for an explanation of the procedure to replace lost stock or bond certificates. PPL Summary Annual Report: Published and mailed in mid-March to all shareowners of record. Shareowner News: An easy-to-read newsletter containing current items of interest to shareowners -- published and mailed at the beginning of each quarter. Periodic Mailings: Letters regarding new investor programs, special items of interest, or other pertinent information are mailed on a non-scheduled basis as necessary. Duplicate Mailings: The summary annual report and other investor publications are mailed to each investor account. If you have more than one account, or if there is more than one investor in your household, you may contact Investor Services to request that only one publication be delivered to your address. Please provide account numbers for all duplicate mailings. Shareowner Information Line: Shareowners can get detailed corporate and financial information 24 hours a day using the Shareowner Information Line. They can hear timely recorded messages about earnings, dividends and other company news releases; request information by fax; and request printed materials in the mail. The toll-free Shareowner Information Line is 1-800-345-3085. Other PPL publications, such as the annual and quarterly reports to the Securities and Exchange Commission (Forms 10-K and 10-Q) will be mailed upon request. Another part of this service is an enhanced Internet home page (www.pplresources.com). Shareowners can access PPL Securities and Exchange Commission filings, stock quotes and historical performance. Visitors to our website can provide their E-mail address and indicate their desire to receive future earnings or news releases automatically. Investor Services: For any questions you have or additional information you require about PPL and its subsidiaries, please call the Shareowner Information Line, or write to: George I. Kline Manager-Investor Services PPL Corporation Two North Ninth Street Allentown, PA 18101 Internet Access: For updated information throughout the year, check out our home page at http://www.pplresources.com. You may also contact Investor Services via E-mail at invserv@papl.com. Listed Securities: Fiscal Agents: New York Stock Exchange Stock Transfer Agents and Registrars PPL Corporation: Norwest Bank Minnesota, N.A. Common Stock (Code: PPL) Shareowner Services 161 North Concord Exchange PPL Electric Utilities Corporation: South St. Paul, MN 55075 4-1/2% Preferred Stock (Code: PPLPRB) PPL Electric Utilities Corporation 4.40% Series Preferred Stock Investor Services Department (Code: PPLPRA) Dividend Disbursing Office and Dividend Reinvestment Plan Agent PP&L Capital Trust: PPL Electric Utilities Corporation 8.20% Preferred Securities Investor Services Department (Code: PPLPRC) Mortgage Bond Trustee PP&L Capital Trust II: Bankers Trust Co. 8.10% Preferred Securities Attn: Security Transfer Unit (Code: PPLPRD) P.O. Box 291569 Nashville, TN 37229 Philadelphia Stock Exchange Bond Interest Paying Agent PPL Corporation: PPL Electric Utilities Corporation Common Stock Investor Services Department PPL Electric Utilities Corporation 4-1/2% Preferred Stock 3.35% Series Preferred Stock 4.40% Series Preferred Stock 4.60% Series Preferred Stock SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PPL Corporation --------------- (Registrant) PPL Electric Utilities Corporation ---------------------------------- (Registrant) By /s/ William F. Hecht - --------------------------------------- William F. Hecht - Chairman, President and Chief Executive Officer (PPL Corporation and PPL Electric Utilities Corporation) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. TITLE ----- By /s/ William F. Hecht Principal Executive - --------------------------------------- William F. Hecht - Chairman, President Officer and Director and Chief Executive Officer (PPL Corporation and PPL Electric Utilities Corporation) By /s/ John R. Biggar Principal Financial - --------------------------------------- John R. Biggar - Senior Vice President Officer and Chief Financial Officer (PPL Corporation and PPL Electric Utilities Corporation) By /s/ Joseph J. McCabe Principal Accounting - --------------------------------------- Joseph J. McCabe - Vice President and Officer Controller (PPL Corporation and PPL Electric Utilities Corporation) Frederick M. Bernthal Stuart Heydt E. Allen Deaver Frank A. Long Directors William J. Flood Norman Robertson Elmer D. Gates Marilyn Ware By /s/ William F. Hecht - --------------------------------------- William F. Hecht, Attorney-in-fact Date: March 1, 2000 EXHIBIT INDEX The following Exhibits indicated by an asterisk preceding the Exhibit number are filed herewith. The balance of the Exhibits have heretofore been filed with the Commission and pursuant to Rule 12(b)-32 are incorporated herein by reference. Exhibits indicated by a are filed or listed pursuant to Item 601(b)(10)(iii) of Regulation S-K. 3(a)-1 - Articles of Incorporation of PP&L Resources, Inc. (Exhibit B to Proxy Statement of PP&L and Prospectus of PP&L Resources, dated March 9, 1995) 3(a)-2 - Amended and Restated Articles of PP&L, Inc. (Exhibit 3(i) to PP&L's Form 10-Q Report (File No. 1-905) for the quarter ended March 31, 1999) 3(b)-1 - By-laws of PP&L Resources, Inc. (Exhibit 3(ii)(a) to PP&L Resources' Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1998) 3(b)-2 - By-laws of PP&L, Inc. (Exhibit 3(ii)(b) to PP&L's Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1998) 4(a)-1 - Amended and Restated Employee Stock Ownership Plan, effective January 1, 1998 (Exhibit 4(a)-1 to PP&L Resources' Form 10-K Report (File No. 1-905) for the year ended December 31, 1998) 4(a)-2 - Amendment No. 1 to said Employee Stock Ownership Plan, effective January 1, 1998 (Exhibit 4(a)-2 to PP&L Resources' Form 10-K Report (File No. 1-905) for the year ended December 31, 1998) 4(a)-3 - Amendment No. 2 to said Employee Stock Ownership Plan, effective December 1, 1998 (Exhibit 4(a)-3 to PP&L Resources' Form 10-K Report (File No. 1-905) for the year ended December 31, 1998) *4(a)-4 - Amendment No. 3 to said Employee Stock Ownership Plan, effective September 14, 1998 *4(a)-5 - Amendment No. 4 to said Employee Stock Ownership Plan, effective January 1, 1999 *4(a)-6 - Amendment No. 5 to said Employee Stock Ownership Plan, dated June 2, 1999 4(b)-1 - Mortgage and Deed of Trust, dated as of October 1, 1945, between PP&L and Guaranty Trust Company of New York, as Trustee (now Bankers Trust Company, as successor Trustee) (Exhibit 2(a)-4 to Registration Statement No. 2-60291) 4(b)-2 - Supplement, dated as of July 1, 1954, to said Mortgage and Deed of Trust (Exhibit 2(b)-5 to Registration Statement No. 219255) 4(b)-3 - Supplement, dated as of October 1, 1989, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated November 6, 1989) 4(b)-4 - Supplement, dated as of July 1, 1991, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated July 29, 1991) 4(b)-5 - Supplement, dated as of May 1, 1992, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated June 1, 1992) 4(b)-6 - Supplement, dated as of November 1, 1992, to said Mortgage and Deed of Trust (Exhibit 4(b)-29 to PP&L's Form 10-K Report (File 1-905) for the year ended December 31, 1992) 4(b)-7 - Supplement, dated as of February 1, 1993, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated February 16, 1993) 4(b)-8 - Supplement, dated as of April 1, 1993, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated April 30, 1993) 4(b)-9 - Supplement, dated as of June 1, 1993, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated July 7, 1993) 4(b)-10 - Supplement, dated as of October 1, 1993, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated October 29, 1993) 4(b)-11 - Supplement, dated as of February 15, 1994, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated March 11, 1994) 4(b)-12 - Supplement, dated as of March 1, 1994, to said Mortgage and Deed of Trust (Exhibit 4(b) to PP&L's Form 8-K Report (File No. 1-905) dated March 11, 1994) 4(b)-13 - Supplement, dated as of March 15, 1994, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated March 30, 1994) 4(b)-14 - Supplement, dated as of September 1, 1994, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K (File No. 1-905) dated October 3, 1994) 4(b)-15 - Supplement, dated as of October 1, 1994, to said Mortgage and Deed of Trust (Exhibit 4(a) to PP&L's Form 8-K Report (File No. 1-905) dated October 3, 1994) 4(b)-16 - Supplement, dated as of August 1, 1995, to said Mortgage and Deed of Trust (Exhibit 6(a) to PP&L's Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1995) 4(b)-17 - Supplement, dated as of April 1, 1997 to said Mortgage and Deed of Trust (Exhibit 4(b)-17 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1997) 4(b)-18 - Supplement, dated as of May 5, 1998, to said Mortgage and Deed of Trust (Exhibit 4.3 to PP&L's Form 8-K Report (File No. I-905) dated May 1, 1998) *4(b)-19 - Supplement, dated as of June 1, 1999, to said Mortgage and Deed of Trust 4(c)-1 - Indenture, dated as of November 1, 1997, among PP&L Resources, Inc., PP&L Capital Funding, Inc. and The Chase Manhattan Bank, as Trustee (Exhibit 4.1 to PP&L Resources 8- K Report (File No. 1-905) dated November 12, 1997) 4(c)-2 - Supplement, dated as of November 1, 1997, to said Indenture (Exhibit 4.2 to PP&L Resources' 8-K Report (File No. 1-905) dated November 12, 1997) 4(c)-3 - Supplement, dated as of March 1, 1999, to said Indenture (Exhibit 4.3 to Registration Statement Nos. 333-87847, 333- 87847-01 and 333-87847-02) *4(c)-4 - Supplement, dated as of October 1, 1999, to said Indenture 4(d)-1 - Junior Subordinated Indenture, dated as of April 1, 1997, between PP&L, Inc. and The Chase Manhattan Bank, as Trustee (Exhibit 4.1 to Registration Statement No. 333-20661) 4(d)-2 - Amended and Restated Trust Agreement, dated as of April 8, 1997, among PP&L, Inc., The Chase Manhattan Bank, as Property Trustee, Chase Manhattan Bank (Delaware), as Delaware Trustee, and John R. Biggar and James E. Abel, as Administrative Trustees (Exhibit 4.4 to Registration Statement No. 333-20661) 4(d)-3 - Guarantee Agreement, dated as of April 8, 1997, between PP&L, Inc. and The Chase Manhattan Bank, as Trustee (Exhibit 4.6 to Registration Statement No. 333-20661) 4(e)-1 - Amended and Restated Trust Agreement, dated as of June 13, 1997, among PP&L, Inc., The Chase Manhattan Bank, as Property Trustee, Chase Manhattan Bank (Delaware), as Delaware Trustee, and John R. Biggar and James E. Abel, as Administrative Trustees (Exhibit 4.4 to Registration Statement No. 333-27773) 4(e)-2 - Guarantee Agreement, dated as of June 13, 1997, between PP&L, Inc. and The Chase Manhattan Bank, as Trustee (Exhibit 4.6 to Registration Statement No. 333-27773) 10(a) - Amended and Restated 364-Day Revolving Credit Agreement, dated as of July 1, 1999, among PP&L, Inc., PP&L Capital Funding, Inc., PP&L Resources, Inc. and the banks named therein (Exhibit 10 to PP&L Resources' Form 10-Q Report (File No. 1-905) for the quarter ended June 30, 1999) 10(b) - Five-Year Revolving Credit Agreement, dated as of November 20, 1997, among PP&L, Inc., PP&L Capital Funding, Inc., PP&L Resources, Inc. and the banks named therein (Exhibit 10(b) to PP&L Resources' Form 10-K Report (File No. 1-905) for the year ended December 31, 1997) *10(b)-1 - Amendment No. 1 to said Five-Year Revolving Credit Agreement 10(c) - Pollution Control Facilities Agreement, dated as of May 1, 1973, between PP&L, Inc. and the Lehigh County Industrial Development Authority (Exhibit 5(z) to Registration Statement No. 2-60834) *10(d) - Amended and Restated Operating Agreement of the PJM Interconnection, L.L.C., dated September 3, 1999 10(e)-1 - Capacity and Energy Sales Agreement, dated March 9, 1984, between PP&L, Inc. and Jersey Central Power & Light Company (Exhibit 10(f)-3 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1984) 10(e)-2 - First Supplement, effective February 28, 1986, to said Capacity and Energy Sales Agreement (Exhibit 10(e)-4 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1986) 10(e)-3 - Second Supplement, effective January 1, 1987, to said Capacity and Energy Sales Agreement (Exhibit 10(g)-3 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1989) 10(e)-4 - Amendments to Exhibit A, effective October 1, 1987, to said Capacity and Energy Sales Agreement (Exhibit 10(e)-6 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1987) 10(e)-5 - Third Supplement, effective December 1, 1988, to said Capacity and Energy Sales Agreement (Exhibit 10(g)-5 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1989) 10(e)-6 - Fourth Supplement, effective December 1, 1988, to said Capacity and Energy Sales Agreement (Exhibit 10(g)-6 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1989) 10(f)-1 - Capacity and Energy Sales Agreement, dated January 28, 1988, between PP&L, Inc. and Baltimore Gas and Electric Company (Exhibit 10(e)-7 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1987) 10(f)-2 - First Supplement, effective November 1, 1988, to said Capacity and Energy Sales Agreement (Exhibit 10(i)-2 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1989) 10(f)-3 - Second Supplement, effective June 1, 1989, to said Capacity and Energy Sales Agreement (Exhibit 10(i)-3 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1989) 10(f)-4 - Third Supplement, effective June 1, 1991, to said Capacity and Energy Sales Agreement (Exhibit 10(g)-4 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1991) 10(f)-5 - Fourth Supplement, effective June 1, 1992, to said Capacity and Energy Sales Agreement (Exhibit 10(h)-5 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1997) 10(f)-6 - Fifth Supplement, effective July 15, 1993, to said Capacity and Energy Sales Agreement (Exhibit 10(h)-6 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1997) 10(f)-7 - Sixth Supplement, effective June 1, 1993, to said Capacity and Energy Sales Agreement (Exhibit 10(h)-7 to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1997) *10(g) - Capacity and Energy Sales Agreement, dated May 25, 1999, between PP&L, Inc. and UGI Utilities, Inc. 10(h) - Amended and Restated Directors Deferred Compensation Plan, effective January 1, 1998 (Exhibit 10(l) to PP&L Resources' Form 10-K Report (File No. 1-905) for the year ended December 31, 1998) [_]10(i)-1 - Amended and Restated Officers Deferred Compensation Plan, effective January 1, 1998 (Exhibit 10(m)-1 to PP&L Resources' Form 10-K Report (File No. 1-905) for the year ended December 31, 1998) [_]10(i)-2 - Amendment No. 1 to said Officers Deferred Compensation Plan, effective September 1, 1998 (Exhibit 10(m)-2 to PP&L Resources' Form 10-K Report (File No. 1-905) for the year ended December 31, 1998) [_]10(j)-1 - Amended and Restated Supplemental Executive Retirement Plan, effective January 1, 1998 (Exhibit 10(n)-1 to PP&L Resources' Form 10-K Report (File No. 1-905) for the year ended December 31, 1998) [_]10(j)-2 - Amendment No. 1 to said Supplemental Executive Retirement Plan, effective September 1, 1998 (Exhibit 10(n)-2 to PP&L Resources' Form 10-K Report (File No. 1-905) for the year ended December 31, 1998) *10(j)-3 - Amendment No. 2 to said Supplemental Executive Retirement Plan, effective July 1, 1999 10(k)-1 - Amended and Restated Incentive Compensation Plan, effective January 1, 1999 (Schedule A to Proxy Statement of PP&L Resources, dated March 12, 1999) *10(k)-2 - Amendment No. 1 to said Amended and Restated Incentive Compensation Plan, effective January 1, 1999 10(l) - Short-Term Incentive Plan (Schedule B to Proxy Statement of PP&L Resources, dated March 12, 1999) [_]10(m) - Terry H. Hunt Employment Agreement, dated as of October 1, 1998, among PP&L Resources, Inc., Terry H. Hunt and Penn Fuel Gas, Inc. (Exhibit 10(q) to PP&L Resources' Form 10-K Report (File No. 1-905) for the year ended December 31, 1998) [_]10(n) - Form of Severance Agreement entered into between PP&L Resources and Officers (Exhibit 10 to PP&L Resources' Form 10-Q Report (File No. 1-905) for the quarter ended June 30, 1998) 10(o) - Nuclear Fuel Lease, dated as of February 1, 1982, between PP&L, as lessee, and Newton I. Waldman, not in his individual capacity, but solely as Cotrustee of the Pennsylvania Power & Light Energy Trust, as lessor (Exhibit 10(g) to PP&L's Form 10-K Report (File No. 1-905) for the year ended December 31, 1981) 10(p)-1 - Asset Purchase Agreement between PP&L Global, Inc. and The Montana Power Company (Exhibit 10(a) to PP&L Resources' Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1998) 10(p)-2 - Equity Contribution Agreement among PP&L Resources, Inc., PP&L Global Inc. and The Montana Power Company (Exhibit 10(b) to PP&L Resources' Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1998) 10(q)-1 - Asset Purchase Agreement between PP&L Global, Inc. and Portland General Electric Company (Exhibit 10(c) to PP&L Resources' Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1998) 10(q)-2 - Equity Contribution Agreement among PP&L Resources, Inc., PP&L Global, Inc. and Portland General Electric Company (Exhibit 10(d) to PP&L Resources' Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1998) 10(r)-1 - Asset Purchase Agreement between PP&L Global, Inc. and Puget Sound Energy, Inc. (Exhibit 10(e) to PP&L Resources' Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1998) 10(r)-2 - Equity Contribution Agreement among PP&L Resources, Inc., PP&L Global, Inc. and Puget Sound Energy, Inc. (Exhibit 10(f) to PP&L Resources' Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1998) 10(s)-1 - Asset Purchase Agreement among PP&L Global, Inc., Penobscot Hydro Co., Inc. and Bangor Hydro-Electric Company (Exhibit 10(w)-1 to PP&L Resources' 10-K Report for the year ended December 31, 1998) 10(s)-2 - Equity Contribution Agreement, among PP&L Global, Inc., PP&L Resources, Inc., Penobscot Hydro Co., Inc. and Bangor Hydro- Electric Company (Exhibit 10(w)-2 to PP&L Resources' 10-K Report for the year ended December 31, 1998) *12(a) - PPL Corporation and Subsidiaries Computation of Ratio of Earnings to Fixed Charges *12(b) - PPL Electric Utilities Corporation and Subsidiaries Computation of Ratio of Earnings to Fixed Charges *23 - Consent of PricewaterhouseCoopers LLP *24 - Power of Attorney *27 - Financial Data Schedule EX-4.(A).4 2 AMENDMENT NO. 3 ESOP (09/14/98) EXHIBIT 4(a)-4 AMENDMENT NO. 3 TO PP&L EMPLOYEE STOCK OWNERSHIP PLAN WHEREAS, PP&L, Inc. ("Company") has adopted the PP&L Employee Stock Ownership Plan ("Plan") effective January 1, 1975; and WHEREAS, the Plan was amended and restated effective January 1, 1998, and subsequently amended by Amendment Nos. 1 and 2; and WHEREAS, the Company desires to further amend the Plan; NOW, THEREFORE, the Plan is hereby amended as follows: I. Effective September 14, 1998 the following sections of Articles II, III, IV, V, VII, VIII, IX, X, XII and XIII are amended to read: 2.3 "Affiliated Company" or "Affiliated Companies" shall mean with respect to any Participating Company, (a) any corporation that is a member of a controlled group of corporations, as determined under section 414(b) of the Code, which includes such Participating Company; (b) any member of an affiliated service group, as determined under section 414(m) of the Code, of which such Participating Company is a member; (c) any trade or business (whether or not incorporated) that is under common control with such Participating Company, as determined under section 414(c) of the Code; and (d) any other organization or entity which is required to be aggregated with the Participating Company under section 414(o) of the Code and regulations issued thereunder. "50% Affiliated Company" means an Affiliated Company, but determined with "more than 50%" substituted for the phrase "at least 80%" in section 1563(a) of the Code, when applying sections 414(b) and (c) of the Code. 2.7 "Compensation" shall mean the annual compensation received by an Employee from a Participating Company as reported on Internal Revenue Service Form W-2 or a successor form plus the Employee's elective deferrals under the Employee Savings Plan or Deferred Savings Plan; provided, however, that Compensation shall not -1- include fringe benefits not normally included in compensation, such as tuition refunds, moving expenses, etc. and shall not, for purposes of allocation under Section 5.2(a), include any amount in excess of (i) for the 1975 and 1976 Plan Years, $16,000 and (ii) commencing with the 1977 Plan Year, the median annual compensation of all Participants during the Plan Year or $100,000, whichever is less. Such median compensation shall be determined as of the close of a Plan Year and shall be rounded to an even thousand dollars. For an Employee classified as a Managers Compensation Plan employee, Compensation shall also include the full amount of any single-sum award paid to the Participant from the fund credited annually with a percentage of annualized base pay salaries in accordance with the Managers Compensation Plan. 2.11 "Dividend-based Contribution" shall mean the contribution made by a Participating Company or Resources in accordance with Section 4.4. 2.14 "Employee" shall mean any person classified by a Participating Company as an employee of such Participating Company, including officers, shareholders, or directors who are employees, but excluding: (a) persons covered by a collective bargaining agreement unless such agreement specifically provides for participation under the Retirement Plan; (b) persons classified by the Participating Company as independent contractors, regardless of whether they are subsequently determined to be employees for employment tax or any other purpose; (c) persons classified by the Participating Company as leased employees, whether or not as described in section 414(n) of the Code; (d) persons classified by the Participating Company as specific professional employees, cooperative associates, or college interns, as those terms are defined under Participating Company policy. 2.26 "Participating Company" shall mean PP&L, PP&L EnergyPlus Co., and each other Affiliated Company which is authorized by the Board to adopt this Plan by action of its board of directors. 2.31 "Qualified Military Service" means any service (either voluntary or involuntary) by an individual in the Uniformed Services if such individual is entitled to reemployment rights with a Participating Company with respect to such service. 2.34 "Returning Veteran" means a former Employee who on or after December 12, 1994, returns from Qualified Military Service to employment by a Participating Company within the period of time during which his reemployment rights are -2- protected by law. 3.1 Eligibility. (a) All persons who were participants in the Plan immediately prior to the Effective Date and who are in the employ of a Participating Company on the Effective Date shall be Participants hereunder as of such date. All Employees as of the Effective Date (but who are not eligible to participate under the preceding sentence) who have completed one year of Credited Service shall be Participants as of that date. Other Employees shall become Participants on the first day of the calendar month next following the date on which an Employee completes one year of Credited Service, or if later, on which an individual becomes an Employee. A "year of Credited Service," for the purposes of this Article, shall require completion of at least 1,000 Hours of Service during the 12 months from commencement of employment. An Employee who fails to complete 1,000 Hours of Service during his initial 12 months of employment shall complete a year of Credited Service as of the end of any Plan Year in which he completes 1,000 Hours of Service; provided, however, that the first Plan Year during which such Employee shall have the opportunity to complete such 1,000 Hours of Service shall include the anniversary of his commencement of employment. (b) An Employee may elect in writing not to become a Participant by filing such election with the Employee Benefit Plan Board. 3.4 Officers, Directors, and Shareholders. Officers, directors, and shareholders of a Participating Company who are Participants shall participate in the Plan on the same basis as other Participants. 4.4 Dividend-based Contribution. Commencing with the 1990 Plan Year, a Participating Company or Resources may contribute to the Plan an amount determined at the sole discretion of PP&L or Resources relating to the reduction in taxes arising out of the payment of dividends to participants and the contribution thereof to the Plan. The Dividend-based Contribution is in addition to contributions made pursuant to Sections 4.1, 4.2 and 4.3. All contributions by PP&L, Resources or a Participating Company are expressly conditioned upon their deductibility for federal income tax purposes. 5.3 Allocation of Earnings. Any dividends or other distributions on the Stock allocated to a Participant's Account shall be paid no later than 90 days after the close of the Plan Year to the Participant in cash either by the Trustee or directly by PP&L, a Participating Company or Resources. 5.5 Maximum Allocation. The provisions of this Section shall be construed to comply with section 415 of the Code. -3- (a) Notwithstanding anything in this Article to the contrary, in no event shall the sum of (1) any Participating Company or Resources contributions and other employer contributions, (2) any forfeitures and (3) the Participant's own contributions, if any, allocated for any Limitation Year to any Participant under this and any other defined contribution plan maintained by PP&L or any 50% Affiliated Company, exceed the lesser of (A) $30,000 plus the lesser of $30,000 or the value of the Stock contributed to the Plan for such Plan Year or (B) twenty-five percent (25%) of any Participant's compensation for the Limitation Year. Amounts described in sections 415(l) and 419A(d)(2) of the Code contributed for any Plan Year for the benefit of any Participant shall be treated as annual additions to the extent provided in such Sections. 7.2 Death. If a Participant dies either while in the employment of a Participating Company or after termination of employment but prior to the commencement of benefit payments, the full amount of his interest in the Fund shall be paid to the Participant's beneficiary in a single sum. 7.7 Timing of Distribution. (b) A Participant who terminates employment with a Participating Company on or after age 55, and whose Account exceeds, or exceeded at the time of any prior distribution, $5,000, shall be entitled to defer payment of his benefits until a date not later than that specified in Section 7.7(a)(2). 8.2 Duties and Powers of Employee Benefit Plan Board and Administrative Committee. (a) In addition to the duties and powers described elsewhere hereunder, the Employee Benefit Plan Board shall have all such powers as may be necessary to discharge its duties hereunder including but not limited to the following specific duties and powers: (9) to establish a claims procedure under which claims will be reviewed by the Manager-Employee Benefits of PP&L, or such other individual as may be designated by the Vice President-Human Resources of PP&L and under which each claimant shall receive notice in writing in the event any claim for benefits with respect to a Participant's participation in the Plan has been denied; such notice shall set forth the specific reasons for such denial. Such claims procedure shall also provide an opportunity for full and fair review by the Administrative Committee of the Employee Benefit Plan Board; 8.3 Reliance on Reports and Certificates. The members of the Employee Benefit Plan Board and the officers and directors of PP&L, any Participating Company and Resources shall be entitled to rely upon all valuations, certificates and reports made -4- by the Trustee or by any duly appointed accountant, and upon all opinions given by any duly appointed legal counsel. 8.5 Indemnification of the Employee Benefit Plan Board. Each member of the Employee Benefit Plan Board, the Administrative Committee, and each of their designees shall be indemnified by the Participating Companies against expenses (other than amounts paid in settlement to which a Participating Company does not consent) reasonably incurred by him in connection with any action to which he may be a party by reason of the delegation to him of administrative functions and duties, except in relation to matters as to which he shall be adjudged in such action to be personally guilty of negligence or willful misconduct in the performance of his duties. The foregoing right to indemnification shall be in addition to such other rights as the member of the Employee Benefit Plan Board, the Administrative Committee, and each of their designees may enjoy as a matter of law or by reason of insurance coverage of any kind. Rights granted hereunder shall be in addition to and not in lieu of any rights to indemnification to which the member of the Employee Benefit Plan Board, the Administrative Committee and each of their designees may be entitled pursuant to the bylaws of PP&L. Service on the Employee Benefit Plan Board shall be deemed in partial fulfillment of the Employee Benefit Plan Board member's function as an employee, officer and/or director of PP&L or Resources, if he serves in such other capacity as well. 9.5 Expenses. All expenses of administration of this Plan shall be paid from the Fund unless they are paid directly by a Participating Company. 10.1 Amendment. PP&L reserves the power to amend the Plan at any time by or pursuant to action of the Board of Directors. In addition, the Employee Benefit Plan Board may make such amendments to the Plan as it deems necessary or desirable except those amendments which substantially increase the cost of the Plan to PP&L or a Participating Company or significantly alter the benefit design or eligibility requirements of the Plan. Each amendment to the Plan will be binding on each Participating Company. Except as expressly provided elsewhere in the Plan, prior to the satisfaction of all liabilities with respect to the benefits provided under this Plan, no such amendment or termination shall cause any part of the monies contributed hereunder to revert to PP&L or to be diverted to any purpose other than for the exclusive benefit of Participants and their beneficiaries. No amendment shall have the effect of retroactively depriving Participants of benefits already accrued under the Plan. Upon complete termination of the Plan without establishment or maintenance of a successor plan (other than an employee stock ownership plan as defined in section 4975(e)(7) of the Code), Participants may receive distribution of their Accounts. Amendments to the allocation formulas contained in Article V shall not be made more frequently than once every six months. 10.2 Termination. The Plan and the Fund forming part of the Plan may be terminated or contributions completely discontinued at any time by or pursuant to action -5- of the board of directors of Resources. In the event of a termination, partial termination, or a complete discontinuance of contributions or in the event Resources is dissolved, liquidated, or adjudicated a bankrupt, the interest of the Participants, their estates and beneficiaries, shall be nonforfeitable and shall be fully vested, and distributions shall be made to them in full shares of Stock and cash in lieu of fractional shares based on the price at which the Trustee sells such Stock or the fair market value thereof. When all assets have been paid out by the Trustee, the Fund shall cease. Any distribution after termination of the Plan may be made at any time, and from time to time, in whole or in part in full shares of Stock and cash in lieu of fractional shares based on the price at which the Trustee sells such Stock or the fair market value thereof; provided, however, that no Stock may be distributed to a Participant within seven years after the month in which such Stock was allocated to the Participant's Account except in the case of the Participant's retirement, Total Disability, death or other termination of employment with PP&L and all Affiliated Companies. In making such distributions, any and all determinations, divisions, appraisals, apportionments and allotments so made shall be final and conclusive. 12.1 No Employment Rights. Neither the action of PP&L in establishing the Plan, nor any provisions of the Plan, nor any action taken by it or by the Employee Benefit Plan Board shall be construed as giving to any employee of a Participating Company the right to be retained in its employ, or any right to payment except to the extent of the benefits provided in the Plan to be paid from the Fund. 12.2 Source of Benefits. All benefits payable under the Plan shall be paid or provided for solely from the Fund, and neither any Participating Company nor Resources assume liability or responsibility therefor. 12.5 Incapacity. If the Employee Benefit Plan Board deems any Participant who is entitled to receive payments hereunder incapable of receiving or disbursing the same by reason of age, illness or infirmity or incapacity of any kind, the Employee Benefit Plan Board may direct the Trustee to apply such payment directly for the comfort, support and maintenance of such Participant or to pay the same to any responsible person caring for the Participant as determined by the Employee Benefit Plan Board to be qualified to receive and disburse such payments for the Participant's benefit, and the receipt of benefit such person shall be a complete acquittance for the payment of benefit. Payments pursuant to this Section 12.5 shall be complete discharge to the extent thereof of any and all liability of the Participating Companies, Resources, the Employee Benefit Plan Board, the Administrative Committee (if any), the Trustee, and the Fund. 12.7 Voting or Tendering Stock. (c) Confidentiality. All instructions received by the Trustee from individual participants (or beneficiaries) pursuant to this Section 12.7 shall be held by the -6- Trustee in strict confidence and shall not be divulged or released to any person; provided, that, to the extent necessary for the operation of the Plan or compliance with applicable law, such instructions may be relayed by the Trustee to a recordkeeper, auditor or other person providing services to the Plan or responsible for monitoring compliance with applicable laws, if such person is either: (1) a person who is not a Participating Company or an Affiliated Company or an employee, officer or director of a Participating Company or an Affiliated Company and who agrees not to divulge such instructions to any other person, including a Participating Company, an Affiliated Company, or employees, officers and directors of a Participating Company or an Affiliated Company; or (2) a person who is an employee of a Participating Company or an Affiliated Company, if such person is specifically authorized by the Employee Benefit Plan Board to receive such information pursuant to confidentiality procedures designed to safeguard the confidentiality of such information. The Employee Benefit Plan Board shall be responsible for monitoring compliance with such procedures, for the adequacy of such procedures, and for appointing an independent fiduciary to carry out activities relating to any situation that, in the determination of the Employee Benefit Plan Board, involves a potential for undue employer influence on Participants (or beneficiaries) with regard to their exercise of rights under this Section 12.7. 13.1 Applicability and Effective Date. The rights of any Returning Veteran who resumes employment with a Participating Company on or after December 12, 1994 shall be modified as set forth in this Article. 13.3 Restoration of TRASOP, PAYSOP, and Dividend-based Contributions. With respect to any Plan Year for which a Returning Veteran would have been a Participant, but failed to share in TRASOP, PAYSOP, or Dividend-based Contributions under Sections 4.1, 4.3 and 4.4 solely by reason of his Qualified Military Service, the Participating Company shall contribute to such Participant's Account an amount equal to the TRASOP, PAYSOP, and Dividend-based Contributions that would have been allocated to his Account, but for his absence for Qualified Military Service. Such contribution shall not include the earnings that would have accrued on such amount. -7- 13.4 Restoration of Matching Contributions. (a) Each Returning Veteran who, during his period of Qualified Military Service, would have been eligible to make Matching Contributions shall be permitted to contribute an amount equal to the Matching Contributions that he could have made during such absence from employment. Such "make-up" contributions shall be made during the period that begins with his reemployment by a Participating Company and ends with (1) the expiration of a period of five years, or (2) if shorter, a period of three times the period of Qualified Military Service. (b) Any make-up contributions described in Subsection (a) hereof shall be in addition to those Matching Contributions that the Participant may elect to make pursuant to Section 4.2. 13.5 Determination of Compensation. For purposes of determining the amount of any make-up contributions under Section 13.3 or Section 13.4 and for applying the limits of Section 5.5, a Participant's compensation during any period of Qualified Military Service shall be deemed to equal either: (a) the compensation he would have received but for such Qualified Military Service, based on the rate of pay he would have received from a Participating Company; or (b) if the amount described in (a) above is not reasonably certain, his average compensation from a Participating Company during the 12-month period immediately preceding the Qualified Military Service (or, if shorter, the period of employment immediately preceding the Qualified Military Service). Such amount shall be adjusted as necessary to reflect the length of the Participant's Qualified Military Service. II. Except as provided for in this Amendment No. 3, all other provisions of the Plan shall remain in full force and effect. IN WITNESS WHEREOF, this Amendment No. 3 is executed this _____ day of ________________, 1999. PP&L, INC. By:____________________________________ John M. Chappelear Vice President-Investments & Pensions -8- EX-4.(A).5 3 AMENDMENT NO. 4 ESOP (01/01/99) EXHIBIT 4(a)-5 AMENDMENT NO. 4 TO PP&L EMPLOYEE STOCK OWNERSHIP PLAN WHEREAS, PP&L, Inc. ("PP&L") has adopted the PP&L Employee Stock Ownership Plan ("Plan") effective January 1, 1975; and WHEREAS, the Plan was amended and restated effective January 1, 1998, and subsequently amended by Amendment Nos. 1, 2 and 3; and WHEREAS, the Company desires to further amend the Plan; NOW, THEREFORE, the Plan is hereby amended as follows: I. Effective January 1, 1999 the following section of Article II is amended to read: 2.14 "Employee" shall mean any person classified by a Participating Company as an employee of such Participating Company, including officers, shareholders, or directors who are employees, but excluding: (d) persons classified by the Participating Company as cooperative associates or college interns, as those terms are defined under Participating Company policy. II. Except as provided for in this Amendment No. 4, all other provisions of the Plan shall remain in full force and effect. IN WITNESS WHEREOF, this Amendment No. 4 is executed this _____ day of ________________, 1999. PP&L, INC. By:_______________________________________ John M. Chappelear Vice President-Investments & Pensions EX-4.(A).6 4 AMENDMENT NO. 5 ESOP (06/02/99) EXHIBIT 4(a)-6 AMENDMENT NO. 5 TO PP&L EMPLOYEE STOCK OWNERSHIP PLAN WHEREAS, PP&L, Inc. ("PP&L") has adopted the PP&L Employee Stock Ownership Plan ("Plan") effective January 1, 1975; and WHEREAS, the Plan was amended and restated effective January 1, 1998, and subsequently amended by Amendment Nos. 1, 2, 3 and 4; and WHEREAS, recent litigation involving the eligibility of independent contractors to participate in the employee benefit plans of other companies has highlighted the need to clarify that those individuals who are classified by PP&L or affiliated companies as independent contractors have at no time, since the inception of the Plan, been entitled to be eligible employees under the Plan; and WHEREAS, the modifications to the definition of "Employee" set forth in this amendment do not change the terms of the Plan, but rather clarify existing terms of the Plan; NOW THEREFORE, the following section of Article II is hereby amended to read as follows, to clarify the manner in which the Plan has been operated since its inception: 2.14 "Employee" shall mean any person classified by a Participating Company as an employee of such Participating Company, including officers, shareholders, or directors who are employees, but excluding: (a) persons covered by a collective bargaining agreement unless such agreement specifically provides for participation under the Retirement Plan; -1- (b) persons classified by the Participating Company as independent contractors, regardless of whether they are subsequently determined to be employees for employment tax or any other purpose. In no event shall the term "Employee" include persons classified by a Participating Company as independent contractors, regardless of whether they are subsequently determined to be employees for employment tax or any other reason, or persons classified by a Participating Company as leased employees, whether or not described in section 414(n) of the Code. For purposes of the preceding sentence, an "independent contractor" shall be an individual who is classified by the Participating Company in accordance with objective business criteria as an independent contractor in a good faith determination consistent with the factors set forth in Revenue Ruling 87-41 or any successor thereto, provided that the Participating Company has communicated to the individual that he has been engaged as an independent contractor rather than as an Employee. The foregoing exclusion is intended solely to prevent the retroactive participation by individuals classified in good faith as independent contractors in the event that such status should be determined, for employment tax or any other purposes, to be incorrect. Except as provided for in this Amendment No. 5, all other provisions of the Plan shall remain in full force and effect. IN WITNESS WHEREOF, this Amendment No. 5 is executed this _____ day of ________________, 1999. PP&L, INC. By:_____________________________________ John M. Chappelear Vice President-Investments & Pensions -2- EX-4.(B).19 5 SUPP TO MORTGAGE AND DEED OF TRUST (06/01/99) EXHIBIT 4(B).19 - -------------------------------------------------------------------------------- PP&L, INC (formerly Pennsylvania Power & Light Company) TO BANKERS TRUST COMPANY (successor to Morgan Guaranty Trust Company of New York, formerly Guaranty Trust Company of New York) As Trustee under PP&L, Inc.'s Mortgage and Deed of Trust, Dated as of October 1, 1945 ________________________ Sixty-seventh Supplemental Indenture Providing among other things for First Mortgage Bonds, Short-Term Series B ________________________ Dated as of June 1, 1999 - ------------------------------------------------------------------------------- SIXTY-SEVENTH SUPPLEMENTAL INDENTURE SIXTY-SEVENTH SUPPLEMENTAL INDENTURE, dated as of the 1st day of June, 1999 made and entered into by and between PP&L, INC. (formerly Pennsylvania Power & Light Company), a corporation of the Commonwealth of Pennsylvania, whose address is Two North Ninth Street, Allentown, Pennsylvania 18101 (hereinafter sometimes called the Company), and BANKERS TRUST COMPANY (successor to MORGAN GUARANTY TRUST COMPANY OF NEW YORK, formerly GUARANTY TRUST COMPANY OF NEW YORK), a corporation of the State of New York, whose address is 130 Liberty Street, New York, New York 10006 (hereinafter sometimes called the Trustee), as Trustee under the Mortgage and Deed of Trust, dated as of October 1, 1945 (hereinafter called the Mortgage and, together with any indentures supplemental thereto, hereinafter called the Indenture), which Mortgage was executed and delivered by Pennsylvania Power & Light Company to secure the payment of bonds issued or to be issued under and in accordance with the provisions of the Mortgage, reference to which said Mortgage is hereby made, this instrument (hereinafter called the Sixty-seventh Supplemental Indenture) being supplemental thereto; WHEREAS, said Mortgage was or is to be recorded in various Counties in the Commonwealth of Pennsylvania, which Counties include or will include all Counties in which this Sixty-seventh Supplemental Indenture is to be recorded; and WHEREAS, by an amendment to its Articles of Incorporation filed with the Office of the Secretary of State of Pennsylvania on September 12, 1997, the Company changed its name to PP&L, Inc.; and WHEREAS, an instrument, dated August 5, 1994, was executed by the Company appointing Bankers Trust Company as Trustee in succession to said Morgan Guaranty Trust Company of New York (resigned) under the Indenture, and by Bankers Trust Company accepting said appointment, which instrument was or is to be recorded in various Counties in the Commonwealth of Pennsylvania; and WHEREAS, by the Mortgage the Company covenanted that it would execute and deliver such supplemental indenture or indentures and such further instruments and do such further acts as might be necessary or proper to carry out more effectually the purposes of the Indenture and to make subject to the lien of the Indenture any property thereafter acquired and intended to be subject to the lien thereof; and WHEREAS, the Company executed and delivered as supplements to the Mortgage, the following supplemental indentures: Designation Dated as of ----------- ----------- First Supplemental Indenture.................. July 1, 1947 Second Supplemental Indenture................. December 1, 1948 Third Supplemental Indenture.................. February 1, 1950 Fourth Supplemental Indenture................. March 1, 1953 Fifth Supplemental Indenture.................. August 1, 1955 Sixth Supplemental Indenture.................. December 1, 1961 Seventh Supplemental Indenture................ March 1, 1964 Eighth Supplemental Indenture................. June 1, 1966 Ninth Supplemental Indenture.................. November 1, 1967 Tenth Supplemental Indenture.................. December 1, 1967 Eleventh Supplemental Indenture............... January 1, 1969 Twelfth Supplemental Indenture................ June 1, 1969 Thirteenth Supplemental Indenture............. March 1, 1970 Fourteenth Supplemental Indenture............. February 1, 1971 Fifteenth Supplemental Indenture.............. February 1, 1972 Sixteenth Supplemental Indenture.............. January 1, 1973 -2- Designation Dated as of ----------- ----------- Seventeenth Supplemental Indenture............ May 1, 1973 Eighteenth Supplemental Indenture............. April 1, 1974 Nineteenth Supplemental Indenture............. October 1, 1974 Twentieth Supplemental Indenture.............. May 1, 1975 Twenty-first Supplemental Indenture........... November 1, 1975 Twenty-second Supplemental Indenture.......... December 1, 1976 Twenty-third Supplemental Indenture........... December 1, 1977 Twenty-fourth Supplemental Indenture.......... April 1, 1979 Twenty-fifth Supplemental Indenture........... April 1, 1980 Twenty-sixth Supplemental Indenture........... June 1, 1980 Twenty-seventh Supplemental Indenture......... June 1, 1980 Twenty-eighth Supplemental Indenture.......... December 1, 1980 Twenty-ninth Supplemental Indenture........... February 1, 1981 Thirtieth Supplemental Indenture.............. February 1, 1981 Thirty-first Supplemental Indenture........... September 1, 1981 Thirty-second Supplemental Indenture.......... April 1, 1982 Thirty-third Supplemental Indenture........... August 1, 1982 Thirty-fourth Supplemental Indenture.......... October 1, 1982 Thirty-fifth Supplemental Indenture........... November 1, 1982 Thirty-sixth Supplemental Indenture........... February 1, 1983 Thirty-seventh Supplemental Indenture......... November 1, 1983 Thirty-eighth Supplemental Indenture.......... March 1, 1984 Thirty-ninth Supplemental Indenture........... April 1, 1984 Fortieth Supplemental Indenture............... August 15, 1984 Forty-first Supplemental Indenture............ December 1, 1984 Forty-second Supplemental Indenture........... June 15, 1985 Forty-third Supplemental Indenture............ October 1, 1985 Forty-fourth Supplemental Indenture........... January 1, 1986 Forty-fifth Supplemental Indenture............ February 1, 1986 Forty-sixth Supplemental Indenture............ April 1, 1986 Forty-seventh Supplemental Indenture.......... October 1, 1986 Forty-eighth Supplemental Indenture........... March 1, 1988 Forty-ninth Supplemental Indenture............ June 1, 1988 Fiftieth Supplemental Indenture............... January 1, 1989 Fifty-first Supplemental Indenture............ October 1, 1989 Fifty-second Supplemental Indenture........... July 1, 1991 Fifty-third Supplemental Indenture............ May 1, 1992 Fifty-fourth Supplemental Indenture........... November 1, 1992 Fifty-fifth Supplemental Indenture............ February 1, 1993 Fifty-sixth Supplemental Indenture............ April 1, 1993 Fifty-seventh Supplemental Indenture.......... June 1, 1993 Fifty-eighth Supplemental Indenture........... October 1, 1993 Fifty-ninth Supplemental Indenture............ February 15, 1994 Sixtieth Supplemental Indenture............... March 1, 1994 Sixty-first Supplemental Indenture............ March 15, 1994 Sixty-second Supplemental Indenture........... September 1, 1994 Sixty-third Supplemental Indenture............ October 1, 1994 Sixty-fourth Supplemental Indenture........... August 1, 1995 -3- Designation Dated as of ----------- ----------- Sixty-fifth Supplemental Indenture............ April 1, 1997 Sixty-sixth Supplemental Indenture............ May 1, 1998 which supplemental indentures were or are to be recorded in various Counties in the Commonwealth of Pennsylvania; and WHEREAS, the Company executed and delivered its Supplemental Indenture, dated July 1, 1954, creating a security interest in certain personal property of the Company, pursuant to the provisions of the Pennsylvania Uniform Commercial Code, as a supplement to the Mortgage, which Supplemental Indenture was filed in the Office of the Secretary of the Commonwealth of Pennsylvania on July 1, 1954, and all subsequent supplemental indentures were so filed; and WHEREAS, in addition to the property described in the Mortgage, as heretofore supplemented, the Company has acquired certain other property, rights and interests in property; and WHEREAS, the Company has heretofore issued, in accordance with the provisions of the Mortgage, as supplemented, the following series of First Mortgage Bonds: Principal Principal Amount Amount Series Issued Outstanding - ------ ------ ----------- 3% Series due 1975..................... $ 93,000,000 None 2-3/4% Series due 1977................. 20,000,000 None 3-1/4% Series due 1978................. 10,000,000 None 2-3/4% Series due 1980................. 37,000,000 None 3-1/2% Series due 1983................. 25,000,000 None 3-3/8% Series due 1985................. 25,000,000 None 4-5/8% Series due 1991................. 30,000,000 None 4-5/8% Series due 1994................. 30,000,000 None 5-5/8% Series due 1996................. 30,000,000 None 6-3/4% Series due 1997................. 30,000,000 None 6-1/2% Series due 1972................. 15,000,000 None 7% Series due 1999..................... 40,000,000 None 8-1/8% Series due June 1, 1999......... 40,000,000 None 9% Series due 2000..................... 50,000,000 None 7-1/4% Series due 2001................. 60,000,000 None 7-5/8% Series due 2002................. 75,000,000 None 7-1/2% Series due 2003................. 80,000,000 None Pollution Control Series A............. 28,000,000 None 9-1/4% Series due 2004................. 80,000,000 None 10-1/8% Series due 1982................ 100,000,000 None 9-3/4% Series due 2005................. 125,000,000 None 9-3/4% Series due November 1, 2005..... 100,000,000 None 8-1/4% Series due 2006................. 150,000,000 None 8-1/2% Series due 2007................. 100,000,000 None 9-7/8% Series due 1983-1985............ 100,000,000 None -4- Principal Principal Amount Amount Series Issued Outstanding - ------ ------ ----------- 15-5/8% Series due 2010................. $100,000,000 None 11-3/4% Series due 1984................. 30,000,000 None Pollution Control Series B.............. 70,000,000 None Pollution Control Series C.............. 20,000,000 None 14% Series due December 1, 1990......... 125,000,000 None 15% Series due 1984-1986................ 50,000,000 None 14-3/4% Series A due 1986............... 30,000,000 None 14-3/4% Series B due 1986............... 20,000,000 None 16-1/2% Series due 1987-1991............ 52,000,000 None 16-1/8% Series due 1992................. 100,000,000 None 16-1/2% Series due 1986-1990............ 92,500,000 None 13-1/4% Series due 2012................. 100,000,000 None Pollution Control Series D.............. 70,000,000 None 12-1/8% Series due 1989-1993............ 50,000,000 None 13-1/8% Series due 2013................. 125,000,000 None Pollution Control Series E.............. 37,750,000 None 13-1/2% Series due 1994................. 125,000,000 None Pollution Control Series F.............. 115,500,000 None 12-3/4% Series due 2014................. 125,000,000 None Pollution Control Series G.............. 55,000,000 None 12% Series due 2015..................... 125,000,000 None 10-7/8% Series due 2016................. 125,000,000 None 9-5/8% Series due 1996.................. 125,000,000 None 9% Series due 2016...................... 125,000,000 None 9-1/2% Series due 2016.................. 125,000,000 None 9-1/4% Series due 1998.................. 125,000,000 None 9-5/8% Series due 1998.................. 125,000,000 None 10% Series due 2019..................... 125,000,000 None 9-1/4% Series due 2019.................. 250,000,000 $215,000,000 9-3/8% Series due 2021.................. 150,000,000 99,750,000 7-3/4% Series due 2002.................. 150,000,000 150,000,000 8-1/2% Series due 2022.................. 150,000,000 150,000,000 Pollution Control Series H.............. 90,000,000 90,000,000 6-7/8% Series due 2003.................. 100,000,000 100,000,000 7-7/8% Series due 2023.................. 200,000,000 200,000,000 5-1/2% Series due 1998.................. 150,000,000 None 6-1/2% Series due 2005.................. 125,000,000 125,000,000 6% Series due 2000...................... 125,000,000 125,000,000 6-3/4% Series due 2023.................. 150,000,000 150,000,000 Pollution Control Series I.............. 53,250,000 53,250,000 6.55% Series due 2006................... 150,000,000 150,000,000 7.30% Series due 2024................... 150,000,000 150,000,000 6-7/8% Series due 2004.................. 150,000,000 150,000,000 7-3/8% Series due 2014.................. 100,000,000 100,000,000 Pollution Control Series J.............. 115,500,000 115,500,000 -5- Principal Principal Amount Amount Series Issued Outstanding - ------ ------ ----------- 7.70% Series due 2009....................... $200,000,000 $200,000,000 Pollution Control Series K.................. 55,000,000 55,000,000 Short-Term Series A......................... 800,000,000 None 6 1/8% REset Put Securities Series due 2006. 200,000,000 200,000,000 which bonds are also sometimes called bonds of the First through Seventy-fourth Series, respectively; and WHEREAS, Section 8 of the Mortgage provides that the form of each series of bonds (other than the First Series) issued thereunder shall be established by Resolution of the Board of Directors of the Company and that the form of such series, as established by said Board of Directors, shall specify the descriptive title of the bonds and various other terms thereof, and may also contain such provisions not inconsistent with the provisions of the Indenture as the Board of Directors may, in its discretion, cause to be inserted therein expressing or referring to the terms and conditions upon which such bonds are to be issued and/or secured under the Indenture; and WHEREAS, Section 120 of the Mortgage provides, among other things, that any power, privilege or right expressly or impliedly reserved to or in any way conferred upon the Company by any provision of the Indenture, whether such power, privilege or right is in any way restricted or is unrestricted, may be in whole or in part waived or surrendered or subjected to any restriction if at the time unrestricted or to additional restriction if already restricted, and the Company may enter into any future covenants, limitations or restrictions for the benefit of any one or more series of bonds issued thereunder, or the Company may cure any ambiguity contained therein or in any supplemental indenture or may establish the terms and provisions of any series of bonds other than said First Series, by an instrument in writing executed and acknowledged by the Company in such manner as would be necessary to entitle a conveyance of real estate to record in all of the States in which any property at the time subject to the lien of the Indenture shall be situated; and WHEREAS, the Company now desires to create a new series of bonds and to add to its covenants and agreements contained in the Mortgage, as heretofore supplemented, certain other covenants and agreements to be observed by it and to alter and amend in certain respects the covenants and provisions contained in the Mortgage; and WHEREAS, the execution and delivery by the Company of this Sixty-seventh Supplemental Indenture, and the terms of the bonds of the Seventy-fifth Series, hereinafter referred to, have been duly authorized by the Board of Directors of the Company by appropriate Resolutions of said Board of Directors; NOW, THEREFORE, THIS INDENTURE WITNESSETH: That PP&L, Inc., in consideration of the premises and of One Dollar to it duly paid by the Trustee at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, and in further evidence of assurance of the estate, title and rights of the Trustee and in order further to secure the payment both of the principal of and interest and premium, if any, on the bonds from time to time issued under the Indenture, according to their tenor and effect and the performance of all the provisions of the Indenture (including any modification made as in the Mortgage provided) and of said bonds, hereby grants, bargains, sells, releases, conveys, assigns, transfers, mortgages, pledges, sets over and confirms (subject, however, to Excepted Encumbrances as defined in Section 6 of the Mortgage) unto Bankers Trust Company, as Trustee under the Indenture, and to its successor or successors in said trust, and to said Trustee and its successors and assigns forever, all property, real, personal and mixed, of the kind or nature specifically mentioned in the Mortgage, as heretofore supplemented, or of any other kind or nature, acquired by the Company after the date of the execution and delivery of the Sixty-sixth Supplemental Indenture (except any herein or in the Mortgage, as heretofore supplemented, expressly excepted and except any which may not lawfully be mortgaged or pledged under the Indenture), now owned -6- or, subject to the provisions of Section 87 of the Mortgage, hereafter acquired by the Company (by purchase, consolidation, merger, donation, construction, erection or in any other way) and wheresoever situated, including (without in anywise limiting or impairing by the enumeration of the same the scope and intent of the foregoing) all lands, power sites, flowage rights, water rights, water locations, water appropriations, ditches, flumes, reservoirs, reservoir sites, canals, raceways, dams, dam sites, aqueducts, and all other rights or means for appropriating, conveying, storing and supplying water; all rights of way and roads; all plants for the generation of electricity by steam, water and/or other power; all power houses, gas plants, street lighting systems, standards and other equipment incidental thereto, telephone, radio and television systems, air-conditioning systems and equipment incidental thereto, water works, water systems, steam heat and hot water plants, substations, lines, service and supply systems, bridges, culverts, tracks, ice or refrigeration plants and equipment, offices, buildings and other structures and the equipment thereof; all machinery, engines, boilers, dynamos, electric, gas and other machines, regulators, meters, transformers, generators, motors, electrical, gas and mechanical appliances, conduits, cables, water, steam heat, gas or other pipes, gas mains and pipes, service pipes, fittings, valves and connections, pole and transmission lines, wires, cables, tools, implements, apparatus, furniture and chattels; all municipal and other franchises, consents or permits; all lines for the transmission and distribution of electric current, gas, steam heat or water for any purpose including towers, poles, wires, cables, pipes, conduits, ducts and all apparatus for use in connection therewith; all real estate, lands, easements, servitudes, licenses, permits, franchises, privileges, rights of way and other rights in or relating to real estate or the occupancy of the same and (except as herein or in the Mortgage, as heretofore supplemented, expressly excepted) all the right, title and interest of the Company in and to all other property of any kind or nature appertaining to and/or used and/or occupied and/or enjoyed in connection with any property hereinbefore or in the Mortgage, as heretofore supplemented, described. TOGETHER with all and singular the tenements, hereditaments, prescriptions, servitudes, and appurtenances belonging or in anywise appertaining to the aforesaid property or any part thereof, with the reversion and reversions, remainder and remainders and (subject to the provisions of Section 57 of the Mortgage) the tolls, rents, revenues, issues, earnings, income, product and profits thereof, and all the estate, right, title and interest and claim whatsoever, at law as well as in equity, which the Company now has or may hereafter acquire in and to the aforesaid property and franchises and every part and parcel thereof. IT IS HEREBY AGREED by the Company that, subject to the provisions of Section 87 of the Mortgage and to the extent permitted by law, all the property, rights, and franchises acquired by the Company (by purchase, consolidation, merger, donation, construction, erection or in any other way) after the date hereof, except any herein or in the Mortgage, as heretofore supplemented, expressly excepted, shall be and are as fully granted and conveyed hereby and as fully embraced within the lien hereof and the lien of the Indenture, as if such property, rights and franchises were now owned by the Company and were specifically described herein and conveyed hereby. IT IS HEREBY DECLARED by the Company that all the property, rights and franchises now owned or hereafter acquired by the Company have been, or are, or will be owned or acquired with the intention to use the same in carrying on the business or branches of business of the Company, and it is hereby declared that it is the intention of the Company that all thereof, except any herein or in the Mortgage, as heretofore supplemented, expressly excepted, shall (subject to the provisions of Section 87 of the Mortgage and to the extent permitted by law) be embraced within the lien of this Sixty-seventh Supplemental Indenture and the lien of the Indenture. PROVIDED that the following are not and are not intended to be now or hereafter granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over or confirmed hereunder and are hereby expressly excepted from the lien and operation of this Sixty-seventh Supplemental Indenture and from the lien and operation of the Indenture, viz: (1) cash, --- shares of stock, bonds, notes and other obligations and other securities not hereafter specifically pledged, paid, deposited, delivered or held under the Indenture or covenanted so to be; (2) goods, wares, merchandise, equipment, apparatus, materials, or supplies held for the purpose of sale or other disposition in the usual course of business; fuel, oil and similar materials and supplies consumable in the operation of any of the properties of the Company; construction equipment acquired for temporary use; all aircraft, rolling stock, trolley coaches, buses, -7- motor coaches, automobiles and other vehicles and materials and supplies held for the purposes of repairing or replacing (in whole or part) any of the same; all timber, minerals, mineral rights and royalties; (3) bills, notes and accounts receivable, judgments, demands and choses in action, and all contracts, leases and operating agreements not specifically pledged under the Indenture or covenanted so to be; the Company's contractual rights or other interest in or with respect to tires not owned by the Company; (4) the last day of the term of any lease or leasehold which may be or become subject to the lien of the Indenture; and (5) electric energy, gas, steam, ice, and other materials or products generated, manufactured, produced or purchased by the Company for sale, distribution or use in the ordinary course of its business; provided, however, that the property and rights expressly excepted from the lien and operation of the Indenture in the above subdivisions (2) and (3) shall (to the extent permitted by law) cease to be so excepted in the event and as of the date that the Trustee or a receiver or trustee shall enter upon and take possession of the Mortgaged and Pledged Property in the manner provided in Article XIII of the Mortgage by reason of the occurrence of a Default as defined in Section 65 thereof, as supplemented by the provisions of this Sixty-seventh Supplemental Indenture. TO HAVE AND TO HOLD all such properties, real, personal and mixed, granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over or confirmed by the Company as aforesaid, or intended so to be, unto Bankers Trust Company, as Trustee, and its successors and assigns forever. IN TRUST NEVERTHELESS for the same purposes and upon the same terms, trusts and conditions and subject to and with the same provisos and covenants as are set forth in the Mortgage, as heretofore supplemented, this Sixty-seventh Supplemental Indenture being supplemental to the Mortgage. AND IT IS HEREBY COVENANTED by the Company that all the terms, conditions, provisos, covenants and provisions contained in the Mortgage, as heretofore supplemented, shall affect and apply to the property hereinbefore described and conveyed and to the estate, rights, obligations and duties of the Company and the Trustee and the beneficiaries of the trust with respect to said property, and to the Trustee and its successors as Trustee of said property in the same manner and with the same effect as if the said property had been owned by the Company at the time of the execution of the Mortgage, and had been specifically and at length described in and conveyed to the Trustee by the Mortgage as a part of the property therein stated to be conveyed. The Company further covenants and agrees to and with the Trustee and its successors in said trust under the Indenture, as follows: ARTICLE I. Seventy-fifth Series of Bonds SECTION 1. There shall be a series of bonds designated "Short-Term Series B" (herein sometimes referred to as the "Seventy-fifth Series"), each of which shall also bear the descriptive title First Mortgage Bonds, and the form thereof, which shall be established by Resolution of the Board of Directors of the Company, shall contain suitable provisions with respect to the matters hereinafter in this Section specified. Bonds of the Seventy-fifth Series shall be limited to $600 million in aggregate principal amount (with no more than $200 million in aggregate principal amount to be Outstanding at any one time), except as provided in Section 16 of the Mortgage, and shall be issued as fully registered bonds in denominations of One Thousand Dollars and in any multiple or multiples of One Thousand Dollars; each bond of the Seventy-fifth Series shall mature on a date not more than sixty days from the date of issue, shall bear interest at such rate or rates and have such other terms and provisions not inconsistent with the Mortgage as the Board of Directors may determine in accordance with one or more resolutions filed with the Trustee and one or more written orders referring to this Sixty-seventh Supplemental Indenture; the principal of and interest on each said bond to be payable at the office or agency of the Company in the Borough of Manhattan, The City of New York, and interest -8- on each said bond to be also payable at the office of the Company in the City of Allentown, Pennsylvania, in such coin or currency of the United States of America as at the time of payment is legal tender for public and private debts. Bonds of the Seventy-fifth Series shall be dated as in Section 10 of the Mortgage provided. Notwithstanding the foregoing, so long as there is no existing default in the payment of interest on the bonds of the Seventy-fifth Series, the person in whose name any bond of the Seventy-fifth Series is registered at the close of business on any Record Date with respect to any interest payment date shall be entitled to receive the interest payable on such interest payment date; provided that, interest payable on the maturity date will be payable to the person to whom the principal thereof shall be payable. "Record Date" for bonds of the Seventy-fifth Series, shall mean the business day next preceding the corresponding interest payment date. "Original Interest Accrual Date" with respect to bonds of the Seventy-fifth Series of a designated interest rate and maturity shall mean the date of first authentication of Bonds of a designated interest rate and maturity unless the written order filed for such bonds with the Trustee on or before such date shall specify another date from which interest shall accrue, in which case "Original Interest Accrual Date" shall mean such other date specified in the written order for Bonds of such designated interest rate and maturity. (I) Each holder of a bond of the Seventy-fifth Series, except as may be provided in the written order requesting authentication and delivery of such bond, consents that the bonds of the Seventy-fifth Series may be redeemable at the option of the Company or pursuant to the requirements of the Indenture in whole at any time, or in part from time to time, prior to maturity, without notice provided in Section 52 of the Mortgage, at the principal amount of the bonds to be redeemed, in each case, together with accrued interest to the date fixed for redemption by the Company in a notice delivered on or before the date fixed for redemption by the Company to the Trustee and to the holders of the bonds to be redeemed. (II) At the option of the registered owner, any bonds of the Seventy-fifth Series, upon surrender thereof, for cancellation, at the office or agency of the Company in the Borough of Manhattan, The City of New York, shall be exchangeable for a like aggregate principal amount of bonds of the same series, interest rate, maturity and other terms of other authorized denominations. Bonds of the Seventy-fifth Series shall be transferable, upon the surrender thereof for cancellation, together with a written instrument of transfer in form approved by the registrar duly executed by the registered owner or by his duly authorized attorney, at the office or agency of the Company in the Borough of Manhattan, The City of New York; provided that such transfer shall not result in any security being required to be registered under the Securities Act of 1933, as amended, and an opinion of counsel satisfactory to the Company to such effect shall have been provided to the Company. Upon any transfer or exchange of bonds of the Seventy-fifth Series, the Company may make a charge therefor sufficient to reimburse it for any tax or taxes or other governmental charge, as provided in Section 12 of the Mortgage, but the Company hereby waives any right to make a charge in addition thereto for any exchange or transfer of bonds of the Seventy-fifth Series. ARTICLE II. Maintenance and Replacement Fund Covenant -- Dividend Covenant -- Other Related Provisions of the Mortgage SECTION 2. Subject to the provisions of Section 3 hereof, the Company covenants and agrees that the provisions of Section 39 of the Mortgage, which were to remain in effect so long as any bonds of the First Series remained Outstanding, shall remain in full force and effect so long as any bonds of the Seventy-fifth Series are Outstanding. -9- Clause (d) of subsection (II)(B) of Section 4 of the Mortgage, as heretofore amended, is hereby further amended by inserting the words "and Seventy-fifth Series" after the words "and Seventy-fourth Series" each time such words appear therein. Clause (6) and clause (e) of Section 5 of the Mortgage and Section 29 of the Mortgage, as heretofore amended, are hereby further amended by inserting therein "Seventy-fifth, before "Seventy-fourth," each time such words occur therein. ARTICLE III. Miscellaneous Provisions SECTION 3. The Company reserves the right to make such amendments to the Mortgage, as supplemented, as shall be necessary in order to delete subsection (I) of Section 39 of the Mortgage, and each holder of bonds of the Seventy-fifth Series hereby consents to such deletion without any other or further action by any holder of bonds of the Seventy-fifth Series. SECTION 4. The terms defined in the Mortgage, as heretofore supplemented, shall, for all purposes of this Sixty-seventh Supplemental Indenture, have the meanings specified in the Mortgage, as heretofore supplemented. SECTION 5. Whenever in this Sixty-seventh Supplemental Indenture either of the parties hereto is named or referred to, this shall, subject to the provisions of Articles XVI and XVII of the Mortgage, be deemed to include the successors and assigns of such party, and all the covenants and agreements in this Sixty-seventh Supplemental Indenture contained by or on behalf of the Company, or by or on behalf of the Trustee shall, subject as aforesaid, bind and inure to the respective benefits of the respective successors and assigns of such parties, whether so expressed or not. SECTION 6. So long as any bonds of the Seventy-fifth Series remain Outstanding, unless this provision shall have been waived in writing by the holders of seventy per centum (70%) in aggregate principal amount of bonds of the Seventy-fifth Series Outstanding at the time of such consent, subdivision (c) of Section 65 of the Mortgage shall read as follows: "(c) Failure to pay interest or premium, if any, upon or principal (whether at maturity as therein expressed or by declaration, or otherwise) of any Outstanding Qualified Lien Bonds or of any outstanding indebtedness secured by any mortgage or other lien (not included in the term Excepted Encumbrances) prior to the lien of this Indenture, existing upon any property of the Company which is subject to the lien and operation of this Indenture continued beyond the period of grace, if any, specified in such mortgage or Qualified Lien or other lien securing the same;" SECTION 7. A breach of a specified covenant or agreement of the Company contained in this Sixty-seventh Supplemental Indenture shall become a Default under the Indenture upon the happening of the events provided in Section 65(g) of the Mortgage with respect to such a covenant or agreement. SECTION 8. The Trustee hereby accepts the trusts herein declared, provided, created or supplemented and agrees to perform the same upon the terms and conditions herein and in the Mortgage, as heretofore supplemented, set forth and upon the following terms and conditions: The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Sixty-seventh Supplemental Indenture or for or in respect of the recitals contained herein, all of which -10- recitals are made by the Company solely. Each and every term and condition contained in Article XVII of the Mortgage, as heretofore amended by said First through Sixty-sixth Supplemental Indentures, shall apply to and form part of this Sixty-seventh Supplemental Indenture with the same force and effect as if the same were herein set forth in full with such omissions, variations and insertions, if any, as may be appropriate to make the same conform to the provisions of this Sixty-seventh Supplemental Indenture. SECTION 9. Nothing in this Sixty-seventh Supplemental Indenture, expressed or implied, is intended, or shall be construed, to confer upon, or to give to, any person, firm or corporation, other than the parties hereto and the holders of the bonds and coupons Outstanding under the Indenture, any right, remedy or claim under or by reason of this Sixty-seventh Supplemental Indenture or by any covenant, condition, stipulation, promise or agreement hereof, and all the covenants, conditions, stipulations, promises and agreements in this Sixty- seventh Supplemental Indenture contained by or on behalf of the Company shall be for the sole and exclusive benefit of the parties hereto, and of the holders of the bonds and coupons Outstanding under the Indenture. SECTION 10. This Sixty-seventh Supplemental Indenture shall be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. PP&L, INC. does hereby constitute and appoint JAMES E. ABEL, Vice President -Finance and Treasurer of PP&L, INC., to be its attorney for it, and in its name and as and for its corporate act and deed to acknowledge this Sixty- seventh Supplemental Indenture before any person having authority by the laws of the Commonwealth of Pennsylvania to take such acknowledgment, to the intent that the same may be duly recorded, and BANKERS TRUST COMPANY does hereby constitute and appoint JACKIE BARTNICK, a Vice President of BANKERS TRUST COMPANY, to be its attorney for it, and in its name and as and for its corporate act and deed to acknowledge this Sixty-seventh Supplemental Indenture before any person having authority by the laws of the Commonwealth of Pennsylvania to take such acknowledgment, to the intent that the same may be duly recorded. -11- IN WITNESS WHEREOF, PP&L, INC. has caused its corporate name to be hereunto affixed, and this instrument to be signed and sealed by its President or one of its Vice Presidents, and its corporate seal to be attested by its Secretary or one of its Assistant Secretaries for and in its behalf, in the City of Allentown, Pennsylvania, and BANKERS TRUST COMPANY has caused its corporate name to be hereunto affixed, and this instrument to be signed and sealed by one of its Principals, Vice Presidents or Trust Officers, and its corporate seal to be attested by one of its Vice Presidents, Assistant Vice Presidents or Trust Officers, in The City of New York, as of the day and year first above written. PP&L, INC. By /s/ James E. Abel -------------------------------------- Vice President - Finance and Treasurer Attest: /s/ Diane M. Koch - --------------------------- Assistant Secretary -12- BANKERS TRUST COMPANY, as Trustee By /s/ Jackie Bartnick --------------------------------- Vice President Attest: /s/ Vincent Chorney - ----------------------------- Assistant Vice President -13- COMMONWEALTH OF PENNSYLVANIA ) ) ss.: COUNTY OF LEHIGH ) On this ____ day of June, 1999, before me, a notary public, the undersigned officer, personally appeared JAMES E. ABEL, who acknowledged himself to be the Vice President - Finance and Treasurer of PP&L, INC., a corporation and that he, as such Vice President - Finance and Treasurer, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as Vice President - Finance and Treasurer. In witness whereof, I hereunto set my hand and official seal. /s/ Francine A. Greenzweig ------------------------------- Notary Public -14- STATE OF NEW YORK ) ) ss.: COUNTY OF KINGS ) On this 23rd day of June, 1999, before me, a notary public, the undersigned officer, personally appeared JACKIE BARTNICK, who acknowledged herself to be a Vice President of BANKERS TRUST COMPANY, a corporation and that she, as such Vice President, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by herself as Vice President. In witness whereof, I hereunto set my hand and official seal. By: /s/ Boris Treyger ------------------------ BORIS TREYGER Notary Public, State of New York No. 01TR6016003 Qualified in Kings County Commission Expires Nov. 9, 2000 Bankers Trust Company hereby certifies that its precise name and address as Trustee hereunder are: Bankers Trust Company 130 Liberty Street New York, New York 10006 BANKERS TRUST COMPANY By: /s/ Vincent Chorney ------------------------- Assistant Vice President EX-4.(C).4 6 SUPPLEMENT TO INDENTURE (10/01/99) EXHIBIT 4(C)-4 ================================================================================ PP&L CAPITAL FUNDING, INC., Issuer and PP&L RESOURCES, INC., Guarantor TO THE CHASE MANHATTAN BANK, Trustee _________ Supplemental Indenture No. 3 Dated as of October 1, 1999 Supplemental to the Indenture dated as of November 1, 1997 Establishing a series of Securities designated Medium-Term Notes, Series C limited in aggregate principal amount to $500,000,000 ================================================================================ SUPPLEMENTAL INDENTURE No. 3, dated as of October 1, 1999 among PP&L CAPITAL FUNDING, INC., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), PP&L RESOURCES, INC., a corporation duly organized and existing under the laws of the Commonwealth of Pennsylvania (herein called the "Guarantor"), and THE CHASE MANHATTAN BANK, a New York banking corporation, as Trustee (herein called the "Trustee), under the Indenture dated as of November 1, 1997 (hereinafter called the "Original Indenture"), this Supplemental Indenture No. 3 being supplemental thereto. The Original Indenture and any and all indentures and instruments supplemental thereto are hereinafter sometimes collectively called the "Indenture." Recitals of the Company and the Guarantor The Original Indenture was authorized, executed and delivered by the Company and the Guarantor to provide for the issuance by the Company from time to time of its Securities (such term and all other capitalized terms used herein without definition having the meanings assigned to them in the Original Indenture), to be issued in one or more series as contemplated therein, and for the Guarantee by the Guarantor of the payment of the principal, premium, if any, and interest, if any, on such Securities. As contemplated by Sections 301 and 1201(f) of the Original Indenture, the Company wishes to establish a series of Securities to be designated "Medium- Term Notes, Series C" to be limited in aggregate principal amount (except as contemplated in Section 301(b) of the Original Indenture) to $500,000,000, such series of Securities to be hereinafter sometimes called "Series No. 3." As contemplated by Section 201 and 1402 of the Original Indenture, the Guarantor wishes to establish the form and terms of the Guarantees to be endorsed on the Securities of Series No. 3. The Company has duly authorized the execution and delivery of this Supplemental Indenture No. 3 to establish the Securities of Series No. 3 and has duly authorized the issuance of such Securities; the Guarantor has duly authorized the execution and delivery of this Supplemental Indenture No. 3 and has duly authorized its Guarantees of the Securities of Series No. 3; and all acts necessary to make this Supplemental Indenture No. 3 a valid agreement of the Company and the Guarantor, to make the Securities of Series No. 3 valid obligations of the Company, and to make the Guarantees valid obligations of the Guarantor, have been performed. NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE No. 3 WITNESSETH: For and in consideration of the premises and of the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities of Series No. 3, as follows: ARTICLE ONE Third Series of Securities Section 1. There is hereby created a series of Securities designated "Medium-Term Notes, Series C" and limited in aggregate principal amount (except as contemplated in Section 301(b) of the Original Indenture) to $500,000,000. The forms and terms of the Securities of Series No. 3 shall be established in an Officer's Certificate of the Company, as contemplated by Section 301 of the Original Indenture. Section 2. The Company hereby agrees that, if the Company shall make any deposit of money and/or Eligible Obligations with respect to any Securities of Series No. 3, or any portion of the principal amount thereof, as contemplated by Section 701 of the Indenture, the Company shall not deliver an Officer's Certificate described in clause (z) in the first paragraph of said Section 701 unless the Company shall also deliver to the Trustee, together with such Officer's Certificate, either: (A) an instrument wherein the Company, notwithstanding the satisfaction and discharge of its indebtedness in respect of such Securities, shall assume the obligation (which shall be absolute and unconditional) to irrevocably deposit with the Trustee or Paying Agent such additional sums of money, if any, or additional Eligible Obligations (meeting the requirements of Section 701), if any, or any combination thereof, at such time or times, as shall be necessary, together with the money and/or Eligible Obligations theretofore so deposited, to pay when due the principal of and premium, if any, and interest due and to become due on such Securities or portions thereof, all in accordance with and subject to the provisions of said Section 701; provided, however, that such instrument may state that the obligation of the Company to make additional deposits as aforesaid shall be subject to the delivery to the Company by the Trustee of a notice asserting the deficiency accompanied by an opinion of an independent public accountant of nationally recognized standing, selected by the Trustee, showing the calculation thereof (which opinion shall be obtained at the expense of the Company); or (B) an Opinion of Counsel to the effect that the Holders of such Securities, or portions of the principal amount thereof, will not recognize income, gain or loss for United States federal income tax purposes as a result of the satisfaction and discharge of the Company's indebtedness in respect thereof and will be subject to United States federal income tax on the same amounts, at the same times and in the same manner as if such satisfaction and discharge had not been effected. ARTICLE TWO Form of Guarantee Guarantees to be endorsed on the Securities of Series No. 3 shall be in substantially the form set forth below: 2 [FORM OF GUARANTEE] PP&L Resources, Inc., a corporation organized under the laws of the Commonwealth of Pennsylvania (the "Guarantor", which term includes any successor under the Indenture (the "Indenture") referred to in the Security upon which this Guarantee is endorsed), for value received, hereby unconditionally guarantees to the Holder of the Security upon which this Guarantee is endorsed, the due and punctual payment of the principal of, and premium, if any, and interest, if any, on such Security when and as the same shall become due and payable, whether at the Stated Maturity, by declaration of acceleration, call for redemption, or otherwise, in accordance with the terms of such Security and of the Indenture. In case of the failure of PP&L Capital Funding, Inc., a corporation organized under the laws of the State of Delaware (the "Company", which term includes any successor under the Indenture), punctually to make any such payment, the Guarantor hereby agrees to cause such payment to be made punctually when and as the same shall become due and payable, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise, and as if such payment were made by the Company. The Guarantor hereby agrees that its obligations hereunder shall be absolute and unconditional irrespective of, and shall be unaffected by, any invalidity, irregularity or unenforceability of such Security or the Indenture, any failure to enforce the provisions of such Security or the Indenture, or any waiver, modification or indulgence granted to the Company with respect thereto, by the Holder of such Security or the Trustee or any other circumstance which may otherwise constitute a legal or equitable discharge or defense of a surety or guarantor; provided, however, that notwithstanding the foregoing, no such waiver, modification or indulgence shall, without the consent of the Guarantor, increase the principal amount of such Security, or increase the interest rate thereon, or change any redemption provisions thereof (including any change to increase any premium payable upon redemption thereof) or change the Stated Maturity thereof. The Guarantor hereby waives the benefits of diligence, presentment, demand for payment, any requirement that the Trustee or the Holder of such Security exhaust any right or take any action against the Company or any other Person, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest or notice with respect to such Security or the indebtedness evidenced thereby and all demands whatsoever, and covenants that this Guarantee will not be discharged in respect of such Security except by complete performance of the obligations contained in such Security and in this Guarantee. This Guarantee shall constitute a guaranty of payment and not of collection. The Guarantor hereby agrees that, in the event of a default in payment of principal, or premium, if any, or interest, if any, on such Security, whether at its Stated Maturity, by declaration of acceleration, call for redemption, or otherwise, legal proceedings may be instituted by the Trustee on behalf of, or by, the Holder of such Security, subject to the terms and conditions set forth in the Indenture, 3 directly against the Guarantor to enforce this Guarantee without first proceeding against the Company. The obligations of the Guarantor hereunder with respect to such Security shall be continuing and irrevocable until the date upon which the entire principal of, premium, if any, and interest, if any, on such Security has been, or has been deemed pursuant to the provisions of Article Seven of the Indenture to have been, paid in full or otherwise discharged. The Guarantor shall be subrogated to all rights of the Holder of such Security upon which this Guarantee is endorsed against the Company in respect of any amounts paid by the Guarantor on account of such Security pursuant to the provisions of this Guarantee or the Indenture; provided, however, that the Guarantor shall not be entitled to enforce or to receive any payments arising out of, or based upon, such right of subrogation until the principal of, and premium, if any, and interest, if any, on all Securities issued under the Indenture shall have been paid in full. This Guarantee shall remain in full force and effect and continue notwithstanding any petition filed by or against the Company for liquidation or reorganization, the Company becoming insolvent or making an assignment for the benefit of creditors or a receiver or trustee being appointed for all or any significant part of the Company's assets, and shall, to the fullest extent permitted by law, continue to be effective or reinstated, as the case may be, if at any time payment of the Security upon which this Guarantee is endorsed, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by the Holder of such Security, whether as a "voidable preference," "fraudulent transfer," or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned on such Security, such Security shall, to the fullest extent permitted by law, be reinstated and deemed paid only by such amount paid and not so rescinded, reduced, restored or returned. This Guarantee shall not be valid or obligatory for any purpose until the certificate of authentication of the Security upon which this Guarantee is endorsed shall have been manually executed by or on behalf of the Trustee under the Indenture. All terms used in this Guarantee which are defined in the Indenture shall have the meanings assigned to them in such Indenture. This Guarantee shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be governed by and construed in accordance with the laws of the State of New York. 4 IN WITNESS WHEREOF, the Guarantor has caused this Guarantee to be executed as of the date first written above. PP&L RESOURCES, INC. By:___________________________ [END OF FORM] ARTICLE THREE Miscellaneous Provisions Section 1. This Supplemental Indenture No. 3 is a supplement to the Original Indenture. As supplemented by this Supplemental Indenture No. 3, the Indenture is in all respects ratified, approved and confirmed, and the Original Indenture and this Supplemental Indenture No. 3 shall together constitute one and the same instrument. Section 2. The recitals contained in this Supplemental Indenture No. 3 shall be taken as the statements of the Company and the Guarantor, and the Trustee assumes no responsibility for their correctness and makes no representations as to the validity or sufficiency of this Supplemental Indenture No. 3. Section 3. This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 5 IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture No. 3 to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first written above. PP&L CAPITAL FUNDING, INC. By: /s/ John R. Biggar ---------------------------- Name: John R. Biggar Title: President [SEAL] ATTEST: /s/ Diane M. Koch - ----------------- PP&L RESOURCES, INC. By: /s/ James E. Abel ---------------------------- Name: James E. Abel Title: Vice President-Finance and Treasurer [SEAL] ATTEST: /s/ Diane M. Koch - ----------------- THE CHASE MANHATTAN BANK, as Trustee By: /s/ Francine Springer ---------------------------- Name: Francine Springer Title: Assistant Vice President [SEAL] ATTEST: /s/ [Illegible] - ----------------- 6 EX-10.(B).1 7 AMENDMENT NO. 1 FIVE YEAR REVOLVING CREDIT AGREE. EXHIBIT 10.B1 AMENDMENT dated as of July 15, 1999 (this "Amendment"), to the 5-Year Revolving Credit Agreement dated as of November 20, 1997 (the "Credit Agreement"), among PP&L, INC. ("PPL"), a Pennsylvania corporation and PP&L CAPITAL FUNDING, INC., a Delaware corporation ("Finance Co."), as Borrowers (the "Borrowers"); PP&L RESOURCES, INC., a Pennsylvania corporation ("Resources"), as guarantor of the obligations of Finance Co. thereunder; the banks from time to time party thereto (the "Banks") and THE CHASE MANHATTAN BANK, a New York banking corporation, as fronting bank, as collateral agent, and as agent for the Banks to the extent and in the manner provided in Section 8 therein (in such capacity, the "Agent"). WHEREAS, the Borrowers have requested that the Banks amend certain provisions of the Credit Agreement as set forth herein; WHEREAS, the Banks are willing, on the terms, subject to the conditions and to the extent set forth below, to provide such amendments; and WHEREAS, capitalized terms used and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement. NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto hereby agree, on the terms and subject to the conditions set forth herein, as follows: SECTION 1. Amendment to Credit Agreement. Section 1.2 of the Credit ----------------------------- Agreement is amended by replacing the amount "$500,000" contained in such section with the amount "$1,000,000". SECTION 2. Amendment to Credit Agreement. Subsection (a) of Section ----------------------------- 1.4 of the Credit Agreement is amended by replacing the first sentence with the following: "The outstanding principal balance of each Loan shall be due and payable by the Borrower to which such Loan was made on the Expiry Date." SECTION 3. Amendment to Credit Agreement. Section 3.4 is amended by ----------------------------- replacing such section with the following: "3.4 Net Payments. All payments under this Agreement shall be made ------------ without set-off or counterclaim and in such amounts as may be necessary in order that all such payments of principal and interest in connection with Loans (after deduction or withholding for or on account of (i) any present or future taxes, levies, imposts, duties or other charges of whatsoever nature imposed by any government or any political subdivision or taxing authority thereof, excluding any tax on or measured by the net income of a Bank pursuant to the income tax laws of the jurisdiction where such Bank's principal or lending office is located or in which such Bank maintains a place of business (all such non-excluded taxes, levies, imposts, duties or other charges, the "Taxes") and (ii) any taxes on or measured by the net income payable by any such Bank with respect to the amount by which the payments required to be made by this (S) 3.4 exceed the amount otherwise specified to be paid under this Agreement) shall not be less than the amounts otherwise specified to be paid under this Agreement; and the Borrowers further agree to pay and to save the Agent, the Fronting Bank and the Banks (and any participant, to the extent provided in Section 10.6(b)(B)) harmless, on an after-tax basis, from all liability for Taxes on or in connection with Loans or any payments thereunder, and any interest, penalties or additions with respect thereto, provided, however, ----------------- that such interest, penalties and additions are not a result of any action, omission or failure to act on the part of the Agent, the Fronting Bank or the Banks. A certificate as to any additional amounts payable to any Bank under this (S) 3.4 submitted to the applicable Borrower by such Bank shall show in reasonable detail the amount payable and the calculations used to determine such amount and shall, absent manifest error, be final, conclusive and binding upon all parties hereto. With respect to each deduction or withholding for or on account of any Taxes, the applicable Borrower shall promptly furnish to each Bank such certificates, receipts and other documents as may be required (in the judgment of such Bank) to establish any tax credit to which such Bank may be entitled." SECTION 4. Amendment to Credit Agreement. Subsection (a) of each of ----------------------------- Section 5.1A and Section 5.1B of the Credit Agreement is amended by replacing the words "Price Waterhouse" with "PricewaterhouseCoopers". SECTION 5. Amendment to Credit Agreement. Section 7.6A to the Credit ----------------------------- Agreement is amended by replacing the words "Regulations G, U or X" contained in such Section with "Regulation U or X". SECTION 6. Amendment to Credit Agreement. Section 7.9A of the Credit ----------------------------- Agreement is amended by replacing such section with the following: "7.9A Subsidiaries. The assets of all Subsidiaries of PPL, excluding ------------ intangible transition property created under the 3 Pennsylvania Electricity Generation Customer Choice and Competition Act held by PP&L Transition Bond Company LLC, a subsidiary of PPL, or any similar special purpose company organized for the purpose of issuing bonds payable from revenues associated with such transition property, do not comprise in the aggregate more than 35% of the total consolidated assets of PPL." SECTION 7. Amendment to Credit Agreement. Section 7.11A of the ----------------------------- Credit Agreement is amended by replacing such section with the following: "7.11A Public Utility Holding Company Act. PPL is not a "holding company" ---------------------------------- within the meaning of the Public Utility Holding Company Act of 1935, as amended." SECTION 8. Amendment to Credit Agreement. Section 10.1 of the Credit ----------------------------- Agreement is amended by deleting the definition of "364-Day Agreement". SECTION 9. Amendment to Credit Agreement. Section 10.1 of the Credit ----------------------------- Agreement is amended by replacing the definition of "Bank" with the following: "'Bank' shall mean each Person listed on Schedule I hereto and any other ---- Person that shall have become a party hereto as a result of an assignment pursuant to Section 10.6(b)(A) hereto, other than any such Person that ceases to be a party hereto as a result of an assignment pursuant to Section 10.6(b)(A) hereto." SECTION 10. Amendment to Credit Agreement. Section 10.1 of the ----------------------------- Credit Agreement is amended by replacing the definition of "Commitment" with the following: "'Commitment', for each Bank, shall mean the amount specified opposite its ---------- name on Schedule I hereto or in the assignment pursuant to which such Bank shall have assumed its Commitment, as applicable, such Commitment to be reduced by the amount of any reduction thereto effected pursuant to (S) 1.7, (S) 6 and/or (S) 10.6(b)(A)." SECTION 11. Amendment to Credit Agreement. Subsection (i) of the ----------------------------- definition of "Indebtedness" contained in Section 10.1 of the Credit Agreement is amended by replacing the parenthetical with the following: "(the amount of any such obligation to be the net amount that would be payable upon the acceleration, termination or liquidation thereof)" SECTION 12. Amendment to Credit Agreement. Section 10.1 of the ----------------------------- Credit Agreement is amended by adding the following 4 language to subsection (a) of the definition of "Interest Period" after the words "on the date of such Loan": "or on the last day of the most recent Interest Period applicable thereto" SECTION 13. Amendment to Credit Agreement. Section 10.1 of the Credit ----------------------------- Agreement is amended by replacing the definition of "Non-Recourse Indebtedness of PPL" with the following: "'Non-Recourse Indebtedness of PPL' shall mean (a) indebtedness that is -------------------------------- nonrecourse to PPL or any of its Subsidiaries and (b) any transition bonds issued by PP&L Transition Bond Company LLC, a subsidiary of PPL, or any similar special purpose company organized for the purpose of issuing bonds payable from revenues associated with intangible transition property created under the Pennsylvania Electricity Generation Customer Choice and Competition Act or other assets of PP&L Transition Bond Company LLC or any such other special purpose company, provided that (i) such bonds are -------- nonrecourse to PPL or any of its subsidiaries (other than PP&L Transition Bond Company LLC or any such other special purpose company) and (ii) the aggregate amount of such transition bonds shall not exceed $2,850,000,000." SECTION 14. Amendment to Credit Agreement. Section 10.1 of the ----------------------------- Credit Agreement is amended by replacing the definition of "Non-Recourse Indebtedness of Resources" with the following: "'Non-Recourse Indebtedness of Resources' shall mean (a) indebtedness that -------------------------------------- is nonrecourse to Resources, either Borrower or any of PPL's Subsidiaries and (b) any transition bonds issued by PP&L Transition Bond Company LLC, a subsidiary of PPL, or any similar special purpose company organized for the purpose of issuing bonds payable from revenues associated with intangible transition property created under the Pennsylvania Electricity Generation Customer Choice and Competition Act or other assets of PP&L Transition Bond Company LLC or any such other special purpose company, provided that (i) -------- such bonds are nonrecourse to PPL or any of its subsidiaries (other than PP&L Transition Bond Company LLC or any such other special purpose company) and (ii) the aggregate amount of such transition bonds shall not exceed $2,850,000,000." SECTION 15. Amendment to Credit Agreement. Section 10.6(b)(A) of the ----------------------------- Credit Agreement is amended by deleting clause (iii) of the proviso in its entirety and then renumbering clause (iv) to be clause (iii). 5 SECTION 16. Amendment to Credit Agreement. Section 10.6(b)(B) of the ----------------------------- Credit Agreement is amended by replacing the proviso contained in the last sentence of such section with the following: "provided that such participant shall be entitled to receive additional -------- amounts under (S)(S) 1.8, 2.5 and 3.4 on the same basis as if it were a Bank but in no case shall be entitled to any amount greater than would have been payable had the Bank not sold such participations." SECTION 17. Representations and Warranties. The Borrowers and ------------------------------ Resources hereby represent and warrant to each Bank, on and as of the date hereof, and after giving effect to this Amendment, that: (a) the representations and warranties set forth in Sections 7.A and 7.B of the Credit Agreement are true and correct in all material respects on and as of the date hereof, except to the extent such representations and warranties relate to an earlier date; and (b) no Default or Event of Default has occurred and is continuing. SECTION 18. Effectiveness. The amendments to the Credit Agreement ------------- set forth in this Amendment shall become effective only upon receipt by the Agent of duly executed counterparts hereof which, when taken together, bear the authorized signatures of the Borrowers, Resources and the Required Banks. SECTION 19. Governing Law. THIS AMENDMENT SHALL BE CONSTRUED IN ------------- ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. SECTION 20. Counterparts. This Amendment may be executed in any ------------ number of counterparts, each of which shall be an original but all of which, when taken together, shall constitute but one instrument. Delivery of an executed counterpart of a signature page of this Amendment by facsimile transmission shall be as effective as delivery of a manually executed counterpart of this Amendment. SECTION 21. Expenses. The Borrowers agree to pay all expenses -------- incurred by the Agent in connection with the preparation, execution and delivery of this Amendment, including the fees, charges and disbursements of counsel. SECTION 22. Headings. Section headings used herein are for -------- convenience of reference only, are not part of this 6 Amendment and are not to affect the construction of, or to be taken into consideration in interpreting, this Amendment. SECTION 23. EFFECT OF THIS AMENDMENT GENERALLY. Except as expressly ---------------------------------- set forth herein, this Amendment shall not by implication or otherwise limit, impair, constitute a waiver of, or otherwise affect the rights and remedies of the Banks under the Credit Agreement or any other Loan Document, and shall not alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other Loan Document, all of which are ratified and affirmed in all respects and shall continue in full force and effect. Nothing herein shall be deemed to entitle the Borrowers to a consent to, or a waiver, amendment, modification or other change of, any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement or any other Loan Document in similar or different circumstances. This Amendment shall apply and be effective only with respect to the provisions of the Credit Agreement specifically referred to herein. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written. PP&L INC., By: /s/ James E. Abel ------------------------- Name: James E. Abel Title: Vice President- Finance and Treasurer PP&L CAPITAL FUNDING, INC., By: /s/ Russell R. Clelland ------------------------- Name: Russell R. Celland Title: Manager-Finance PP&L RESOURCES, INC., By: /s/ James E. Abel ------------------------- Name: James E. Abel Title: Vice President- Finance and Treasurer 7 THE CHASE MANHATTAN BANK, individually and as Agent and Fronting Bank, By: /s/ Jaimin Patel -------------------------- Name: Jaimin Patel Title: Vice President CITIBANK, N.A., By: /s/ Robert J. Harrity, Jr -------------------------- Name: Robert J. Harrity, Jr. Title: Managing Director THE BANK OF NEW YORK, By: /s/ John N. Watt -------------------------- Name: John N. Watt Title: Vice President THE BANK OF NOVA SCOTIA By: /s/ J. Alan Edwards -------------------------- Name: J. Alan Edwards Title: Authorized Signatory CREDIT SUISSE FIRST BOSTON, By: /s/ Douglas E. Maher -------------------------- Name: Douglas E. Maher Title: Vice President By: /s/ James P. Moran -------------------------- Name: James P. Moran Title: Director DEUTSCHE BANK AG, NEW YORK BRANCH and/or CAYMAN ISLANDS BRANCH, By: /s/ -------------------------- Name: Title: THE FIRST NATIONAL BANK OF CHICAGO, By: /s/ George R. Schanz -------------------------- Name: George R. Schanz Title: First Vice President FIRST UNION NATIONAL BANK, By: /s/ Michael J. Kolosowsky -------------------------- Name: Michael J. Kolosowsky Title: Vice President THE FUJI BANK, LIMITED, NEW YORK BRANCH By: /s/ -------------------------- Name: Title: MELLON BANK, N.A., By: /s/ Mark W. Rogers -------------------------- Name: Mark W. Rogers Title: Vice President NATIONSBANK, N.A., By: /s/ Michael R. Williams -------------------------- Name: Michael R. Williams Title: Managing Director TORONTO DOMINION (TEXAS), INC., By: /s/ Alva J. Jones ------------------------- Name: Alva J. Jones Title: Vice President EX-10.(D) 8 AMENDED AND RESTATED OPERATION AGREE. PJM EXHIBIT 10(d) ================================================================================ Amended and Restated Operating Agreement of PJM Interconnection, L.L.C. Please Note: This document does not include certain ----------- Operating Agreement revisions that are pending FERC approval. Dated June 2, 1997 (Revised December 31, 1997, January 26, 1998, January 30, 1998, March 17, 1998, May 15, 1998, June 26, 1998, September 24, 1998, October 14, 1998, October 15, 1998, November 19, 1998, January 29, 1999 February 12, 1999, March 2, 1999, April 27, 1999, March 31, 1999, May 11, 1999, May 12, 1999, May 25, 1999, June 16, 1999, July 19, 1999, and September 3, 1999) ================================================================================ OPERATING AGREEMENT Table of Contents
1. DEFINITIONS............................................................ 2 1.1 Act............................................................. 2 1.2 Affiliate....................................................... 2 1.3 Agreement....................................................... 2 1.4 Annual Meeting of the Members................................... 2 1.5 Board Member.................................................... 2 1.6 Capacity Resource............................................... 2 1.7 Control Area.................................................... 3 1.8 Electric Distributor............................................ 3 1.9 Effective Date.................................................. 3 1.10 Emergency....................................................... 3 1.11 End-Use Customer................................................ 3 1.12 FERC............................................................ 3 1.13 Finance Committee............................................... 4 1.14 Generation Owner................................................ 4 1.15 Good Utility Practice........................................... 4 1.16 Interconnection................................................. 4 1.17 LLC............................................................. 4 1.18 Load Serving Entity............................................. 4 1.19 Locational Marginal Price....................................... 4 1.20 MAAC............................................................ 4 1.21 Market Buyer.................................................... 5 1.22 Market Participant.............................................. 5 1.23 Market Seller................................................... 5 1.24 Member.......................................................... 5 1.25 Members Committee............................................... 5 1.26 NERC............................................................ 5 1.27 Office of the Interconnection................................... 5 1.28 Operating Reserve............................................... 5 1.29 Original PJM Agreement.......................................... 5 1.30 Other Supplier.................................................. 6 1.31 PJM Board....................................................... 6 1.32 PJM Control Area................................................ 6 1.33 PJM Dispute Resolution Procedures............................... 6 1.34 PJM Interchange Energy Market................................... 6 1.35 PJM Manuals..................................................... 6 1.36 PJM Tariff...................................................... 6 1.37 Planning Period................................................. 6 1.38 President....................................................... 6 1.39 Related Parties................................................. 7
Second Revised: November 19, 1998 Effective: January 19, 1999 i 1.40 Reliability Assurance Agreement................................ 7 1.41 Sector Votes................................................... 7 1.42 State.......................................................... 7 1.43 System......................................................... 7 1.44 Transmission Facilities........................................ 7 1.45 Transmission Owner............................................. 7 1.46 Transmission Owners Agreement.................................. 8 1.47 User Group..................................................... 8 1.48 Voting Member.................................................. 8 1.49 Weighted Interest.............................................. 8 2. FORMATION, NAME; PLACE OF BUSINESS.................................... 8 2.1 Formation of LLC; Certificate of Formation..................... 8 2.2 Name of LLC.................................................... 9 2.3 Place of Business.............................................. 9 2.4 Registered Office and Registered Agent......................... 9 3. PURPOSES AND POWERS OF LLC............................................ 9 3.1 Purposes....................................................... 9 3.2 Powers......................................................... 10 4. EFFECTIVE DATE AND TERMINATION........................................ 10 4.1 Effective Date and Termination................................. 10 4.2 Governing Law.................................................. 10 5. WORKING CAPITAL AND CAPITAL CONTRIBUTIONS............................. 11 5.1 Funding of Working Capital and Capital Contributions........... 11 5.2 Contributions to Association................................... 11 6. TAX STATUS AND DISTRIBUTIONS.......................................... 11 6.1 Tax Status..................................................... 11 6.2 Return of Capital Contributions................................ 12 6.3 Liquidating Distribution....................................... 12 7. PJM BOARD............................................................. 12 7.1 Composition.................................................... 12 7.2 Qualifications................................................. 13 7.3 Term of Office................................................. 13 7.4 Quorum......................................................... 13 7.5 Operating and Capital Budgets.................................. 14 7.5.1 Finance Committee....................................... 14 7.5.2 Adoption of Budgets..................................... 14 7.6 By-laws........................................................ 14 7.7 Duties and Responsibilities of the PJM Board................... 14 8. MEMBERS COMMITTEE..................................................... 16 8.1 Sectors........................................................ 16 8.1.1 Designation............................................. 16 8.1.2 Related Parties......................................... 17 8.2 Representatives................................................ 17 8.2.1 Appointment............................................. 17 8.2.2 Regulatory Authorities.................................. 17 8.2.3 Initial Representatives................................. 17 8.2.4 Change of or Substitution for a Representative.......... 17
Second Revised: November 19, 1998 Effective: January 19, 1999 ii 8.3 Meetings........................................................ 18 8.3.1 Regular and Special Meetings............................. 18 8.3.2 Attendance............................................... 18 8.3.3 Quorum................................................... 18 8.4 Manner of Acting................................................ 18 8.5 Chair and Vice Chair of the Members Committee................... 19 8.5.1 Selection and Term....................................... 19 8.5.2 Duties................................................... 19 8.6 Other Committees................................................ 19 8.7 User Groups..................................................... 20 8.8 Powers of the Members Committee................................. 20 9. OFFICERS............................................................... 21 9.1 Election and Term............................................... 21 9.2 President....................................................... 21 9.3 Secretary....................................................... 21 9.4 Treasurer....................................................... 22 9.5 Renewal of Officers; Vacancies.................................. 22 9.6 Compensation.................................................... 22 10. OFFICE OF THE INTERCONNECTION......................................... 22 10.1 Establishment................................................... 22 10.2 Processes and Organization...................................... 22 10.3 Confidential Information........................................ 23 10.4 Duties and Responsibilities..................................... 23 11. MEMBERS............................................................... 25 11.1 Management Rights............................................... 25 11.2 Other Activities................................................ 25 11.3 Member Responsibilities......................................... 25 11.3.1 General................................................. 25 11.3.2 Facilities Planning and Operation....................... 26 11.3.3 Electric Distributors................................... 27 11.3.4 Reports to the Office of the Interconnection............ 28 11.4 Regional Transmission Expansion Planning Protocol............... 28 11.5 Member Right to Petition........................................ 28 11.6 Membership Requirements......................................... 29 12. TRANSFERS OF MEMBERSHIP INTEREST...................................... 30 13. INTERCHANGE........................................................... 30 13.1 Interchange Arrangements with Non-Members....................... 30 13.2 Energy Market................................................... 30 14. METERING.............................................................. 30 14.1 Installation, Maintenance and Reading of Meters................. 30 14.2 Metering Procedures............................................. 30 14.3 Integrated Megawatt-Hours....................................... 31 14.4 Meter Locations................................................. 31 15. ENFORCEMENT OF OBLIGATIONS............................................ 31 15.1 Failure to Meet Obligations..................................... 31 15.1.1 Termination of Market Buyer Rights...................... 31 15.1.2 Termination of Market Seller Rights..................... 31
Second Revised: November 19, 1998 Effective: January 19, 1999 iii 15.1.3 Payment of Bills........................................ 32 15.2 Enforcement of Obligations...................................... 33 15.3 Obligations to a Member in Default.............................. 33 15.4 Obligations of a Member in Default.............................. 33 15.5 No Implied Waiver............................................... 33 16. LIABILITY AND INDEMNITY............................................... 34 16.1 Members......................................................... 34 16.2 LLC Indemnified Parties......................................... 35 16.3 Worker' Compensation Claims..................................... 36 16.4 Limitation of Liability......................................... 36 16.5 Resolution of Disputes.......................................... 36 16.6 Gross Negligence or Willful Misconduct.......................... 36 16.7 Insurance....................................................... 36 17. MEMBER REPRESENTATIONS, WARRANTIES AND COVENANTS...................... 37 17.1 Representations and Warranties.................................. 37 17.1.1 Organization and Existence.............................. 37 17.1.2 Power and Authority..................................... 37 17.1.3 Authorization and Enforceability........................ 37 17.1.4 No Government Consents.................................. 37 17.1.5 No Conflict or Breach................................... 37 17.1.6 No Proceedings.......................................... 38 17.2 Municipal Electric Systems...................................... 38 17.3 Survival........................................................ 38 18. MISCELLANEOUS PROVISIONS.............................................. 38 18.1 [Reserved]...................................................... 38 18.2 Fiscal and Taxable Year......................................... 38 18.3 Reports......................................................... 38 18.4 Bank Accounts; Checks, Notes and Drafts......................... 39 18.5 Books and Records............................................... 39 18.6 Amendment....................................................... 40 18.7 Interpretation.................................................. 40 18.8 Severability.................................................... 40 18.9 Force Majeure................................................... 41 18.10 Further Assurances............................................. 41 18.11 Seal........................................................... 41 18.12 Counterparts................................................... 41 18.13 Costs of Meetings.............................................. 41 18.14 Notice......................................................... 42 18.15 Headings....................................................... 42 18.16 No Third-Party Beneficiaries................................... 42 18.17 Confidentiality................................................ 42 18.17.1 Party Access.......................................... 42 18.17.2 Required Disclosure................................... 43 18.18 Termination and Withdrawal..................................... 43 18.18.1 Termination........................................... 43 18.18.2 Withdrawal............................................ 43 18.18.3 Winding Up............................................ 44
Second Revised: November 19, 1998 Effective: January 19, 1999 iv SCHEDULE 1 - PJM INTERCHANGE ENERGY MARKET.............................. 1 1. MARKET OPERATIONS.................................................. 1 1.1 Introduction.................................................. 1 1.2 Cost-based Offers............................................. 1 1.3 Definitions................................................... 1 1.3.1 Dispatch Rate.................................... 1 1.3.2 Equivalent Load.................................. 1 1.3.3 External Market Buyer............................ 1 1.3.4 External Resource................................ 2 1.3.5 Fixed Transmission Right......................... 2 1.3.6 Generating Market Buyer.......................... 2 1.3.7 Generator Forced Outage.......................... 2 1.3.8 Generator Maintenance Outage..................... 2 1.3.9 Generator Planned Outage......................... 2 1.3.10 Internal Market Buyer............................ 2 1.3.11 Inadvertent Interchange.......................... 2 1.3.12 Market Operations Center......................... 3 1.3.13 Maximum Generation Emergency..................... 3 1.3.14 Minimum Generation Emergency..................... 3 1.3.14a NERC Interchange Distribution Calculator......... 3 1.3.15 Network Resource................................. 3 1.3.16 Network Service User............................. 3 1.3.17 Network Transmission Service..................... 3 1.3.18 Normal Maximum Generation........................ 3 1.3.19 Normal Minimum Generation........................ 3 1.3.20 Offer Data....................................... 3a 1.3.21 Office of the Interconnection Control Center..... 4 1.3.22 Operating Day.................................... 4 1.3.23 Operating Margin................................. 4 1.3.24 Operating Margin Customer........................ 4 1.3.25 PJM Interchange.................................. 4 1.3.26 PJM Interchange Export........................... 4 1.3.27 PJM Interchange Import........................... 5 1.3.28 PJM Open Access Same-time Information System..... 5 1.3.29 Point-to-Point Transmission Service.............. 5 1.3.30 Ramping Capability............................... 5 1.3.31 Regulation....................................... 5 1.3.32 Regulation Class................................. 5 1.3.32a Spot Market Backup............................... 5 1.3.33 Spot Market Energy............................... 5a 1.3.34 Transmission Congestion Charge................... 5a 1.3.35 Transmission Congestion Credit................... 6 1.3.36 Transmission Customer............................ 6 1.3.37 Transmission Forced Outage....................... 6 1.3.37a Transmission Loading Relief...................... 6 1.3.37b Transmission Loading Relief Customer............. 6 1.3.38 Transmission Planned Outage...................... 6
Second Revised: November 19, 1998 Effective: January 19, 1999 v 1.4 Market Buyers.................................................... 6 1.4.1 Qualification.......................................... 6 1.4.2 Submission of Information.............................. 7 1.4.3 Fees and Costs......................................... 7 1.4.4 Office of the Interconnection Determination............ 8 1.4.5 Existing Participants.................................. 8 1.4.6 Withdrawal............................................. 8 1.5 Market sellers................................................... 9 1.5.1 Qualification.......................................... 9 1.5.2 Withdrawal............................................. 9 1.6 Office of the Interconnec1.5.2 Withdrawal........................ 9 1.6.1 Operation of the PJM Interchange Energy Market......... 9 1.6.2 Scope of Services...................................... 9 1.6.3 Records and Reports.................................... 10 1.6.4 PJM Manuals............................................ 11 1.7 General.......................................................... 11 1.7.1 Market Sellers......................................... 11 1.7.2 Market Buyers.......................................... 11 1.7.3 Agents................................................. 11 1.7.4 General Obligations of the Market Participants......... 11 1.7.5 Market Operations Center............................... 13 1.7.6 Scheduling and Dispatching............................. 13 1.7.7 Pricing................................................ 13 1.7.8 Generating Market Buyer Resources...................... 13 1.7.9 Delivery to an External Market Buyer................... 13 1.7.10 Other Transactions..................................... 14 1.7.11 Emergencies............................................ 14 1.7.12 Fees and Charges....................................... 14 1.7.13 Relationship to PJM Control Area....................... 14a 1.7.14 PJM Manuals............................................ 15 1.7.15 Corrective Action...................................... 15 1.7.16 Recording.............................................. 15 1.7.17 Operating Reserves..................................... 15 1.7.18 Regulation............................................. 15a 1.7.19 Ramping................................................ 16 1.7.20 Communication and Operating Requirements............... 16 1.7.21 Multi-settlement System................................ 17 1.8 Selection, Scheduling and Dispatch Procedure Adjustment Process.. 17 1.8.1 PJM Dispute Resolution Agreement....................... 17 1.8.2 Market or Control Area Hourly Operational Disputes..... 17 1.9 Prescheduling.................................................... 18 1.9.1 Outage Scheduling...................................... 18 1.9.2 Planned Outages........................................ 18 1.9.3 Generator Maintenance Outages.......................... 19 1.9.4 Forced Outages......................................... 19 1.9.5 Market Participant Responsibilities.................... 20
Third Revised: July 19, 1999 Effective: July 19, 1999 vi 1.9.6 Internal Market Buyer Responsibilities................................ 20 1.9.7 Market Seller Responsibilities........................................ 20 1.9.8 Office of the Interconnection Responsibilities........................ 20 1.10 Scheduling........................................................................ 21 1.10.1 Day-Ahead Scheduling.................................................. 21 1.10.2 Pool-Scheduled Resources.............................................. 23 1.10.3 Self-scheduled Resources.............................................. 24 1.10.4 Capacity Resources.................................................... 24 1.10.5 External Resources.................................................... 25 1.10.6 External Market Buyers................................................ 26 1.10.6A Transmission Loading Relief Customers................................. 26 1.10.7 Bilateral Transactions................................................ 26a 1.10.8 Office of the Interconnection Responsibilities........................ 27 1.10.9 Hourly Scheduling..................................................... 27 1.11 Dispatch.......................................................................... 28 1.11.1 Resource Output....................................................... 28 1.11.2 Operating Basis....................................................... 28 1.11.3 Pool-dispatched Resources............................................. 29 1.11.3a Maximum Generation Emergency.......................................... 29 1.11.4 Regulation............................................................ 29 1.11.5 PJM Open Access Same-time Information System.......................... 29 2. CALCULATION OF LOCATIONAL MARGINAL PRICES................................................ 30 2.1 Introduction....................................................................... 30 2.2 General............................................................................ 30 2.3 Determination of System Conditions Using the State Estimator....................... 31 2.4 Determination of Energy Offers Used in Calculating Locational Marginal Prices...... 31 2.5 Calculation of Locational Marginal Prices.......................................... 32 2.6 Performance Evaluation............................................................. 32 3. ACCOUNTING AND BILLING................................................................... 33 3.1 Introduction....................................................................... 33 3.2 Market Buyers...................................................................... 33 3.2.1 Spot Market Energy.................................................... 33 3.2.2 Regulation............................................................ 34 3.2.3 Operating Reserves.................................................... 35 3.2.4 Transmission Congestion............................................... 35 3.2.5 Transmission Losses................................................... 35 3.2.6 Emergency Energy...................................................... 36 3.2.7 Billing............................................................... 36 3.3 Market Sellers..................................................................... 36 3.3.1 Spot Market Energy.................................................... 37 3.3.2 Regulation............................................................ 37 3.3.3 Operating Reserves.................................................... 37 3.3.4 Emergency Energy...................................................... 37 3.3.5 Billing............................................................... 38
Second Revised: November 19, 1998 Effective: January 19, 1999 vii 3.4 Transmission Customers............................................. 38 3.4.1 Transmission Congestion.................................. 38 3.4.2 Transmission Losses...................................... 38 3.4.3 Billing.................................................. 38 3.5 Other Control Areas................................................ 39 3.5.1 Energy Sales............................................. 39 3.5.2 Operating Margin Sales................................... 39 3.5.3 Transmission Congestion.................................. 39 3.5.4 Billing.................................................. 39 3.6 Metering Reconciliation............................................ 39 3.6.1 Meter Correction Billing................................. 39 3.6.2 Meter Corrections Between Market Participants............ 40 3.6.3 500 kV Meter Errors...................................... 40 3.6.4 Meter Corrections Between Control Areas.................. 40 3.6.5 Meter Correction Data.................................... 40 3.6.6 Correction Limits........................................ 40 4. RATE TABLE............................................................... 41 4.1 Offered Price Rates................................................ 41 4.2 Transmission Losses................................................ 41 4.3 Emergency Energy Purchases......................................... 41 5. CALCULATION OF TRANSMISSION CONGESTION CHARGES AND CREDITS............... 42 5.1 Transmission Congestion Charge Calculation......................... 42 5.1.1 Calculation by Office of the Interconnection............. 42 5.1.2 General.................................................. 42 5.1.3 Network Service User Calculation......................... 42 5.1.4 Transmission Customer Calculation........................ 42 5.1.5 Operating Margin Customer Calculation.................... 42 5.1.6 Transmission Loading Relief Customer Calculation......... 43 5.1.7 Total Transmission Congestion Charges.................... 43 5.2 Transmission Congestion Credit Calculation......................... 43 5.2.1 Eligibility.............................................. 43 5.2.2 Fixed Transmission Rights................................ 43 5.2.3 Target Allocation for Network Service Users.............. 44 5.2.4 Target Allocation for other Holders...................... 44 5.2.5 Calculation of Transmission Congestion Credits........... 44 5.2.6 Distribution of Excess Congestion Charges................ 44 5.3 Unscheduled Transmission Service (Loop Flow)....................... 44a 6. "MUST-RUN" FOR RELIABILITY GENERATION.................................... 45 6.1 Introduction...................................................... 45 6.2 Identification of Facility Outages................................ 45 6.3 Dispatch for Local Reliability.................................... 45 6.3.1 Request and Dispatch.................................... 45 6.3.2 Designation of Facilities............................... 45a 6.4 Price Caps........................................................ 45a 6.4.1 Applicability........................................... 45a 6.4.2 Level................................................... 45b
Fourth Revised: July 19, 1999 Effectivd: July 19, 1999 viii 7. FIXED TRANSMISSION RIGHTS AUCTIONS....................................................................... 46 7.1 Auctions of Fixed Transmission Rights.......................................................... 46 7.1.1 Auction Period and Scope of Auctions................................................ 46 7.1.2 Frequency and Time of Auctions...................................................... 46 7.1.3 Duration of Fixed Transmission Rights................................................ 46 7.2 Fixed Transmission Rights Characteristics...................................................... 47 7.2.1 Reconfiguration of Fixed Transmission Rights........................................ 47 7.2.2 Specified Buses..................................................................... 47 7.2.3 Transmission Congestion Charges.............................................................. 47 7.3 Auction Procedures............................................................................. 47 7.3.1 Role of the Office of the Interconnection........................................... 47 7.3.2 Notice of Offer..................................................................... 48 7.3.3 Pending Applications for Firm Service............................................... 48 7.3.4 On-Peak and Off-Peak Periods........................................................ 48 7.3.5 Offers and Bids..................................................................... 49 7.3.6 Determination of Winning Bids and Clearing Price.................................... 50 7.3.7 Announcements of Winners and Prices................................................. 50 7.3.8 Auction Settlements................................................................. 51 7.3.9 Allocation of Auction Revenues...................................................... 51 7.4 Simultaneous Feasibility....................................................................... 51 SCHEDULE 2 - COMPONENTS OF COST.............................................................................. 1 SCHEDULE 2A - EXPLANATION OF THE TREATMENT OF THE COSTS OF EMISSIONS ALLOWANCES.............................. 1 SCHEDULE 3 - ALLOCATION OF THE COST AND EXPENSES OF THE OFFICE OF THE INTERCONNECTION........................ 1 SCHEDULE 4 - STANDARD FORM OF AGREEMENT TO BECOME A MEMBER OF THE LLC........................................ 1
Second Revised: July 19, 1999 Effective: July 19, 1999 viiia SCHEDULE 5 - PJM DISPUTE RESOLUTION PROCEDURES............................................................... 1 1. DEFINITIONS............................................................................................... 1 1.1 Alternate Dispute Resolution Committee.......................................................... 1 1.2 MAAC Dispute Resolution Committee............................................................... 1 1.3 Related PJM Agreements.......................................................................... 1 2. PURPOSES AND OBJECTIVES................................................................................... 1 2.1 Common and Uniform Procedures................................................................... 1 2.2 Interpretation.................................................................................. 1 3. NEGOTIATION AND MEDIATION................................................................................. 2 3.1 When Required................................................................................... 2 3.2 Procedures...................................................................................... 2 3.2.1 Initiation........................................................................... 2 3.2.2 Selection of Mediator................................................................ 2 3.2.3 Advisory Mediator.................................................................... 2 3.2.4 Mediation Process.................................................................... 3 3.2.5 Mediator's Assessment................................................................ 3 3.3 Costs........................................................................................... 4 4. ARBITRATION............................................................................................... 4 4.1 When Required................................................................................... 4 4.2 Binding Decision................................................................................ 4 4.3 Initiation...................................................................................... 4 4.4 Selection of Arbitrator(s)...................................................................... 4 4.5 Procedures...................................................................................... 5 4.6 Summary Disposition and Interim Measures........................................................ 5 4.6.1 Lack of Good Faith Basis............................................................. 5 4.6.2 Discovery Limits..................................................................... 5 4.6.3 Interim Decision..................................................................... 5 4.7 Discovery of Facts.............................................................................. 6 4.7.1 Discovery Procedures................................................................. 6 4.7.2 Procedures Arbitrator................................................................ 6 4.8 Evidentiary Hearing............................................................................. 6 4.9 Confidentiality................................................................................. 7 4.9.1 Designation.......................................................................... 7 4.9.2 Compulsory Disclosure................................................................ 7 4.9.3 Public Information................................................................... 7 4.10 Timetable...................................................................................... 8 4.11 Advisory Interpretations....................................................................... 8 4.12 Decisions...................................................................................... 8 4.13 Costs.......................................................................................... 8 4.14 Enforcement.................................................................................... 9 5. ALTERNATE DISPUTE RESOLUTION COMMITTEE.................................................................... 9 5.1 Membership...................................................................................... 9 5.1.1 Representatives...................................................................... 9 5.1.2 Term................................................................................. 9 5.2 Voting Requirements............................................................................. 9 5.3 Officers........................................................................................ 9 5.4 Meetings........................................................................................ 10
Second Revised: November 19, 1998 Effective: January 19, 1999 ix 5.5 Responsibilities................................................................................ 10 SCHEDULE 6 - REGIONAL TRANSMISSION EXPANSION PLANNING PROTOCOL............................................... 1 1. REGIONAL TRANSMISSION EXPANSION PLANNING PROTOCOL......................................................... 1 1.1 Purpose and Objectives.......................................................................... 1 1.2 Conformity with NERC and MAAC Criteria.......................................................... 1 1.3 Establishment of Committees..................................................................... 1 1.4 Contents of the Regional Transmission Expansion Plan............................................ 2 1.5 Procedure for Development of the Regional Transmission Expansion Plan........................... 2 1.5.1 Commencement of the Process.......................................................... 2 1.5.2 Development of Scope, Assumptions and Procedures..................................... 3 1.5.3 Scope of Studies..................................................................... 3 1.5.4 Supply of Data....................................................................... 3 1.5.5 Coordination of the Regional Transmission Expansion Plan............................. 3 1.5.6 Development of the Recommended Regional Transmission Expansion Plan.................. 3a 1.6 Approval of the Final Regional Transmission Expansion Plan...................................... 4 1.7 Obligation to Build............................................................................. 5 1.8 Relationship to the PJM Control Area Open Access Transmission PJM Tariff........................ 5 SCHEDULE 7 - UNDERFREQUENCY RELAY OBLIGATIONS AND CHARGES.................................................... 1 1. UNDERFREQUENCY RELAY OBLIGATION........................................................................... 1 1.1 Application..................................................................................... 1 1.2 Obligations..................................................................................... 1 2. UNDERFREQUENCY RELAY CHARGES.............................................................................. 1 3. DISTRIBUTION OF UNDERFREQUENCY RELAY CHARGES.............................................................. 2 3.1 Share of Charges................................................................................ 2 3.2 Allocation by the Office of the Interconnection................................................. 2 SCHEDULE 8 - DELEGATION OF RELIABILITY RESPONSIBILITIES...................................................... 1 1. DELEGATION................................................................................................ 1 2. NEW PARTIES............................................................................................... 1 3. IMPLEMENTATION OF RELIABILITY ASSURANCE AGREEMENT......................................................... 1 SCHEDULE 9 - EMERGENCY PROCEDURE CHARGES..................................................................... 1 1. EMERGENCY PROCEDURE CHARGE................................................................................ 1 2. DISTRIBUTION OF EMERGENCY PROCEDURE CHARGES............................................................... 1 2.1 Complying Parties............................................................................... 1 2.2 All Parties..................................................................................... 1 SCHEDULE 10 - ACCOUNTING FOR UNSCHEDULED TRANSMISSION SERVICE COMPENSATION......................................................................................... 1 SCHEDULE 11 - PJM CAPACITY CREDIT MARKETS.................................................................... 1 1. PURPOSES AND OBJECTIVES.................................................................................. 1 1.1 PJM Capacity Credit Markets.................................................................... 1 1.2 Voluntary Use of PJM Capacity Credit Market.................................................... 1 1.3 Use of Capacity Credits........................................................................ 1 2. DEFINITIONS.............................................................................................. 1 2.1 [Reserved.].................................................................................... 1
Third Revised: July 19, 1999 Effective: July 19, 1999 x 2.2 Buy Bid........................................................................................ 1 2.3 Capacity Credit................................................................................ 2 2.4 Capacity Credit Market Implementation Date..................................................... 2 2.5 Capacity Resources............................................................................. 2 2.6 Fixed Block.................................................................................... 2 2.7 Holiday........................................................................................ 2 2.8 PJM Capacity Credit Market..................................................................... 2 2.9 PJM Daily Capacity Credit Market............................................................... 2 2.10 PJM Monthly Capacity Credit Market............................................................ 2 2.11 Sell Offer.................................................................................... 2 2.12 Unforced Capacity............................................................................. 3 2.13 Up-To Block.................................................................................... 3 3. PARTICIPATION IN THE PJM CAPACITY CREDIT MARKET.......................................................... 3 3.1 Eligibility.................................................................................... 3 3.2 Effect of Withdrawal........................................................................... 3 4. RESPONSIBILITIES OF THE OFFICE OF THE INTERCONNECTION.................................................... 3 4.1 Operation of the PJM Capacity Credit Market.................................................... 3 4.2 Records and Reports............................................................................ 4 5. GENERAL PROVISIONS....................................................................................... 4 5.1 Market Sellers................................................................................. 4 5.2 Market Buyers.................................................................................. 4 5.3 Agents......................................................................................... 5 5.4 General Obligations Market Participants........................................................ 5 5.5 Relationship of Capacity Credits to Capacity Obligations Imposed Under the Reliability Assurance Agreement................................................................ 5 5.6 Deficiency Charges............................................................................. 5 5.7 Fixed Transmission Rights...................................................................... 5 5.8 Confidentiality................................................................................ 6 6. OPERATION OF THE PJM CAPACITY CREDIT MARKETS............................................................. 6 6.1 Content of Sell Offers......................................................................... 6 6.1.1 Specifications...................................................................... 6 6.1.2 Market-based Offers................................................................. 6 6.1.3 Availability of Capacity Credits for Sale........................................... 6 6.2 Content of Buy Bids............................................................................ 7 6.3 Submission of Sell Offers and Buy Bids......................................................... 7 6.4 Conduct of PJM Capacity Credit Markets......................................................... 8 6.4.1 PJM Daily Capacity Credit Markets................................................... 8 6.4.2 PJM Monthly Capacity Credit Markets................................................. 9 6.5 Market Clearing Procedures..................................................................... 9 6.6 Settlement Procedures.......................................................................... 10 6.7 Billing........................................................................................ 10 6.8 Time Standard.................................................................................. 11
Revised: July 19, 1999 Effective: July 19, 1999 xi 7. EFFECTIVE DATE AND TRANSITION............................................................................ 11 7.1 Effective Date................................................................................. 11 7.2 Transition Provisions.......................................................................... 11 7.3 Capacity Credit................................................................................ 11 7.4 Mandatory Sell Offers and Buy Bids............................................................. 11
Revised: July 19, 1999 Effective: July 19, 1999 xii Amended and Restated Operating Agreement of PJM Interconnection, L.L.C. This Amended and Restated Operating Agreement of PJM Interconnection, L.L.C., dated as of this 2/nd/ day of June, 1997, amends and restates as of the Effective Date the Operating Agreement of PJM Interconnection, L.L.C. filed with the FERC on April 2, 1997, as amended. WHEREAS, certain of the Members have previously entered into an agreement, originally dated September 26, 1956, as amended and supplemented up to and including December 31, 1996, stating "their respective rights and obligations with respect to the coordinated operation of their electric supply systems and the interchange of electric capacity and energy among their systems" (such agreement as amended and supplemented being referred to as the "Original PJM Agreement"), and which coordinated operations and interchange came to be known as the PJM Interconnection (the "Interconnection"); and WHEREAS, pursuant to a resolution of June 16, 1993, an unincorporated association comprised of the parties to the Original PJM Agreement was formed for the purpose of implementation of the Original PJM Agreement as it then existed and as it subsequently has been amended and supplemented, such association being known as the "PJM Interconnection Association"; and WHEREAS, because of changes in federal law and policy, the Original PJM Agreement, together with other documents and agreements, was amended, restated and submitted to FERC on December 31, 1996 to restructure fundamental aspects of the operation of the Interconnection; and WHEREAS, so that the provisions of the Original PJM Agreement could be placed into effect consistent with a February 28, 1997 order of FERC, including those provisions related to the governance of the Interconnection, the parties to the Original PJM Agreement, along with the other interested parties, approved the conversion of the PJM Interconnection Association into the LLC pursuant to the provisions of the Delaware Limited Liability Company Act, as amended (the "Delaware LLC Act"), pursuant to a Certificate of Formation (the "Certificate of Formation") and a Certificate of Conversion (the "Certificate of Conversion"), each filed with the Delaware Secretary of State (the "Recording Office") on March 31, 1997; and WHEREAS, the Members wish to amend and restate the Operating Agreement of PJM Interconnection, L.L.C. adopted in connection with the formation of the LLC and as in effect immediately prior to the Effective Date in the form set forth below; and WHEREAS, the Members intend to form an Independent System Operator in accordance with the regulations of the Federal Energy Regulatory Commission; and Now, therefore, in consideration of the foregoing, and of the covenants and agreements hereinafter set forth, the Members hereby agree as follows: 1 DEFINITIONS Unless the context otherwise specifies or requires, capitalized terms used in this Agreement shall have the respective meanings assigned herein or in the Schedules hereto for all purposes of this Agreement (such definitions to be equally applicable to both the singular and the plural forms of the terms defined). Unless otherwise specified, all references herein to Sections, Schedules, Exhibits or Appendices are to Sections, Schedules, Exhibits or Appendices of this Agreement. As used in this Agreement: 1.1 Act. "Act" shall mean the Delaware Limited Liability Company Act, Title 6, (S) (S) 18-101 to 18-1109 of the Delaware Code. 1.2 Affiliate. "Affiliate" shall mean any two or more entities, one of which controls the other or that are under common control. "Control" shall mean the possession, directly or indirectly, of the power to direct the management or policies of an entity. Ownership of publicly-traded equity securities of another entity shall not result in control or affiliation for purposes of this Agreement if the securities are held as an investment, the holder owns (in its name or via intermediaries) less than 10 percent of the outstanding securities of the entity, the holder does not have representation on the entity's board of directors (or equivalent managing entity) or vice versa, and the holder does not in fact exercise influence over day-to-day management decisions. Unless the contrary is demonstrated to the satisfaction of the Members Committee, control shall be presumed to arise from the ownership of or the power to vote, directly or indirectly, ten percent or more of the voting securities of such entity. 1.3 Agreement. "Agreement" shall mean this Amended and Restated Operating Agreement of PJM Interconnection, L.L.C., including all Schedules, Exhibits, Appendices, addenda or supplements hereto, as amended from time to time. 1.4 Annual Meeting of the Members. "Annual Meeting of the Members" shall mean the meeting specified in Section 8.3.1 of this Agreement. 1.5 Board Member. "Board Member" shall mean a member of the PJM Board. 1.6 Capacity Resource. "Capacity Resource" shall mean the net capacity from owned or contracted for generating facilities all of which (i) are accredited to a Load Serving Entity pursuant to the procedures set forth in the Reliability Assurance Agreement and (ii) are committed to satisfy that Load Serving Entity's obligations under the Reliability Assurance Agreement and this Agreement. 2 1.7 Control Area. "Control Area" shall mean an electric power system or combination of electric power systems bounded by interconnection metering and telemetry to which a common automatic generation control scheme is applied in order to: (a) match the power output of the generators within the electric power system(s) and energy purchased from entities outside the electric power system(s), with the load within the electric power system(s); (b) maintain scheduled interchange with other Control Areas, within the limits of Good Utility Practice; (c) maintain the frequency of the electric power system(s) within reasonable limits in accordance with Good Utility Practice and the criteria of NERC and the applicable regional reliability council of NERC; (d) maintain power flows on transmission facilities within appropriate limits to preserve reliability; and (e) provide sufficient generating capacity to maintain operating reserves in accordance with Good Utility Practice. 1.8 Electric Distributor. "Electric Distributor" shall mean a Member that owns or leases with rights equivalent to ownership electric distribution facilities that are used to provide electric distribution service to electric load within the PJM Control Area. 1.9 Effective Date. "Effective Date" shall mean August 1, 1997, or such later date that FERC permits this Agreement to go into effect. 1.10 Emergency. "Emergency" shall mean: (i) an abnormal system condition requiring manual or automatic action to maintain system frequency, or to prevent loss of firm load, equipment damage, or tripping of system elements that could adversely affect the reliability of an electric system or the safety of persons or property; or (ii) a fuel shortage requiring departure from normal operating procedures in order to minimize the use of such scarce fuel; or (iii) a condition that requires implementation of emergency procedures as defined in the PJM Manuals. 1.11 End-Use Customer. "End-Use Customer" shall mean a Member that is a retail end-user of electricity within the PJM Control Area. 1.12 FERC. "FERC" shall mean the Federal Energy Regulatory Commission or any successor federal agency, commission or department exercising jurisdiction over this Agreement. 3 1.13 Finance Committee. "Finance Committee" shall mean the body formed pursuant to Section 7.5.1 of this Agreement. 1.14 Generation Owner. "Generation Owner" shall mean a Member that owns or leases with rights equivalent to ownership facilities for the generation of electric energy that are located within the PJM Control Area. Purchasing all or a portion of the output of a generation facility shall not be sufficient to qualify a Member as a Generation Owner. 1.15 Good Utility Practice. "Good Utility Practice" shall mean any of the practices, methods and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods and acts which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at a reasonable cost consistent with good business practices, reliability, safety and expedition. Good Utility Practice is not intended to be limited to the optimum practice, method, or act to the exclusion of all others, but rather is intended to include acceptable practices, methods, or acts generally accepted in the region. 1.16 Interconnection. "Interconnection" shall mean the coordinated operations and interchange resulting from the Original PJM Agreement as continued in this Agreement. 1.17 LLC. "LLC" shall mean PJM Interconnection, L.L.C., a Delaware limited liability company. 1.18 Load Serving Entity. "Load Serving Entity" shall mean an entity, including a load aggregator or power marketer, (1) serving end-users within the PJM Control Area, and (2) that has been granted the authority or has an obligation pursuant to state or local law, regulation or franchise to sell electric energy to end-users located within the PJM Control Area, or the duly designated agent of such an entity. 1.19 Locational Marginal Price. "Locational Marginal Price" shall mean the hourly integrated market clearing marginal price for energy at the location the energy is delivered or received, calculated as specified in Section 2 of Schedule 1 of this Agreement. 1.20 MAAC. "MAAC" shall mean the Mid-Atlantic Area Council, a reliability council under (S) 202 of the Federal Power Act established pursuant to the MAAC Agreement dated August 1, 1994, or any successor thereto. 4 1.21 Market Buyer. "Market Buyer" shall mean a Member that has met reasonable creditworthiness standards established by the Office of the Interconnection and that is otherwise able to make purchases in the PJM Interchange Energy Market or PJM Capacity Credit Market. 1.22 Market Participant. "Market Participant" shall mean a Market Buyer or a Market Seller, or both. 1.23 Market Seller. "Market Seller" shall mean a Member that has met reasonable creditworthiness standards established by the Office of the Interconnection and that is otherwise able to make sales in the PJM Interchange Energy Market or PJM Capacity Credit Market. 1.24 Member. "Member" shall mean an entity that satisfies the requirements of Section 11.6 of this Agreement and that (i) is a member of the LLC immediately prior to the Effective Date, or (ii) has executed an Additional Member Agreement in the form set forth in Schedule 4 hereof. 1.25 Members Committee. "Members Committee" shall mean the committee specified in Section 8 of this Agreement composed of representatives of all the Members. 1.26 NERC. "NERC" shall mean the North American Electric Reliability Council, or any successor thereto. 1.27 Office of the Interconnection. "Office of the Interconnection" shall mean the employees and agents of the LLC engaged in implementation of this Agreement and administration of the PJM Tariff, subject to the supervision and oversight of the PJM Board acting pursuant to this Agreement. 1.28 Operating Reserve. "Operating Reserve" shall mean the amount of generating capacity scheduled to be available for a specified period of an Operating Day to ensure the reliable operation of the PJM Control Area, as specified in the PJM Manuals. 1.29 Original PJM Agreement. "Original PJM Agreement" shall mean that certain agreement between certain of the Members, originally dated September 26, 1956, and as amended and supplemented up to and including December 31, 1996, relating to the coordinated operation of their electric supply systems and the interchange of electric capacity and energy among their systems. 5 1.30 Other Supplier. "Other Supplier" shall mean a Member that is (i) a seller, buyer or transmitter of electric capacity or energy in, from or through the PJM Control Area, and (ii) is not a Generation Owner, Electric Distributor, Transmission Owner or End-Use Customer. 1.31 PJM Board. "PJM Board" shall mean the Board of Managers of the LLC, acting pursuant to this Agreement. 1.32 PJM Control Area. "PJM Control Area" shall mean the Control Area recognized by NERC as the PJM Control Area. 1.33 PJM Dispute Resolution Procedures "PJM Dispute Resolution Procedures" shall mean the procedures for the resolution of disputes set forth in Schedule 5 of this Agreement. 1.34 PJM Interchange Energy Market. "PJM Interchange Energy Market" shall mean the regional competitive market administered by the Office of the Interconnection for the purchase and sale of spot electric energy at wholesale in interstate commerce and related services established pursuant to Schedule 1 to this Agreement. 1.35 PJM Manuals. "PJM Manuals" shall mean the instructions, rules, procedures and guidelines established by the Office of the Interconnection for the operation, planning, and accounting requirements of the PJM Control Area and the PJM Interchange Energy Market. 1.36 PJM Tariff. "PJM Tariff" shall mean the PJM Open Access Transmission Tariff providing transmission service within the PJM Control Area, including any schedules, appendices, or exhibits attached thereto, as in effect from time to time. 1.37 Planning Period. "Planning Period" shall initially mean the 12 months beginning June 1 and extending through May 31 of the following year, or such other period established by the Reliability Committee established under the Reliability Assurance Agreement. 1.38 President. "President" shall have the meaning specified in Section 9.2. 6 1.39 Related Parties. "Related Parties" shall mean, solely for purposes of the governance provisions of this Agreement: (i) any generation and transmission cooperative and one of its distribution cooperative members; and (ii) any joint municipal agency and one of its members. For purposes of this Agreement, representatives of state or federal government agencies shall not be deemed Related Parties with respect to each other, and a public body's regulatory authority, if any, over a Member shall not be deemed to make it a Related Party with respect to that Member. 1.40 Reliability Assurance Agreement. "Reliability Assurance Agreement" shall mean that certain agreement, dated June 2, 1997 and as amended from time to time, establishing obligations, standards and procedures for maintaining the reliable operation of the PJM Control Area. 1.41 Sector Votes. "Sector Votes" shall mean the affirmative and negative votes of each sector on the Members Committee, as specified in Section 8.4. 1.42 State. "State" shall mean the District of Columbia and any State or Commonwealth of the United States. 1.43 System. "System" shall mean the interconnected electric supply system of a Member and its interconnected subsidiaries exclusive of facilities which it may own or control outside of the PJM Control Area. Each Member may include in its system the electric supply systems of any party or parties other than Members which are within the PJM Control Area, provided its interconnection agreements with such other party or parties do not conflict with such inclusion. 1.44 Transmission Facilities. "Transmission Facilities" shall mean facilities that: (i) are within the PJM Control Area; (ii) meet the definition of transmission facilities pursuant to FERC's Uniform System of Accounts or have been classified as transmission facilities in a ruling by FERC addressing such facilities; and (iii) have been demonstrated to the satisfaction of the Office of the Interconnection to be integrated with the PJM Control Area transmission system and integrated into the planning and operation of the PJM Control Area to serve all of the power and transmission customers within the PJM Control Area. 1.45 Transmission Owner. "Transmission Owner" shall mean a Member that owns or leases with rights equivalent to ownership Transmission Facilities. Taking transmission service shall not be sufficient to qualify a Member as a Transmission Owner. 7 1.46 Transmission Owners Agreement. "Transmission Owners Agreement" shall mean that certain agreement, dated June 2, 1997 and as amended from time to time, by and among Transmission Owners in the PJM Control Area providing for an open-access transmission tariff in the PJM Control Area, and for other purposes. 1.47 User Group. "User Group" shall mean a group formed pursuant to Section 8.7 of this Agreement. 1.48 Voting Member "Voting Member" shall mean (i) a Member as to which no other Member is an Affiliate or Related Party, or (ii) a Member together with any other Members as to which it is an Affiliate or Related Party. 1.49 Weighted Interest. "Weighted Interest" shall be equal to (0.1(1/N) + 0.5(B/C) + 0.2(D/E) + 0.2(F/G)), where: N = the total number of Members B = the Member's internal peak demand for the previous calendar year C = the sum of factor B for all Members D = the Member's net installed generating capacity located in the PJM Control Area as of January 1 of the current calendar year E = the sum of factor D for all Members F = the sum of the Member's circuit miles of transmission facilities multiplied by the respective operating voltage for facilities 100 kV and above as of January 1 of the current calendar year G = the sum of factor F for all Members 2. FORMATION, NAME; PLACE OF BUSINESS 2.1 Formation of LLC; Certificate of Formation. The Members of the LLC hereby: (a) acknowledge the conversion of the PJM Interconnection Association into the LLC, a limited liability company pursuant to the Act, by virtue of the filing of both the Certificate of Formation and the Certificate of Conversion with the Recording Office, effective as of March 31, 1997; (b) confirm and agree to their status as Members of the LLC; (c) enter into this Agreement for the purpose of amending and restating the rights, duties, and relationship of the Members; and (d) agree that if the laws of any jurisdiction in which the LLC transacts business so require, the PJM Board also shall file, with the appropriate office in that jurisdiction, any documents necessary for the LLC to qualify to transact business under such laws; and (ii) agree 8 and obligate themselves to execute, acknowledge, and cause to be filed for record, in the place or places and manner prescribed by law, any amendments to the Certificate of Formation as may be required, either by the Act, by the laws of any jurisdiction in which the LLC transacts business, or by this Agreement, to reflect changes in the information contained therein or otherwise to comply with the requirements of law for the continuation, preservation, and operation of the LLC as a limited liability company under the Act. 2.2 Name of LLC. The name under which the LLC shall conduct its business is "PJM Interconnection, L.L.C." 2.3 Place of Business. The location of the principal place of business of the LLC shall be 955 Jefferson Avenue, Valley Forge Corporate Center, Norristown, Pennsylvania 19403- 2497. The LLC may also have offices at such other places both within and without the State of Delaware as the PJM Board may from time to time determine or the business of the LLC may require. 2.4 Registered Office and Registered Agent. The street address of the initial registered office of the LLC shall be 1209 Orange Street, Wilmington, Delaware 19801, and the LLC's registered agent at such address shall be The Corporation Trust Company. The registered office and registered agent may be changed by resolution of the PJM Board. 3. PURPOSES AND POWERS OF LLC 3.1 Purposes. The purposes of the LLC shall be: (a) to operate in accordance with FERC requirements as an Independent System Operator, comprised of the PJM Board, the Office of the Interconnection, and the Members Committee, with the authorities and responsibilities set forth in this Agreement; (b) as necessary for the operation of the Interconnection as specified above: (i) to acquire and obtain licenses, permits and approvals, (ii) to own or lease property, equipment and facilities, and (iii) to contract with third parties to obtain goods and services, provided that, the L.L.C. may procure goods and services from a Member only after open and competitive bidding; and (c) to engage in any lawful business permitted by the Act or the laws of any jurisdiction in which the LLC may do business and to enter into any lawful transaction and engage in any lawful activities in furtherance of the foregoing purposes and as may be necessary, incidental or convenient to carry out the business of the LLC as contemplated by this Agreement. 9 3.2 Powers. The LLC shall have the power to do any and all acts and things necessary, appropriate, advisable, or convenient for the furtherance and accomplishment of the purposes of the LLC, including, without limitation, to engage in any kind of activity and to enter into and perform obligations of any kind necessary to or in connection with, or incidental to, the accomplishment of the purposes of the LLC, so long as said activities and obligations may be lawfully engaged in or performed by a limited liability company under the Act. 4. EFFECTIVE DATE AND TERMINATION 4.1 Effective Date and Termination. (a) The existence of the LLC commenced on March 31, 1997, as provided in the Certificate of Formation and Certificate of Conversion which were filed with the Recording Office on March 31, 1997. This Agreement shall amend and restate the Operating Agreement of PJM Interconnection, L.L.C. as of the Effective Date. (b) The LLC shall continue in existence until terminated in accordance with the terms of this Agreement. The withdrawal or termination of any Member is subject to the provisions of Section 18.18 of this Agreement. (c) Any termination of this Agreement or withdrawal of any Member from the Agreement shall be filed with the FERC and shall become effective only upon the FERC's approval. Governing Law. This Agreement and all questions with respect to the rights and obligations of the Members, the construction, enforcement and interpretation hereof, and the formation, administration and termination of the LLC shall be governed by the provisions of the Act and other applicable laws of the State of Delaware, and the Federal Power Act. 10 5. WORKING CAPITAL AND CAPITAL CONTRIBUTIONS 5.1 Funding of Working Capital and Capital Contributions. (a) The Office of the Interconnection shall attempt to obtain financing of up to twenty-five percent (25%) of the approved annual operating budget of the LLC adopted by the PJM Board pursuant to (S) 7.5.2 of this Agreement to meet the working capital needs of the LLC, which shall be limited to such working capital needs that arise from timing in cash flows from interchange accounting, tariff administration and payment of the operating costs of the Office of the Interconnection. Such financing, which shall be non-recourse to the Members of the LLC and which shall be for a stated term without penalty for prepayment, may be obtained by borrowing the amount required at market-based interest rates, negotiated on an arm's length basis, (i) from a Member or Members or (ii) from a commercial lender, supported, if necessary, by credit enhancements provided by a Member or Members; provided, however, no Member shall be obligated to provide such financing or credit enhancements. The LLC shall make such filings and seek such approvals as necessary in order for the principal, interest and fees related to any such borrowing to be repaid through charges under the PJM Tariff as appropriate under Schedule 3 of this Agreement. (b) In the event financing of the working capital needs of the Office of the Interconnection is unavailable on commercially reasonable terms, the PJM Board may require the Members to contribute capital in the aggregate up to five million two hundred thousand dollars ($5,200,000) for the working capital needs that could not be financed; provided that in such event each Member's obligation to contribute additional capital shall be in proportion to its Weighted Interest, multiplied by the amount so requested by the PJM Board. Each Member that contributes such capital shall be entitled to earn a return on the contribution to the extent such contribution has not been repaid, which return shall be at a fair market rate as determined by the PJM Board but in no event less than the current interest rate established pursuant to 18 C.F.R. (S) 35.19a(a)(2)(iii); provided further, that any Member not wanting to contribute the requested capital contribution may withdraw from the LLC upon 90 days written notice as provided in Section 18.18.2 of this Agreement. (c) Authority to borrow capital for LLC Operations. Nothing in Section 5.1(a) and (b) shall be construed to restrict the authority of the PJM Board to authorize the LLC to borrow or raise capital in excess of twenty-five percent of the approved annual operating budget of the LLC, for working capital or otherwise, as the PJM Board deems appropriate to fund the operations of the LLC, in accordance with the general powers of the LLC under Section 3.2 to enter into obligations of any kind to accomplish the purposes of the LLC. Nor shall anything in Section 5.1(a) and (b) in any way restrict the authority of the PJM Board to authorize the LLC to grant to lenders such security interests or other rights in assets or revenues received under the PJM Tariff with respect to the costs of operating the LLC and the Office of the Interconnection and to take such other actions as it deems necessary and appropriate to obtain such financing in accordance with such general powers of the LLC under Section 3.2. 11 5.2 Contributions to Association. All contributions prior to the Effective Date of the original Operating Agreement of PJM Interconnection, L.L.C. of cash or other assets to the PJM Interconnection Association by persons who are now or in the future may become Members of the LLC shall be deemed contributions by such Members to the LLC. 6. TAX STATUS AND DISTRIBUTIONS 6.1 Tax Status. The LLC shall make all necessary filings under the applicable Treasury Regulations to have the LLC taxed as a corporation. 11a 6.2 Return of Capital Contributions. (a) In the event Members are required to contribute capital to the LLC in accordance with Section 5.1 herein, the LLC shall request the Transmission Owners to recover such working capital through charges under the PJM Tariff as provided in Schedule 3 of this Agreement. In the event all or a portion of the working capital is recovered pursuant to the PJM Tariff, such amount(s) shall be returned to the Members in accordance with their actual contributions. (b) Except for return of capital contributions and liquidating distributions as provided in the foregoing section and Section 6.3 herein, respectively, the LLC does not intend to make any distributions of cash or other assets to its Members. 6.3 Liquidating Distribution. Upon termination or liquidation of the LLC, the cash or other assets of the LLC shall be distributed as follows: (a) first, in the event the LLC has any liabilities at the time of its termination or dissolution, the LLC shall liquidate such of its assets as is necessary to satisfy such liabilities; (b) second, any capital contribution in cash or in kind by any Member of the PJM Interconnection Association prior to the Effective Date shall be distributed by the LLC back to such Member in the form received by the PJM Interconnection Association; and (c) third, any remaining assets of the LLC shall be distributed to the Members in proportion to their Weighted Interests. 7. PJM BOARD 7.1 Composition. There shall be an LLC Board of Managers, referred to herein as the "PJM Board," composed of seven voting members, with the President as a non-voting member. The seven voting Board Members shall be elected by the Members Committee from a slate of candidates for the then-existing vacancies or expiring terms on the PJM Board. An independent consultant, retained by the Office of the Interconnection upon consideration of the advice and recommendations of the Members Committee, shall be directed to prepare a list of persons qualified and willing to serve on the PJM Board. Not later than 30 days prior to each Annual Meeting of the Members, the Office of the Interconnection shall distribute to the representatives on the Members Committee a slate from among the list proposed by the independent consultant, along with information on the background and experience of the persons on the slate appropriate to evaluating their fitness for service on the PJM Board. Elections for the PJM Board shall be held at each Annual Meeting of the Members, for the purpose of selecting the initial PJM Board in accordance with the provisions of Section 7.3(a), or selecting a person to fill the seat of a Board Member whose term is expiring. Should the Members Committee fail to elect a full PJM Board from the slate proposed by the independent consultant, the Office of the Interconnection shall direct the independent consultant, or a replacement consultant selected by the Office of the Interconnection, to propose a list for a slate of nominees for any vacancies on the PJM Board for consideration by the Members at the next regular meeting of the Members Committee. 12 7.2 Qualifications. A Board Member shall not be, and shall not have been at any time within five years of election to the PJM Board, a director, officer or employee of a Member or of an Affiliate or Related Party of a Member. Except as provided in the LLC's Standards of Conduct filed with the FERC, at any time while serving on the PJM Board, a Board Member shall have no direct business relationship or other affiliation with any Member or its Affiliates or Related Parties. Of the seven Board Members, four shall have expertise and experience in the areas of corporate leadership at the senior management or board of directors level, or in the professional disciplines of finance or accounting, engineering, or utility laws and regulation. Of the other three Board Members, one shall have expertise and experience in the operation or concerns of transmission dependent utilities, one shall have expertise and experience in the operation or planning of transmission systems, and one shall have expertise and experience in the area of commercial markets and trading and associated risk management. 7.3 Term of Office. (a) The persons serving as the Board of Managers of the LLC immediately prior to the Effective Date shall continue in office until the first Annual Meeting of the Members. At the first Annual Meeting of the Members, the then current members of the PJM Board who desire to continue in office shall be elected by the Members to serve until the second Annual Meeting of the Members or until their successors are elected, along with such additional persons as necessary to meet the composition requirements of Section 7.1 and the qualification requirements of Section 7.2. (b) A Board Member shall serve for a term of three years commencing with the Annual Meeting of the Members at which the Board Member was elected; provided, however, that two of the Board Members elected at the first Annual Meeting of the Members following the Effective Date shall be chosen by lot to serve a term of one year, three of such Board Members shall be chosen by lot to serve a term of two years and the final two such Board Members shall serve a term of three years. (c) Vacancies on the PJM Board occurring between Annual Meetings of the Members shall be filled by vote of the then remaining Board Members; a Board Member so selected shall serve until the next Annual Meeting at which time a person shall be elected to serve the balance of the term of the vacant Board Seat. Removal of a Board Member shall require the approval of the Members Committee. 7.4 Quorum. The presence in person or by telephone or other authorized electronic means of a majority of the voting Board Members shall constitute a quorum at all meetings of the PJM Board for the transaction of business except as otherwise provided by statute. If a quorum shall not be present, the Board Members then present shall have the power to adjourn the meeting from time to time, until a quorum shall be present. Provided a quorum is present at a meeting, the PJM Board shall act by majority vote of the Board Members present. 13 7.5 Operating and Capital Budgets. 7.5.1 Finance Committee. Not later than February 1 of each year, the entities specified below shall select the members of a Finance Committee. The Finance Committee shall be composed of one representative of the parties to the Reliability Assurance Agreement chosen by the parties to that agreement, one representative of the parties to the Transmission Owners Agreement chosen by the parties to that agreement, two representatives of the Members Committee chosen by the Members Committee and that are not representatives of an entity that is a party to the Transmission Owners Agreement or an Affiliate or Related Party of such an entity, one representative of the Office of the Interconnection selected by the President, and two Board Members selected by the PJM Board. The Members Committee shall endeavor to elect members of the Finance Committee that are broadly representative of the diversity of interests among the Members. The Office of the Interconnection shall prepare annual budgets in accordance with processes and procedures established by the PJM Board, and shall timely submit its budgets to the Finance Committee for review. The Finance Committee shall submit its analysis of and recommendations on the budgets to the PJM Board, with copies to the Members Committee. The Finance Committee shall also review and comment upon any additional or amended budgets prepared by the Office of the Interconnection at the request of the PJM Board or the Members Committee. 7.5.2 Adoption of Budgets. The PJM Board shall adopt, upon consideration of the advice and recommendations of the Finance Committee, operating and capital budgets for the LLC, and shall distribute to the Members for their information final annual budgets for the following fiscal year not later than 60 days prior to the beginning of each fiscal year of the LLC. 7.6 By-laws. To the extent not inconsistent with any provision of this Agreement, the PJM Board shall adopt such by-laws establishing procedures for the implementation of this Agreement as it may deem appropriate, including but not limited to by-laws governing the scheduling, noticing and conduct of meetings of the PJM Board, selection of a Chair and Vice Chair of the PJM Board, action by the PJM Board without a meeting, and the organization and responsibilities of standing and special committees of the PJM Board. Such by-laws shall not modify or be inconsistent with any of the rights or obligations established by this Agreement. 7.7 Duties and Responsibilities of the PJM Board. In accordance with this Agreement, the PJM Board shall supervise and oversee all matters pertaining to the Interconnection and the LLC, and carry out such other duties as are herein specified, including but not limited to the following duties and responsibilities: i) As its primary responsibility, ensure that the President, the other officers of the LLC, and Office of the Interconnection perform the duties and responsibilities set forth in this Agreement, including but not limited to those set forth in Sections 9.2 through 9.4 and Section 10.4 in a manner 14 consistent with (A) the safe and reliable operation of the Interconnection, (B) the creation and operation of a robust, competitive, and non-discriminatory electric power market in the PJM Control Area, and (C) the principle that a Member or group of Members shall not have undue influence over the operation of the Interconnection; ii) Select the Officers of the LLC; iii) Adopt budgets for the LLC; iv) Approve the Regional Transmission Expansion Plan in accordance with the provisions of the Regional Transmission Expansion Planning Protocol set forth in Schedule 6 of this Agreement. v) On its own initiative or at the request of a User Group as specified herein, submit to the Members Committee such proposed amendments to this Agreement or any Schedule hereto, or a proposed new Schedule, as it may deem appropriate; vi) Petition FERC to modify any provision of this Agreement or any Schedule or practice hereunder that the PJM Board believes to be unjust, unreasonable, or unduly discriminatory under Section 206 of the Federal Power Act, subject to the right of any Member or the Members to intervene in any resulting proceedings; vii) Review for consistency with the creation and operation of a robust, competitive and non-discriminatory electric power market in the PJM Control Area any change to rate design or to non-rate terms and conditions proposed by Transmission Owners for filing under Section 205 of the Federal Power Act. viii) If and to the extent it shall deem appropriate, intervene in any proceeding at FERC initiated by the Members in accordance with Section 11.5(b), and participate in other state and federal regulatory proceedings relating to the interests of the LLC; ix) Review, in accordance with Section 15.1.3, determinations of the Office of the Interconnection with respect to events of default; x) Assess against the other Members in proportion to their Weighted Interest an amount equal to any payment to the Office of the Interconnection, including interest thereon, as to which a Member is in default; xi) Establish reasonable sanctions for failure of a Member to comply with its obligations under this Agreement; xii) Direct the Office of the Interconnection on behalf of the LLC to take appropriate legal or regulatory action against a Member (A) to recover any unpaid amounts due from the Member to the Office of the Interconnection under this Agreement and to make whole any Members subject to an assessment as a result of such unpaid amount, or (B) as may otherwise be 15 necessary to enforce the obligations of this Agreement; xiii) Resolve claims by a Member that the Reliability Committee established by the Reliability Assurance Agreement has exercised its responsibilities in a manner inconsistent with the creation and operation of a robust, competitive and non-discriminatory electric power market in the PJM Control Area, upon due consideration of the views of the Member and of the Reliability Committee, and of the need to preserve the reliability of electric service in the PJM Control Area. xiv) Solicit the views of Members on, and commission from time to time as it shall deem appropriate independent reviews of, (A) the performance of the PJM Interchange Energy Market, (B) compliance by Market Participants with the rules and requirements of the PJM Interchange Energy Market, and (C) the performance of the Office of the Interconnection under performance criteria proposed by the Members Committee and approved by the PJM Board; and xv) Terminate a Member as may be appropriate under the terms of this Agreement. 8. MEMBERS COMMITTEE 8.1 Sectors. 8.1.1 Designation. Voting on the Members Committee shall be by sectors. The Members Committee shall be composed of five sectors, one for Generation Owners, one for Other Suppliers, one for Transmission Owners, one for Electric Distributors, and one for End-Use Customers, provided that there are at least five Members in each Sector. Except as specified in Section 8.1.2, each Voting Member shall have one vote. Each Voting Member shall, within thirty (30) days after the Effective Date or, if later, thirty (30) days after becoming a Member, and thereafter not later than 10 days prior to the Annual Meeting of the Members for each annual period beginning with the Annual Meeting of the Members, submit to the President a sealed notice of the sector in which it is qualified to vote or, if qualified to participate in more than one sector, its rank order preference of the sectors in which it wishes to vote, and shall be assigned to its highest-ranked sector that has the minimum number of Members specified above. If a Member is assigned to a sector other than its highest-ranked sector in accordance with the preceding sentence, its higher sector preference or preferences shall be honored as soon as a higher-ranked sector has five or more Members. A Voting Member may designate as its voting sector any sector for which it or its Affiliate or Related Party Members is qualified. The sector designations of the Voting Members shall be announced by the President at the Annual Meeting. 16 8.1.2 Related Parties. The Members in a group of Related Parties shall each be entitled to a vote, provided that all the Members in a group of Related Parties that chooses to exercise such rights shall be assigned to the Electric Distributor sector. 8.2 Representatives. 8.2.1 Appointment. Each Member may appoint a representative to serve on the Members Committee, with authority to act for that Member with respect to actions or decisions by the Members Committee. Each Member may appoint an alternate representative to act for that Member at meetings of the Members Committee in the absence of the representative. A Member participating in the PJM Interchange Energy Market through an agent may be represented on the Members Committee by that agent. A Member shall appoint its representative by giving written notice identifying its representative and alternate representative to the Office of the Interconnection. Members that are Affiliates or Related Parties may each appoint a representative and alternate representative to the Members Committee, but shall vote as specified in Section 8.1. 8.2.2 Regulatory Authorities. FERC and any other federal agency with regulatory authority over a Member, each State electric utility regulatory commission with regulatory jurisdiction within the PJM Control Area, and each office of consumer advocate from each State all or any part of the territory of which is within the PJM Control Area, may nominate one representative to serve as an ex officio non- voting member of the Members Committee. 8.2.3 Initial Representatives. Initial representatives to the Members Committee shall be appointed no later than 30 days after the Effective Date; provided, however, that each representative to the Management Committee under the Operating Agreement of PJM Interconnection, L.L.C. as in effect immediately prior to the Effective Date shall automatically become a representative to the Members Committee on the Effective Date unless replaced as specified in Section 8.2.4. An entity becoming a Member shall appoint a representative to the Members Committee no later than 30 days after becoming a Member. 8.2.4 Change of or Substitution for a Representative. Any Member may change its representative or alternate on the Members Committee at any time by providing written notice to the Office of the Interconnection identifying its replacement representative or alternate. Any representative to the Members Committee may, by written notice to the Chair, designate a substitute representative from that Member to act for him or her with respect to any matter specified in such notice. 17 8.3 Meetings. 8.3.1 Regular and Special Meetings. The Members Committee shall hold regular meetings, no less frequently than once each calendar quarter at such time and at such place as shall be fixed by the Chair. The Members Committee shall hold an Annual Meeting of the Members each calendar year at such time and place as shall be specified by the Chair. At the Annual Meeting of the Members, Board Members as necessary, officers of the Members Committee, and representatives to the Finance Committee shall be elected. The Members Committee may hold special meetings for one or more designated purposes within the scope of the authority of the Members Committee when called by the Chair on the Chair's own initiative, or at the request of five or more representatives on the Members Committee. The notice of a regular or special meeting shall be distributed to the representatives as specified in Section 18.13 of this Agreement not later than seven days prior to the meeting, shall state the time and place of the meeting, and shall include an agenda sufficient to notify the representatives of the substance of matters to be considered at the meeting; provided, however, that meetings may be called on shorter notice at the discretion of the Chair as the Chair shall deem necessary to deal with an emergency or to meet a deadline for action. 8.3.2 Attendance. Regular and special meetings may be conducted in person or by telephone, or other electronic means as authorized by the Members Committee. The attendance in person or by telephone or other electronic means of a representative or a duly designated substitute shall be required in order to vote. 8.3.3 Quorum. The attendance as specified in Section 8.3.2 of a majority of the Voting Members from each of at least three sectors that each have at least five Members shall constitute a quorum, however, a quorum shall only require one- third of the Voting Members, but not less than ten, from any sector that has more than 20 Voting Members. No action may be taken by the Members Committee at a meeting unless a quorum is present; provided, however, that if a quorum is not present, the Voting Members then present shall have the power to adjourn the meeting from time to time until a quorum shall be present. 8.4 Manner of Acting. (a) All matters brought up for a vote or approval by the Members Committee shall be stated in the form of a motion, which must be seconded. Only one motion may be pending at one time. (b) Each Sector shall be entitled to cast one and zero one-hundredths (1.00) Sector Votes. Each Voting Member shall be entitled to cast one (1) non- divisible vote in its sector. In the case of a Voting Member comprised of Affiliates or Related Parties, any representative, alternate or substitute of any of the Affiliated or Related Parties may cast the vote of the Voting Member. The Sector Vote of each sector shall be split into an affirmative component based on votes for the pending motion, and a negative component based on votes against the pending motion, in direct proportion to the votes cast within the sector for and against the pending motion, rounded to two decimal places. (c) The sum of affirmative Sector Votes necessary to pass the pending motion shall be Revised: November 19, 1998 Effective: January 14, 1999 18 greater than (but not merely equal to) the product of .667 multiplied by the number of sectors that have at least five Members and that participated in the vote. (d) Voting Members not in attendance at the meeting as specified in Section 8.3.2 of this Agreement or abstaining shall not be counted as affirmative or negative votes. 8.5 Chair and Vice Chair of the Members Committee. 8.5.1 Selection and Term. The representatives or their alternates or substitutes on the Members Committee shall elect from among the representatives a Chair and a Vice Chair. The offices of Chair and Vice Chair shall be held for a term of one year and until succession to the office occurs as specified herein. Except as specified below, at each Annual Meeting of the Members the Vice Chair shall succeed to the office of Chair, and a new Vice Chair shall be elected. If the office of Chair becomes vacant, or the Chair leaves the employment of the Member for whom the Chair is the representative, or the Chair is no longer the representative of such Member, the Vice Chair shall succeed to the office of Chair, and a new Vice Chair shall be elected at the next regular or special meeting of the Members Committee, both such officers to serve until the second Annual Meeting of the Members following such succession or election to a vacant office. If the office of Vice Chair becomes vacant, or the Vice Chair leaves the employment of the Member for whom the Vice Chair is the representative, or the Vice Chair is no longer the representative of such Member, a new Vice Chair shall be elected at the next regular or special meeting of the Members Committee. 8.5.2 Duties. The Chair shall call and preside at meetings of the Members Committee, and shall carry out such other responsibilities as the Members Committee shall assign. The Chair shall cause minutes of each meeting of the Members Committee to be taken and maintained, and shall cause notices of meetings of the Members Committee to be distributed. The Vice Chair shall preside at meetings of the Members Committee in the absence of the Chair, and shall otherwise act for the Chair at the Chair's request. 8.6 Other Committees. (a) The Members Committee may form, select the membership, and oversee the activities, of an Operating Committee, a Planning Committee, and an Energy Market Committee as standing committees, and such other committees, subcommittees, task forces, working groups or other bodies as it shall deem appropriate, to provide advice and recommendations to the Members Committee or to the Office of the Interconnection as directed by the Members Committee. (b) The Members Committee shall elect representatives to the Alternate Dispute Resolution Committee as specified in the PJM Dispute Resolution Procedures. 19 8.7 User Groups. (a) Any five or more Members sharing a common interest may form a User Group, and may invite such other Members to join the User Group as the User Group shall deem appropriate. Notification of the formation of a User Group shall be provided to all members of the Members Committee. (b) The Members Committee shall create a User Group composed of representatives of bona fide public interest and environmental organizations that are interested in the activities of the LLC and are willing and able to participate in such a User Group. Meetings of User Groups shall be open to all Members and the Office of the Interconnection. Notices and agendas of meetings of a User Group shall be provided to all Members that ask to receive them. (d) Any recommendation or proposal for action adopted by affirmative vote of three-fourths or more of the members of a User Group shall be circulated by the Office of the Interconnection to the representatives on the Members Committee and shall be considered by the Members Committee at its next regular meeting occurring not earlier than 30 days after the circulation of such notice. (e) If the Members Committee does not adopt a recommendation or proposal submitted to it by a User Group, upon vote of nine-tenths or more of the members of the User Group the recommendation or proposal may be submitted to the PJM Board for its consideration in accordance with Section 7.7(v). 8.8 Powers of the Members Committee. The Members Committee, acting by adoption of a motion as specified in Section 8.4, shall have the power to take the actions specified in this Agreement, including: i) Elect the members of the PJM Board; ii) In accordance with the provisions of Section 18.6 of this Agreement, amend any portion of this Agreement, including the Schedules hereto, or create new Schedules, and file any such amendments or new Schedules with FERC or other regulatory body of competent jurisdiction; iii) Terminate this Agreement; and iv) Provide advice and recommendations to the PJM Board and the Office of the Interconnection. 20 9. OFFICERS 9.1 Election and Term. The officers of the LLC shall consist of a President, a Secretary and a Treasurer. The PJM Board may elect such other officers as it deems necessary to carry out the business of the LLC. All officers shall be elected by the PJM Board and shall hold office until the next annual meeting of the PJM Board and until their successors are elected. Any number of offices may be held by the same person, except that the offices of the President and Treasurer may not be held by the same person. 9.2 President. The PJM Board shall appoint a President and Chief Executive Officer of the LLC (the "President"). The President shall direct and supervise the day-to-day operation of the LLC, and shall report to the PJM Board. The President shall be responsible for directing and supervising the Office of the Interconnection in the performance of the duties and responsibilities specified in Section 10.4. The President shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the LLC, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board to some other officer or agent of the LLC. In the absence of the President or in the event of his or her inability or refusal to act, and if a vice president has been appointed by the PJM Board, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated by the PJM Board in its Minutes) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Vice President shall perform such other duties and have such other powers as the PJM Board may from time to time prescribe. 9.3 Secretary. The Secretary shall attend all meetings of the PJM Board and record all the proceedings of the meetings of the PJM Board in a minute book to be kept for that purpose and shall perform like duties for the standing committees or special committees when required. He or she shall give, or cause to be given, notice of all special meetings of the PJM Board, and shall perform such other duties as may be prescribed by the PJM Board or President, under whose supervision he or she shall be. He or she shall have custody of the corporate seal of the LLC, and he or she, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and, when so affixed, it may be attested by his or her signature or by the signature of such assistant secretary. The PJM Board may give general authority to any other officer to affix the seal of the LLC and to attest the affixing by his or her signature. 21 9.4 Treasurer. The Treasurer shall have or arrange for the custody of the LLC's funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belongings to the LLC and shall deposit all moneys and other valuable effects in the name and to the credit of the LLC in such depositories as may be designated by the PJM Board. The Treasurer shall disburse the funds of the LLC as may be ordered by the PJM Board, taking proper vouchers for such disbursements, and shall render to the President and PJM Board at its regular meetings, or when the PJM Board so requires, an account of his or her transactions as Treasurer and of the financial condition of the LLC. If required by the Board, the Treasurer shall give the LLC a bond (which shall be renewed periodically) in such sum and with such surety or sureties as shall be satisfactory to the PJM Board for the faithful performance of the duties of his office and of the restoration to the LLC, in case of his or her death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his or her possession or under his or her control belonging to the LLC. 9.5 Renewal of Officers; Vacancies. Any officer elected or appointed by the PJM Board may be removed at any time by the affirmative vote of a majority of the PJM Board eligible to vote. Any vacancy occurring in any office of the LLC shall be filled by the PJM Board. 9.6 Compensation. The salaries of all officers and agents of the LLC, and the reasonable compensation of the PJM Board, shall be fixed by the PJM Board. 10. OFFICE OF THE INTERCONNECTION. 10.1 Establishment. The Office of the Interconnection shall implement this Agreement, administer the PJM Tariff, and undertake such other responsibilities as set forth herein. All personnel of the Office of the Interconnection shall be employees of the LLC or under contract thereto. The cost of the Office of the Interconnection and expenses associated therewith, including salaries and expenses of said personnel, space and any necessary facilities or other capital expenditures, shall be recovered in accordance with Schedule 3. The Office of the Interconnection shall adopt, publish and comply with standards of conduct that satisfy the regulations of FERC. 10.2 Processes and Organization. In order to carry out the responsibilities of the Office of the Interconnection for the safe and reliable operation of the Interconnection, the President may establish processes and organization for operating personnel and facilities as the President shall deem appropriate, and shall request such Members as the President shall deem appropriate to participate in such processes and organization. All such processes and organization shall be carried out in accordance with all applicable code of conduct or other functional separation requirements of FERC. 22 10.3 Confidential Information. The Office of the Interconnection shall comply with the requirements of Section 18.17 with respect to any proprietary or confidential information received from or about any Member. 10.4 Duties and Responsibilities. The Office of the Interconnection, under the direction of the President as supervised and overseen by the PJM Board, shall carry out the following duties and responsibilities, in accordance with the provisions of this Agreement: i) Administer and implement this Agreement; ii) Perform such functions in furtherance of this Agreement as the PJM Board, acting within the scope of its duties and responsibilities under this Agreement, may direct; iii) Prepare, maintain, update and disseminate the PJM Manuals; iv) Comply with MAAC and NERC operation and planning standards, principles and guidelines; v) Maintain an appropriately trained workforce, and such equipment and facilities, including computer hardware and software and backup power supplies, as necessary or appropriate to implement or administer this Agreement; vi) Direct the operation and coordinate the maintenance of the facilities of the Interconnection used for both load and reactive supply, so as to maintain reliability of service and obtain the benefits of pooling and interchange consistent with this Agreement and the Reliability Assurance Agreement; vii) Direct the operation and coordinate the maintenance of the bulk power supply facilities of the Interconnection with such facilities and systems of others not party to this Agreement in accordance with agreements between the LLC and such other systems to secure reliability and continuity of service and other advantages of pooling on a regional basis; viii) Perform interchange accounting and maintain records pertaining to the operation of the PJM Interchange Energy Market and the Interconnection; ix) Notify the Members of the receipt of any application to become a Member, and of the action of the Office of the Interconnection on such application, including but not limited to the completion of integration of a new Member's system into the PJM Control Area as specified in Section 11.6(f); x) Calculate the Weighted Interest of each Member; xi) Maintain accurate records of the sectors in which each Voting Member is entitled to vote, and calculate the results of any vote taken in the Members Committee; 23 xii) Furnish appropriate information and reports as are required to keep the Members regularly informed of the outlook for, the functioning of, and results achieved by the Interconnection; xiii) File with FERC on behalf of the Members any amendments to this Agreement or the Schedules hereto, any new Schedules hereto, and make any other regulatory filings on behalf of the Members or the LLC necessary to implement this Agreement; xiv) At the direction of the PJM Board, submit comments to regulatory authorities on matters pertinent to the Interconnection; xv) Consult with the standing or other committees established pursuant to Section 8.6(a) on matters within the responsibility of the committee; xvi) Perform operating studies of the bulk power supply facilities of the Interconnection and make such recommendations and initiate such actions as may be necessary to maintain reliable operation of the Interconnection; xvii) Accept, on behalf of the Members, notices served under this Agreement; xviii) Perform those functions and undertake those responsibilities transferred to it under the Transmission Owners Agreement, including (A) direct the operation of the transmission facilities of the parties to the Transmission Owners Agreement, (B) administer the PJM Tariff, and (C) administer the Regional Transmission Expansion Planning Protocol set forth as Schedule 6 to this Agreement. xix) Perform those functions and undertake those responsibilities transferred to it under the Reliability Assurance Agreement, as specified in Schedule 8 of this Agreement. xx) Monitor the operation of the PJM Control Area, ensure that appropriate Emergency plans are in place and appropriate Emergency drills are conducted, declare the existence of an Emergency, and direct the operations of the Members as necessary to manage, alleviate or end an Emergency; xxi) Incorporate the grid reliability requirements applicable to nuclear generating units in the PJM Control Area planning and operating principles and practices; and xxii) Initiate such legal or regulatory proceedings as directed by the PJM Board to enforce the obligations of this Agreement. 24 11. MEMBERS 11.1 Management Rights. The Members or any of them shall not take part in the management of the business of, and shall not transact any business for, the LLC in their capacity as Members, nor shall they have power to sign for or to bind the LLC. 11.2 Other Activities. Except as otherwise expressly provided herein, any Member may engage in or possess any interest in another business or venture of any nature and description, independently or with others, even if such activities compete directly with the business of the LLC, and neither the LLC nor any Member hereof shall have any rights in or to any such independent ventures or the income or profits derived therefrom. 11.3 Member Responsibilities. 11.3.1 General. To facilitate and provide for the work of the Office of the Interconnection and of the several committees appointed by the Members Committee, each Member shall, to the extent applicable; (a) Maintain adequate records and, subject to the provisions of this Agreement for the protection of the confidentiality of proprietary or commercially sensitive information, provide data required for (i) coordination of operations, (ii) accounting for all interchange transactions, (iii) preparation of required reports, (iv) coordination of planning, including those data required for capacity accounting, (v) preparation of maintenance schedules, (vi) analysis of system disturbances, and (vii) such other purposes, including those set forth in Schedule 2, as will contribute to the reliable and economic operation of the Interconnection; (b) Provide such recording, telemetering, communication and control facilities as are required for the coordination of its operations with the Office of the Interconnection and those of the other Members and to enable the Office of the Interconnection to operate the PJM Control Area and otherwise implement and administer this Agreement, including equipment required in normal and Emergency operations and for the recording and analysis of system disturbances; (c) Provide adequate and properly trained personnel to (i) permit participation in the coordinated operation of the Interconnection, (ii) meet its obligation on a timely basis for supply of records and data, (iii) serve on committees and participate in their investigations, and (iv) share in the representation of the Interconnection in inter-regional and national reliability activities; (d) Share in the costs of committee activities and investigations (including costs of consultants, computer time and other appropriate items), communication facilities used by all the Members (in addition to those provided in the Office of the Interconnection), and such other expenses as are approved for payment by the PJM Board, such costs to be recovered as provided in Schedule 3; 25 (e) Comply with the requirements of the PJM Manuals and all directives of the Office of the Interconnection to take any action for the purpose of managing, alleviating or ending an Emergency, and authorize the Office of the Interconnection to direct the transfer or interruption of the delivery of energy on their behalf to meet an Emergency and to implement agreements with other Control Areas interconnected with the PJM Control Area for the mutual provision of service to meet an Emergency, and be subject to the emergency procedure charges specified in Schedule 9 of this Agreement for any failure to follow the Emergency instructions of the Office of the Interconnection. 11.3.2 Facilities Planning and Operation. Consistent with and subject to the requirements of this Agreement, the PJM Tariff, the MAAC Agreement, the Reliability Assurance Agreement, the Transmission Owners Agreement, and the PJM Manuals, each Member shall cooperate with the other Members in the coordinated planning and operation of the facilities of its System within the PJM Control Area so as to obtain the greatest practicable degree of reliability, compatible economy and other advantages from such coordinated planning and operation. In furtherance of such cooperation each Member shall, as applicable: (a) Consult with the other Members and the Office of the Interconnection, and coordinate the installation of its electric generation and Transmission Facilities with those of such other Members so as to maintain reliable service in the PJM Control Area; (b) Coordinate with the other Members, the Office of the Interconnection and with others in the planning and operation of the regional facilities to secure a high level of reliability and continuity of service and other advantages; (c) Cooperate with the other Members and the Office of the Interconnection in the implementation of all policies and procedures established pursuant to this Agreement for dealing with Emergencies, including but not limited to policies and procedures for maintaining or arranging for a portion of a Member's Capacity Resources at least equal to the level established pursuant to the Reliability Assurance Agreement to have the ability to go from a shutdown condition to an operating condition and start delivering power without assistance from the power system; (d) Cooperate with the members of MAAC to augment the reliability of the bulk power supply facilities of the region and comply with MAAC and NERC operating and planning standards, principles and guidelines and the PJM Manuals; (e) Obtain or arrange for transmission service as appropriate to carry out this Agreement; (f) Cooperate with the Office of the Interconnection's coordination of the operating and maintenance schedules of the Member's generating and Transmission Facilities with the facilities of other Members to maintain reliable service to its own customers and those of the other Members and to obtain economic efficiencies consistent therewith; (g) Cooperate with the other Members and the Office of the Interconnection in the analysis, formulation and implementation of plans to prevent or eliminate conditions that 26 impair the reliability of the Interconnection; and (h) Adopt and apply standards adopted pursuant to this Agreement and conforming to MAAC and NERC standards, principles and guidelines and the PJM Manuals, for system design, equipment ratings, operating practices and maintenance practices. 11.3.3 Electric Distributors. In addition to any of the foregoing responsibilities that may be applicable, each Member that is an Electric Distributor, whether or not that Member votes in the Members Committee in the Electric Distributor sector or meets the eligibility requirements for any other sector of the Members Committee, shall: (a) Accept, comply with or be compatible with all standards applicable within the PJM Control Area with respect to system design, equipment ratings, operating practices and maintenance practices as set forth in the PJM Manuals, or be subject to an interconnected Member's requirements relating to the foregoing, so that sufficient electrical equipment, control capability, information and communication are available to the Office of the Interconnection for planning and operation of the PJM Control Area; (b) Assure the continued compatibility of its local system energy management system monitoring and telecommunications systems to satisfy the technical requirements of interacting automatically or manually with the Office of the Interconnection as it directs the operation of the PJM Control Area; (c) Maintain or arrange for a portion of its connected load to be subject to control by automatic underfrequency, under-voltage, or other load- shedding devices at least equal to the levels established pursuant to the Reliability Assurance Agreement, or be subject to another Member's control for these purposes; (d) Provide or arrange for sufficient reactive capability and voltage control facilities to conform to Good Utility Practice and (i) to meet the reactive requirements of its system and customers and (ii) to maintain adequate voltage levels and the stability required by the bulk power supply facilities of the Interconnection; (e) Shed connected load, share Capacity Resources, initiate active load management programs, and take such other coordination actions as may be necessary in accordance with the directions of the Office of the Interconnection in Emergencies; (f) Maintain or arrange for a portion of its Capacity Resources at least equal to the level established pursuant to the Reliability Assurance Agreement to have the ability to go from a shutdown condition to an operating condition and start delivering power without assistance from the power system; (g) Provide or arrange through another Member for the services of a 24-hour local control center to coordinate with the Office of the Interconnection, each such control center to be furnished with appropriate telemetry equipment as specified in the PJM Manuals, and to be staffed by system operators trained and delegated sufficient authority to take any action necessary to assure that the system for which the operator is responsible is operated in a stable and reliable manner; 27 (h) Provide to the Office of the Interconnection all System, accounting, customer tracking, load forecasting and other data necessary or appropriate to implement or administer this Agreement or the Reliability Assurance Agreement; and (i) Comply with the underfrequency relay obligations and charges specified in Schedule 7 of this Agreement. 11.3.4 Reports to the Office of the Interconnection. Each Member shall report as promptly as possible to the Office of the Interconnection any changes in its operating practices and procedures relating to the reliability of the bulk power supply facilities of the Interconnection. The Office of the Interconnection shall review such reports, and if any change in an operating practice or procedure of the Member is not in accord with the established operating principles, practices and procedures for the Interconnection and such change adversely affects the Interconnection and regional reliability, it shall so inform such Member, and the other Members through their representative on the Operating Committee, and shall direct that such change be modified to conform to the established operating principles, practices and procedures. 11.4 Regional Transmission Expansion Planning Protocol. The Members shall participate in regional transmission expansion planning in accordance with the Regional Transmission Expansion Planning Protocol set forth in Schedule 6 to this Agreement. 11.5 Member Right to Petition. (a) Nothing herein shall deprive any Member of the right to petition FERC to modify any provision of this Agreement or any Schedule or practice hereunder that the petitioning Member believes to be unjust, unreasonable, or unduly discriminatory under Section 206 of the Federal Power Act, subject to the right of any other Member (a) to oppose said proposal, or (b) to withdraw from the LLC pursuant to Section 4.1. (b) Nothing herein shall be construed as affecting in any way the right of the Members, acting pursuant to a vote of the Members Committee as specified in Section 8.4, unilaterally to make an application to FERC for a change in any rate, charge, classification, tariff or service, or any rule or regulation related thereto, under section 205 of the Federal Power Act and pursuant to the rules and regulations promulgated by FERC thereunder, subject to the right of any Member that voted against such change in any rate, charge, classification, tariff or service, or any rule or regulation related thereto, in intervene in opposition to any such application. (c) Nothing in this Agreement shall preclude those Members joining in the proposal to utilize Locational Marginal Prices to deal with transmission congestion from (i) filing amendments to the Agreement necessary to implement the use of Locational Marginal Prices in the PJM Control Area in accordance with such orders or other directives as may be issued by FERC relating thereto, or (ii) implementing the provisions of Sections 1.7.21 and 5.2.2(d) of Schedule 1 to this Agreement, without further authorization or approval by the Members Committee. 28 11.6 Membership Requirements. (a) To qualify as a Member, an entity shall: i) Be a Transmission Owner within the PJM Control Area or an Eligible Customer under the PJM Tariff; ii) If not a Transmission Owner, be a Generation Owner, an Other Supplier, an Electric Distributor, or an End-Use Consumer; iii) Be engaged in buying, selling or transmitting electric energy in or through the Interconnection or have a good faith intent to do so; and iv) Accept the obligations set forth in this Agreement. (b) Certain Members that are Load Serving Entities are parties to the Reliability Assurance Agreement. Upon becoming a Member, any entity that is a Load Serving Entity and that wishes to become a Market Buyer shall also simultaneously execute the Reliability Assurance Agreement. (c) An entity that wishes to become a party to this Agreement shall apply, in writing, to the President setting forth its request, its qualifications for membership, its agreement to supply data as specified in this Agreement, its agreement to pay all costs and expenses in accordance with Schedule 3, and providing all information specified pursuant to the Schedules to this Agreement for entities that wish to become Market Participants. Any such application that meets all applicable requirements shall be approved by the President within sixty (60) days. (d) Nothing in this Section 11 is intended to remove, in any respect, the choice of participation by other utility companies or organizations in the operation of the Interconnection through inclusion in the System of a Member. (e) An entity whose application is accepted by the President pursuant to Section 11.6(c) shall execute a supplement to this Agreement in substantially the form prescribed in Schedule 4, which supplement shall be countersigned by the President and tendered for filing with FERC by the President. The entity shall become a Member effective on the date specified by FERC when accepting the supplement for filing. (f) Entities whose applications contemplate expansion or rearrangement of the PJM Control Area may become Members promptly as described in Sections 11.6(c) and 11.6(e) above, but the integration of the applicant's system into all of the operation and accounting provisions of this Agreement and the Reliability Assurance Agreement shall occur only after completion of all required installations and modifications of metering, communications, computer programming, and other necessary and appropriate facilities and procedures, as determined by the Office of the Interconnection. The Office of the Interconnection shall notify the other Members when such integration has occurred. 29 12. TRANSFERS OF MEMBERSHIP INTEREST The rights and obligations created by this Agreement shall inure to and bind the successors and assigns of such Member; provided, however, that the rights and obligations of any Member hereunder shall not be assigned without the approval of the Members Committee except as to a successor in operation of a Member's electric operating properties by reason of a merger, consolidation, reorganization, sale, spinoff, or foreclosure, as a result of which substantially all such electric operating properties are acquired by such a successor, and such successor becomes a Member. 13. INTERCHANGE 13.1 Interchange Arrangements with Non-Members. Any Member may enter into interchange arrangements with others who are not Members with respect to the delivery or receipt of capacity and energy to fulfill its obligations hereunder or for any other purpose, subject to the standards and requirements established in or pursuant to this Agreement. 13.2 Energy Market. The Office of the Interconnection shall administer an efficient energy market within the Interconnection, to be known as the PJM Interchange Energy Market, in which Members may buy and sell energy. The Office of the Interconnection will schedule in advance and dispatch generation on the basis of least-cost, security-constrained dispatch and the prices and operating characteristics offered by sellers within and into the Interconnection, continuing until sufficient generation is dispatched to serve the energy purchase requirements of the Interconnection and buyers out of the Interconnection, as well as the requirements of the Interconnection for ancillary services provided by such generation. Scheduling and dispatch shall be conducted in accordance with applicable schedules to the PJM Tariff and the Schedules to this Agreement. 14. METERING 14.1 Installation, Maintenance and Reading of Meters. The quantities of electric energy involved in determination of the amounts of the billing rendered hereunder shall be ascertained by means of meters installed, maintained and read either at the expense of the party on whose premises the meters are located or as otherwise provided for by agreement between the parties concerned. 14.2 Metering Procedures. Procedures with respect to maintenance, testing, calibrating, correction and registration records, and precision tolerance of all metering equipment shall be in accordance with Good Utility Practice. The expense of testing any meter shall be borne by the party owning such meter, except that when a meter tested upon request of another party is found to register within the established tolerance the party making the request shall bear the expense of such test. 30 14.3 Integrated Megawatt-Hours All metering of energy required herein shall be the integration of megawatt hours in the clock hour, and the quantities thus obtained shall constitute the megawatt load for such clock hour; provided, however, that adjustment shall be made for other contractual obligations of any Member as may be required to determine the quantity to be accounted for hereunder, and for transmission losses. 14.4 Meter Locations. The meter locations to be used by the Members in determining their energy transactions on the Interconnection shall be as reasonably determined from time to time by the Member or the Office of the Interconnection. 15. ENFORCEMENT OF OBLIGATIONS 15.1 Failure to Meet Obligations. 15.1.1 Termination of Market Buyer Rights. The Office of the Interconnection shall terminate a Market Buyer's right to make purchases from the PJM Interchange Energy Market and PJM Capacity Credit Market if it determines that the Market Buyer does not continue to meet the obligations set forth in this Agreement, provided that the Office of the Interconnection has notified the Market Buyer of any such deficiency and afforded the Market Buyer a reasonable opportunity to cure it. The Office of the Interconnection shall reinstate a Market Buyer's right to make purchases from the PJM Interchange Energy Market and PJM Capacity Credit Market upon demonstration by the Market Buyer that it has come into compliance with the obligations set forth in this Agreement. 15.1.2 Termination of Market Seller Rights. The Office of the Interconnection shall not accept offers from a Market Seller that has not complied with the prices, terms, or operating characteristics of any of its prior scheduled transactions in the PJM Interchange Energy Market, unless such Market Seller has taken appropriate measures to the satisfaction of the Office of the Interconnection to ensure future compliance. Revised: January 29, 1999 Effective: March 31, 1999 31 15.1.3 Payment of Bills. (a) A Member shall make full and timely payment, in accordance with the terms specified by the Office of the Interconnection, of all bills rendered in connection with or arising under or from this Agreement, any service or rate schedule, any tariff, or any services performed by the Office of the Interconnection, notwithstanding any disputed amount, but any such payment shall not be deemed a waiver of any right with respect to such dispute. With respect to any payment that the LLC is required to make to a Member in connection with or arising under this Agreement, any service or rate schedule, or any tariff, the LLC shall have a right of setoff equal to any amount that the Member is required to pay the LLC in connection with or arising under or from this Agreement, any service or rate schedule, any tariff, or any services performed by the Office of the Interconnection. Any Member that fails to make full and timely payment to the LLC, or otherwise fails to meet its financial or other obligations to a Member, the Office of the Interconnection or the LLC under this Agreement, shall upon expiration of the 10 day period specified below be in default. If the Office of the Interconnection concludes, upon its own initiative or the recommendation of or complaint by the Members Committee or any Member, that a Member is in breach of any obligation under this Agreement, the Office of the Interconnection shall so notify such Member and inform all other Members. The notified Member may remedy such asserted breach by: (i) paying all amounts assertedly due, along with interest on such amounts calculated in accordance with the methodology specified for interest on refunds in FERC's regulations at 18 C.F.R. (S) 35.19a(a)(2)(iii); and (ii) demonstration to the satisfaction of the Office of the Interconnection that the Member has taken appropriate measures to meet any other obligation of which it was deemed to be in breach; provided, however, that any such payment or demonstration may be subject to a reservation of rights, if any, to subject such matter to the PJM Dispute Resolution Procedures; and provided, further, that any such determination by the Office of the Interconnection may be subject to review by the PJM Board upon request of the Member involved or the Office of the Interconnection. If a Member has not remedied a breach by the 10th business day following receipt of the Office of the Interconnection's notice, or receipt of the PJM Board's decision on review, if applicable, then the Member shall be in default and, in addition to such other remedies as may be available to the LLC: i) A defaulting Market Participant shall be precluded from buying or selling energy in the PJM Interchange Energy Market until the default is remedied as set forth above. ii) A defaulting Member shall not be entitled to participate in the activities of any committee or other body established by the Members Committee or the Office of the Interconnection. iii) A defaulting Member shall not be entitled to vote on the Members Committee or any other committee or other body established pursuant to this Agreement. Revised: January 29, 1999 Effective: March 31, 1999 32 15.2 Enforcement of Obligations. If the Office of the Interconnection sends a notice to the PJM Board that a Member has failed to perform an obligation under this Agreement, the PJM Board shall initiate such action against such Member to enforce such obligation as the PJM Board shall deem appropriate. Subject to the procedures specified in Section 15.1, a Member's failure to perform such obligation shall be deemed to be a default under this Agreement. In order to remedy a default, but without limiting any rights the LLC may have against the defaulting Member, the PJM Board may assess against, and collect from, the Members not in default, in proportion to their Weighted Interest, an amount equal to the amount that the defaulting Member has failed to pay to the Office of the Interconnection, along with appropriate interest, but such assessment shall in no way relieve the defaulting Member of its obligations, and shall confer upon the Members Committee the right to recover the assessed amounts from the defaulting Member. In addition to any amounts in default, the defaulting Member shall be liable to the LCC for reasonable costs incurred in enforcing the defaulting Member's obligations. 15.3 Obligations to a Member in Default. The Members have no continuing obligation to provide the benefits of interconnected operations to a Member in default. 15.4 Obligations of a Member in Default. A Member found to be in default shall take all possible measures to mitigate the continued impact of the default on the Members not in default, including, but not limited to, loading its own generation to supply its own load to the maximum extent possible. 15.5 No Implied Waiver. A failure of a Member, the PJM Board, or the LLC to insist upon or enforce strict performance of any of the provisions of this Agreement shall not be construed as a waiver or relinquishment to any extent of such entity's right to assert or rely upon any such provisions, rights and remedies in that or any other instance; rather, the same shall be and remain in full force and effect. 33 16. LIABILITY AND INDEMNITY 16.1 Members. (a) As between the Members, except as may be otherwise agreed upon between individual Members with respect to specified interconnections, each Member will indemnify and hold harmless each of the other Members, and its directors, officers, employees, agents, or representatives, of and from any and all damages, losses, claims, demands, suits, recoveries, costs and expenses (including all court costs and reasonable attorneys' fees), caused by reason of bodily injury, death or damage to property of any third party, resulting from or attributable to the fault, negligence or willful misconduct of such Member, its directors, officers, employees, agents, or representatives, or resulting from, arising out of, or in any way connected with the performance of its obligations under this Agreement, excepting only, and to the extent, such cost, expense, damage, liability or loss may be caused by the fault, negligence or willful misconduct of any other Member. The duty to indemnify under this Agreement will continue in full force and effect notwithstanding the expiration or termination of this Agreement or the withdrawal of a Member from this Agreement, with respect to any loss, liability, damage or other expense based on facts or conditions which occurred prior to such termination or withdrawal. (b) The amount of any indemnity payment arising hereunder shall be reduced (including, without limitation, retroactively) by any insurance proceeds or other amounts actually recovered by the Member seeking indemnification in respect of the indemnified action, claim, demand, costs, damage or liability. If any Member shall have received an indemnity payment for an action, claim, demand, cost, damage or liability and shall subsequently actually receive insurance proceeds or other amounts for such action, claim, demand, cost, damage or liability, then such Member shall pay to the Member that made such indemnity payment the lesser of the amount of such insurance proceeds or other amounts actually received and retained or the net amount of the indemnity payments actually received previously. 34 16.2 LLC Indemnified Parties. (a) The LLC will indemnify and hold harmless the PJM Board, the LLC's officers, employees and agents, and any representatives of the Members serving on the Members Committee and any other committee created under Section 8 of this Agreement (all such Board Members, officers, employees, agents and representatives for purposes of this Section 16 being referred to as "LLC Indemnified Parties"), of and from any and all actions, claims, demands, costs (including consequential or indirect damages, economic losses and all court costs and reasonable attorneys' fees) and liabilities to any third parties, arising from, or in any way connected with, the performance of the LLC under this Agreement, or the fact that such LLC Indemnified Party was serving in such capacity, except to the extent that such action, claim, demand, cost or liability results from the willful misconduct of any LLC Indemnified Party with respect to participation in the misconduct. To the extent any dispute arises between any Member and the LLC arising from, or in any way connected with, the performance of the LLC under this Agreement, the Member and the LLC shall follow the PJM Dispute Resolution Procedures. To the extent that any such action, claim, demand, cost or liability arises from a Member's contractual or other obligation to provide electric service directly or indirectly to said third party, which obligation to provide service is limited by the terms of any tariff, service agreement, franchise, statute, regulatory requirement, court decision or other limiting provision, the Member designates the LLC and each LLC Indemnified Party a beneficiary of said limitation. (b) An LLC Indemnified Party shall not be personally liable for monetary damages for any breach of fiduciary duty by such LLC Indemnified Party, except that an LLC Indemnified Party shall be liable to the extent provided by applicable law (i) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, or (ii) for any transaction from which the LLC Indemnified Party derived an improper personal benefit. Notwithstanding (i) and (ii), indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the LLC if and to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. If applicable law is hereafter construed or amended to authorize the further elimination or limitation of the liability of LLC Indemnified Parties, then the liability of the LLC Indemnified Parties, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by law. No amendment to or repeal of this section shall apply to or have any effect on the liability or alleged liability of any LLC Indemnified Party or with respect to any acts or omissions occurring prior to such amendment or repeal. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the LLC, and with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. (c) The LLC may pay expenses incurred by an LLC Indemnified Party in defending a civil, criminal, administrative or investigative action, suit or proceeding in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of 35 such LLC Indemnified Party to repay such amount if it shall ultimately be determined that such LLC Indemnified Party is not entitled to be indemnified by the LLC as authorized in this Section. (d) In the event the LLC incurs liability under this Section 16.2 that is not adequately covered by insurance, such amounts shall be recovered pursuant to the PJM Tariff as provided in Schedule 3 of this Agreement. 16.3 Worker' Compensation Claims. Each Member shall be solely responsible for all claims of its own employees, agents and servants growing out of any Worker's Compensation Law. 16.4 Limitation of Liability. No Member or its directors, officers, employees, agents, or representatives shall be liable to any other Member or its directors, officers, employees, agents, or representatives, whether liability arises out of contract, tort (including negligence), strict liability, or any other cause of or form of action whatsoever, for any indirect, incidental, consequential, special or punitive cost, expense, damage or loss, including but not limited to loss of profits or revenues, cost of capital of financing, loss of goodwill or cost of replacement power, arising from such Member's performance or failure to perform any of its obligations under this Agreement or the ownership, maintenance or operation of its System; provided, however, that nothing herein shall be deemed to reduce or limit the obligations of any Member with respect to the claims of persons or entities that are not parties to this Agreement. 16.5 Resolution of Disputes. To the extent any dispute arises between one or more Members regarding any issue covered by this Agreement, the Members shall follow the dispute resolution procedures set forth in the PJM Dispute Resolution Procedures. 16.6 Gross Negligence or Willful Misconduct. Neither the LLC nor the LLC Indemnified Parties shall be liable to the Members or any of them for any claims, demands or costs arising from, or in any way connected with, the performance of the LLC under this Agreement other than actions, claims or demands based on gross negligence or willful misconduct; provided, however, that nothing herein shall limit or reduce the obligations of the LLC to the Members or any of them under the express terms of this Agreement or the PJM Tariff, including, but not limited to, those set forth in Sections 6.2 and 6.3 of this Agreement. 16.7 Insurance. The PJM Board shall be authorized to procure insurance against the risks borne by the LLC and the LLC Indemnified Parties, the cost of which shall be treated as a cost and expense of the LLC. 36 17. MEMBER REPRESENTATIONS, WARRANTIES AND COVENANTS 17.1 Representations and Warranties. Each Member makes the following representations and warranties to the LLC and each other Member, as of the Effective Date or such later date as such Member shall become admitted as a Member of the LLC. 17.1.1 Organization and Existence. Such Member is an entity duly organized, validly existing and in good standing under the laws of the state of its organization. 17.1.2 Power and Authority. Such Member has the full power and authority to execute, deliver and perform this Agreement and to carry out the transactions contemplated hereby. 17.1.3 Authorization and Enforceability. The execution and delivery of this Agreement by such Member and the performance of its obligations hereunder have been duly authorized by all requisite action on the part of the Member, and do not conflict with any applicable law or with any other agreement binding upon the Member. The Agreement has been duly executed and delivered by such Member and constitutes the legal, valid and binding obligation of such Member, enforceable against it in accordance with the terms thereof, except insofar as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws affecting the enforcement of creditors' rights generally, and to general principles of equity whether such principles are considered in proceedings in law or in equity. 17.1.4 No Government Consents. No authorization, consent, approval or order of, notice to or registration, qualification, declaration or filing with, any governmental authority is required for the execution, delivery and performance by such Member of this Agreement or the carrying out by such Member of the transactions contemplated hereby other than such authorization, consent, approval or order of, notice to or registration, qualification, declaration or filing that is pending before such governmental authority. 17.1.5 No Conflict or Breach. None of the execution, delivery and performance by such Member of this Agreement, the compliance with the terms and provisions hereof and the carrying out of the transactions contemplated hereby, conflicts or will conflict with or will result in a breach or violation of any of the terms, conditions or provisions of any law, governmental rule or regulation or the charter documents or bylaws of such Member or any applicable order, writ, injunction, judgment or decree of any court or governmental authority against such Member or by which it or any of its properties, is bound, or any loan agreement, indenture, mortgage, bond, note, resolution, contract or other agreement or instrument to which such Member is a party or by which it or any of its properties is bound, or constitutes or will constitute a default thereunder or will result in the imposition of any lien upon any of its properties. 37 17.1.6 No Proceedings. There are no actions at law, suits in equity, proceedings or claims pending or, to the knowledge of the Member, threatened against the Member before any federal, state, foreign or local court, tribunal or government agency or authority that might materially delay, prevent or hinder the performance by the Member of its obligations hereunder. 17.2 Municipal Electric Systems. Any provisions of Section 17.1 notwithstanding, if any Member that is a municipal electric system believes in good faith that the provisions of Sections 5.1(b) and 16.1 of this Agreement may not lawfully be applied to that Member under applicable state law governing municipal activities, the Member may request a waiver of the pertinent provisions of the Agreement. Any such request for waiver shall be supported by an opinion of counsel for the Member to the effect that the provision of the Agreement as to which waiver is sought may not lawfully be applied to the Member under applicable state law. The PJM Board shall have the right to have the opinion of the Member's counsel reviewed by counsel to the LLC. If the PJM Board concludes that either or both of Sections 5.1(b) and 16.1 of this Agreement may not lawfully be applied to a municipal electric system Member, it shall waive the application of the affected provision or provisions to such municipal Member. Any Member not permitted by law to indemnify the other Members shall not be indemnified by the other Members. 17.3 Survival. All representations and warranties contained in this Section 17 shall survive the execution and delivery of this Agreement. 18. MISCELLANEOUS PROVISIONS 18.1 [Reserved.] 18.2 Fiscal and Taxable Year. The fiscal year and taxable year of the LLC shall be the calendar year. 18.3 Reports. Each year prior to the Annual Meeting of the Members, the PJM Board shall cause to be prepared and distributed to the Members a report of the LLC's activities since the prior report. 38 18.4 Bank Accounts; Checks, Notes and Drafts. (a) Funds of the LLC shall be deposited in an account or accounts of a type, in form and name and in a bank(s) or other financial institution(s) which are participants in federal insurance programs as selected by the PJM Board. The PJM Board shall arrange for the appropriate conduct of such accounts. Funds may be withdrawn from such accounts only for bona fide and legitimate LLC purposes and may from time to time be invested in such short-term securities, money market funds, certificates of deposit or other liquid assets as the PJM Board deems appropriate. All checks or demands for money and notes of the LLC shall be signed by any officer or by any other person designated by the PJM Board. (b) The Members acknowledge that the PJM Board may maintain LLC funds in accounts, money market funds, certificates of deposit, other liquid assets in excess of the insurance provided by the Federal Deposit Insurance Corporation, or other depository insurance institutions and that the PJM Board shall not be accountable or liable for any loss of such funds resulting from failure or insolvency of the depository institution. (c) Checks, notes, drafts and other orders for the payment of money shall be signed by such persons as the PJM Board from time to time may authorize. When the PJM Board so authorizes, the signature of any such person may be a facsimile. 18.5 Books and Records. (a) At all times during the term of the LLC, the PJM Board shall keep, or cause to be kept, full and accurate books of account, records and supporting documents, which shall reflect, completely, accurately and in reasonable detail, each transaction of the LLC. The books of account shall be maintained and tax returns prepared and filed on the method of accounting determined by the PJM Board. The books of account, records and all documents and other writings of the LLC shall be kept and maintained at the principal office of the Interconnection. (b) The PJM Board shall cause the Office of the Interconnection to keep at its principal office the following: i) A current list in alphabetical order of the full name and last known business address of each Member, the Weighted Interest of each Member, and the Members Committee sector of each Voting Member; ii) A copy of the Certificate of Formation and the Certificate of Conversion, and all Certificates of Amendment thereto; iii) Copies of the LLC's federal, state, and local income tax returns and reports, if any, for the three most recent years; and iv) Copies of the Operating Agreement, as amended, and of any financial statements of the LLC for the three most recent years. 39 18.6 Amendment. (a) Except as provided by law or otherwise set forth herein, this Agreement, including any Schedule hereto, may be amended, or a new Schedule may be created, only upon: (i) submission of the proposed amendment to the PJM Board for its review and comments; (ii) approval of the amendment or new Schedule by the Members Committee, after consideration of the comments of the PJM Board, in accordance with Section 8.4, or written agreement to an amendment of all Members not in default at the time the amendment is agreed upon; and (iii) approval and/or acceptance for filing of the amendment by FERC and any other regulatory body with jurisdiction thereof as may be required by law. If and as necessary, the Members Committee may file with FERC or other regulatory body of competent jurisdiction any amendment to this Agreement or to its Schedules or a new Schedule not filed by the Office of the Interconnection. (b) Notwithstanding the foregoing, an applicant eligible to become a Member in accordance with the procedures specified in this Agreement shall become a Member by executing a counterpart of this Agreement without the need for amendment of this Agreement or execution of such counterpart by any other Member. (c) Each of the following fundamental changes to the LLC shall require or be deemed to require an amendment to this Agreement and shall require the prior approval of FERC: i) Adoption of any plan of merger or consolidation; ii) Adoption of any plan of sale, lease or exchange of assets relating to all, or substantially all, of the property and assets of the LLC; iii) Adoption of any plan of division relating to the division of the LLC into two or more corporations or other legal entities; iv) Adoption of any plan relating to the conversion of the LLC into a stock corporation; v) Adoption of any proposal of voluntary dissolution; or vi) Taking any action which has the purpose or effect of the adoption of any plan or proposal described in items (i), (ii), (iii), (iv) or (v) above. 18.7 Interpretation. Wherever the context may require, any noun or pronoun used herein shall include the corresponding masculine, feminine or neuter forms. The singular form of nouns, pronouns and verbs shall include the plural and vice versa. 18.8 Severability. Each provision of this Agreement shall be considered severable and if for any reason any provision is determined by a court or regulatory authority of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions of this Agreement shall continue in full force and effect and shall in no way be affected, impaired or invalidated, and such invalid, void or unenforceable provision shall be replaced with valid and enforceable provision or provisions which otherwise give effect to the original intent of the invalid, void or unenforceable provision. 40 18.9 Force Majeure. No Member shall be liable to any other Member for damages or otherwise be in breach of this Agreement to the extent and during the period such Member's performance is prevented by any cause or causes beyond such Member's control and without such Member's fault or negligence, including but not limited to any act, omission, or circumstance occasioned by or in consequence of any act of God, labor disturbance, act of the public enemy, war, insurrection, riot, fire, storm or flood, explosion, breakage or accident to machinery or equipment, or curtailment, order, regulation or restriction imposed by governmental, military or lawfully established civilian authorities; provided, however, that any such foregoing event shall not excuse any payment obligation. Upon the occurrence of an event considered by a Member to constitute a force majeure event, such Member shall use due diligence to endeavor to continue to perform its obligations as far as reasonably practicable and to remedy the event, provided that no Member shall be required by this provision to settle any strike or labor dispute. 18.10 Further Assurances. Each Member hereby agrees that it shall hereafter execute and deliver such further instruments, provide all information and take or forbear such further acts and things as may be reasonably required or useful to carry out the intent and purpose of this Agreement and as are not inconsistent with the terms hereof. 18.11 Seal. The seal of the LLC shall have inscribed thereon the name of the LLC, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. 18.12 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together will constitute one instrument, binding upon all parties hereto, notwithstanding that all of such parties may not have executed the same counterpart. 18.13 Costs of Meetings. Each Member shall be responsible for all costs of its representative, alternate or substitute in attending any meeting. The Office of the Interconnection shall pay the other reasonable costs of meetings of the PJM Board and the Members Committee, and such other committees, subcommittees, task forces, working groups, User Groups or other bodies as determined to be appropriate by the Office of the Interconnection, which costs otherwise shall be paid by the Members attending. The Office of the Interconnection shall reimburse all Board Members for their reasonable costs of attending meetings. 41 18.14 Notice. (a) Except as otherwise expressly provided herein, notices required under this Agreement shall be in writing and shall be sent to a Member by overnight courier, hand delivery, telecopier or other reliable electronic means to the representative on the Members Committee of such Member at the address for such Member previously provided by such Member to the other Members or as otherwise directed by the Members Committee. Any such notice so sent shall be deemed to have been given (i) upon delivery if given by overnight couriers or hand delivery, or (ii) upon confirmation if given by telecopier or other reliable electronic means. (b) Notices, as well as copies of the agenda and minutes of all meetings of committees, subcommittees, task forces, working groups, User Groups, or other bodies formed under this Agreement, shall be posted in a timely fashion on and made available for downloading from the PJM website. 18.15 Headings. The section headings used in this Agreement are for convenience only and shall not affect the construction or interpretation of any of the provisions of this Agreement. 18.16 No Third-Party Beneficiaries. This Agreement is intended to be solely for the benefit of the Members and their respective successors and permitted assigns and, unless expressly stated herein, is not intended to and shall not confer any rights or benefits on any third party (other than successors and permitted assigns) not a signatory hereto. 18.17 Confidentiality. 18.17.1 Party Access. No Member shall have a right hereunder to receive or review any documents, data or other information of another Member, including documents, data or other information provided to the Office of the Interconnection, to the extent such documents, data or information have been designated as confidential pursuant to the procedures adopted by the Office of the Interconnection or to the extent that they have been designated as confidential by such other Member; provided, however, a Member may receive and review any composite documents, data and other information that may be developed based on such confidential documents, data or information if the composite does not disclose any individual Member's confidential data or information. 42 18.17.2 Required Disclosure. (a) Notwithstanding anything in the foregoing Section to the contrary, if a Member or the Office of the Interconnection is required by applicable law, or in the course of administrative or judicial proceedings, to disclose information that is otherwise required to be maintained in confidence pursuant to this Agreement, that Member or the Office of the Interconnection may make disclosure of such information; provided, however, that as soon as the Member or the Office of the Interconnection learns of the disclosure requirement and prior to making disclosure, that Member or the Office of the Interconnection shall notify the affected Member or Members of the requirement and the terms thereof and the affected Member or Members may direct, at their sole discretion and cost, any challenge to or defense against the disclosure requirement. The disclosing Member and the Office of the Interconnection shall cooperate with such affected Members to the maximum extent practicable to minimize the disclosure of the information consistent with applicable law. Each Member and the Office of the Interconnection shall cooperate with the affected Members to obtain proprietary or confidential treatment of such information by the person to whom such information is disclosed prior to any such disclosure. (b) The Office of the Interconnection shall endeavor to impose on any contractors retained to provide technical support or otherwise to assist with the implementation or administration of this Agreement a contractual duty of confidentiality consistent with this Agreement. A Member shall not be obligated to provide confidential or proprietary information to any contractor that does not assume such a duty of confidentiality, and the Office of the Interconnection shall not provide any such information to any such contractor without the express written permission of the Member providing the information. 18.18 Termination and Withdrawal. 18.18.1 Termination. Upon termination of this Agreement, final settlement for obligations under this Agreement shall include the accounting for the period ending with the last day of the last month for which the Agreement was effective. 18.18.2 Withdrawal. Subject to the requirements of Section 4.1(c) of this Agreement and Section 1.4.6 of the Schedule 1 to this Agreement, any Member may withdraw from this Agreement upon 90 days notice to the Office of the Interconnection. 43 18.18.3 Winding Up. Any provision of this Agreement that expressly or by implication comes into or remains in force following the termination or expiration of this Agreement shall survive such termination or expiration. The surviving provisions shall include, but shall not be limited to: (i) those provisions necessary to permit the orderly conclusion, or continuation pursuant to another agreement, of transactions entered into prior to the decision to terminate this Agreement, (ii) those provisions necessary to conduct final billing, collection, and accounting with respect to all matters arising hereunder, and (iii) the indemnification provisions as applicable to periods prior to such termination or expiration. IN WITNESS whereof, the Members have caused this Agreement to be executed by their duly authorized representatives. 44 SCHEDULE 1 ---------- PJM INTERCHANGE ENERGY MARKET ----------------------------- (Revises and replaces former Schedules 7.01 and 7.03) Issued: June 2, 1997 Effective: April 1, 1998 1. MARKET OPERATIONS 1.1 Introduction. This Schedule sets forth the scheduling, other procedures, and certain general provisions applicable to the operation of the PJM Interchange Energy Market within the PJM Control Area. This Schedule addresses each of the three time-frames pertinent to the daily operation of the PJM Interchange Energy Market: Prescheduling, Scheduling, and Dispatch. 1.2 Cost-based Offers. Unless and until the FERC shall authorize the use of market-based prices in the PJM Interchange Energy Market, all offers for energy or other services to be sold on the PJM Interchange Energy Market from generating resources located within the PJM Control Area shall not exceed the variable cost of producing such energy or other service, as determined in accordance with Schedule 2 to this Agreement and applicable regulatory standards, requirements and determinations; provided that, a Market Seller may offer to the PJM Interchange Energy Market the right to call on energy from a resource the output of which has been sold on a bilateral basis, with the rate for such energy if called equal to the curtailment rate specified in the bilateral contract. 1.3 Definitions. 1.3.1 Dispatch Rate. "Dispatch Rate" shall mean the control signal, expressed in dollars per megawatt-hour, calculated and transmitted continuously and dynamically to direct the output level of all generation resources dispatched by the Office of the Interconnection in accordance with the Offer Data. 1.3.2 Equivalent Load. "Equivalent Load" shall mean the sum of a Market Participant's net system requirements to serve its customer load in the PJM Control Area, if any, plus its net bilateral transactions. 1.3.3 External Market Buyer. "External Market Buyer" shall mean a Market Buyer making purchases of energy from the PJM Interchange Energy Market for consumption by end-users outside the PJM Control Area, or for load in the Control Area that is not served by Network Transmission Service. Revised: June 26, 1998 Effective: September 17, 1998 1.3.4 External Resource. "External Resource" shall mean a generation resource located outside the metered boundaries of the PJM Control Area. 1.3.5 Fixed Transmission Right. "Fixed Transmission Right" shall mean a right to receive Transmission Congestion Credits as specified in Section 5.2.2 of this Schedule. 1.3.6 Generating Market Buyer. "Generating Market Buyer" shall mean an Internal Market Buyer that is a Load Serving Entity that owns or has contractual rights to the output of generation resources capable of serving the Market Buyer's load in the PJM Control Area, or of selling energy or related services in the PJM Interchange Energy Market or elsewhere. 1.3.7 Generator Forced Outage. "Generator Forced Outage" shall mean an immediate reduction in output or capacity or removal from service, in whole or in part, of a generating unit by reason of an Emergency or threatened Emergency, unanticipated failure, or other cause beyond the control of the owner or operator of the facility, as specified in the relevant portions of the PJM Manuals. A reduction in output or removal from service of a generating unit in response to changes in market conditions shall not constitute a Generator Forced Outage. 1.3.8 Generator Maintenance Outage. "Generator Maintenance Outage" shall mean the scheduled removal from service, in whole or in part, of a generating unit in order to perform necessary repairs on specific components of the facility, if removal of the facility meets the guidelines specified in the PJM Manuals. 1.3.9 Generator Planned Outage. "Generator Planned Outage" shall mean the scheduled removal from service, in whole or in part, of a generating unit for inspection, maintenance or repair with the approval of the Office of the Interconnection in accordance with the PJM Manuals. 1.3.10 Internal Market Buyer. "Internal Market Buyer" shall mean a Market Buyer making purchases of energy from the PJM Interchange Energy Market for ultimate consumption by end- users inside the PJM Control Area that are served by Network Transmission Service. 1.3.11 Inadvertent Interchange. "Inadvertent Interchange" shall mean the difference between net actual energy flow and net scheduled energy flow into or out of the PJM Control Area, as determined and allocated each hour by the Office of the Interconnection in accordance with the procedures set forth in the PJM Manuals to each Electric Distributor that reports to the Office of the Interconnection its hourly net energy flows from metered tie lines. Third Revised: March 2, 1999 Effective: April 13, 1999 2 1.3.12 Market Operations Center. "Market Operations Center" shall mean the equipment, facilities and personnel used by or on behalf of a Market Participant to communicate and coordinate with the Office of the Interconnection in connection with transactions in the PJM Interchange Energy Market or the operation of the PJM Control Area. 1.3.13 Maximum Generation Emergency. "Maximum Generation Emergency" shall mean an Emergency declared by the Office of the Interconnection in which the Office of the Interconnection anticipates requesting one or more Capacity Resources to operate at its maximum net or gross electrical power output, subject to the equipment stress limits for such Capacity Resource, in order to manage, alleviate, or end the Emergency. 1.3.14 Minimum Generation Emergency. "Minimum Generation Emergency" shall mean an Emergency declared by the Office of the Interconnection in which the Office of the Interconnection anticipates requesting one or more generating resources to operate at or below Normal Minimum Generation, in order to manage, alleviate, or end the Emergency. 1.3.14a NERC Interchange Distribution Calculator. "NERC Interchange Distribution Calculator" shall mean the NERC mechanism that is in effect and being used to calculate the distribution of energy, over specific transmission interfaces, from energy transactions. 1.3.15 Network Resource. "Network Resource" shall have the meaning specified in the PJM Tariff. 1.3.16 Network Service User. "Network Service User" shall mean an entity using Network Transmission Service. 1.3.17 Network Transmission Service. "Network Transmission Service" shall mean transmission service provided pursuant to the rates, terms and conditions set forth in Part III of the PJM Tariff, or transmission service comparable to such service that is provided to a Load Serving Entity that is also a Regional Transmission Owner as that term is defined in the PJM Tariff. 1.3.18 Normal Maximum Generation. "Normal Maximum Generation" shall mean the highest output level of a generating resource under normal operating conditions. 1.3.19 Normal Minimum Generation. "Normal Minimum Generation" shall mean the lowest output level of a generating resource under normal operating conditions. Revised: November 19, 1998 Effective: January 19, 1999 3 1.3.20 Offer Data. "Offer Data" shall mean the scheduling, operations planning, dispatch, new resource, and other data and information necessary to schedule and dispatch generation resources for the provision of energy and other services and the maintenance of the reliability and security of the transmission system in the PJM Control Area, and specified for submission to the PJM Interchange Energy Market for such purposes by the Office of the Interconnection. Revised: November 19, 1998 Effective: January 19, 1999 3a 1.3.21 Office of the Interconnection Control Center. "Office of the Interconnection Control Center" shall mean the equipment, facilities and personnel used by the Office of the Interconnection to coordinate and direct the operation of the PJM Control Area and to administer the PJM Interchange Energy Market, including facilities and equipment used to communicate and coordinate with the Market Participants in connection with transactions in the PJM Interchange Energy Market or the operation of the PJM Control Area. 1.3.22 Operating Day. "Operating Day" shall mean the daily 24 hour period beginning at midnight for which transactions on the PJM Interchange Energy Market are scheduled. 1.3.23 Operating Margin. "Operating Margin" shall mean the incremental adjustments, measured in megawatts, required in PJM Control Area operations in order to accommodate, on a first contingency basis, an operating contingency in the PJM Control Area resulting from operations in an interconnected Control Area. Such adjustments may result in constraints causing Transmission Congestion Charges, or may result in Ancillary Services charges pursuant to the PJM Tariff. 1.3.24 Operating Margin Customer. "Operating Margin Customer" shall mean a Control Area purchasing Operating Margin pursuant to an agreement between such other Control Area and the LLC. 1.3.25 PJM Interchange. "PJM Interchange" shall mean the following, as determined in accordance with the Schedules to this Agreement: (a) for a Market Participant that is a Network Service User, the amount by which its hourly Equivalent Load exceeds, or is exceeded by, the sum of the hourly outputs of its operating generating resources; or (b) for a Market Participant that is not a Network Service User, the amount of its Spot Market Backup; or (c) the hourly scheduled deliveries of Spot Market Energy by a Market Seller from an External Resource; or (d) the hourly net metered output of any other Market Seller; or (e) the hourly scheduled deliveries of Spot Market Energy to an External Market Buyer; or (f) the hourly scheduled deliveries to an Internal Market Buyer that is not a Network Service User. 1.3.26 PJM Interchange Export. "PJM Interchange Export" shall mean the following, as determined in accordance with the Schedules to this Agreement: (a) for a Market Participant that is a Network Service User, the amount by which its hourly Equivalent Load is exceeded by the sum of the hourly outputs of its operating generating resources; or (b) for a Market Participant that is not a Network Service User, the amount of its Spot Market Backup sales; or (c) the hourly scheduled deliveries of Spot Market Energy by a Market Seller from an External Resource; or (d) the hourly net metered output of any other Market Seller. Revised: June 26, 1998 Effective: September 17, 1998 4 1.3.27 PJM Interchange Import. "PJM Interchange Import" shall mean the following, as determined in accordance with the Schedules to this Agreement: (a) for a Market Participant that is a Network Service User, the amount by which its hourly Equivalent Load exceeds the sum of the hourly outputs of its operating generating resources; or (b) for a Market Participant that is not a Network Service User, the amount of its Spot Market Backup purchases; or (c) the hourly scheduled deliveries of Spot Market Energy to an External Market Buyer; or (d) the hourly scheduled deliveries to an Internal Market Buyer that is not a Network Service User. 1.3.28 PJM Open Access Same-time Information System. "PJM Open Access Same-time Information System" shall mean the electronic communication system for the collection and dissemination of information about transmission services in the PJM Control Area, established and operated by the Office of the Interconnection in accordance with FERC standards and requirements. 1.3.29 Point-to-Point Transmission Service. "Point-to-Point Transmission Service" shall mean transmission service provided pursuant to the rates, terms and conditions set forth in Part II of the PJM Tariff. 1.3.30 Ramping Capability. "Ramping Capability" shall mean the sustained rate of change of generator output, in megawatts per minute. 1.3.31 Regulation. "Regulation" shall mean the capability of a specific generating unit with appropriate telecommunications, control and response capability to increase or decrease its output in response to a regulating control signal, in accordance with the specifications in the PJM Manuals. 1.3.32 Regulation Class. "Regulation Class" shall mean a subset of the generation units capable of providing Regulation to the PJM Control Area determined by a range of costs for providing Regulation as specified by the Office of the Interconnection using procedures specified in the PJM Manuals. 1.3.32a Spot Market Backup. "Spot Market Backup" shall mean the purchase of energy from, or the delivery of energy to, the PJM Interchange Energy Market in quantities sufficient to complete the delivery or receipt obligations of a bilateral contract that has been curtailed or interrupted for any reason. Revised: June 26, 1998 Effective: September 17, 1998 5 1.3.33 Spot Market Energy. "Spot Market Energy" shall mean energy bought or sold by Market Participants through the PJM Interchange Energy Market at Locational Marginal Prices determined as specified in Section 2 of this Schedule. 1.3.34 Transmission Congestion Charge. "Transmission Congestion Charge" shall mean a charge attributable to the increased cost of energy delivered at a given load bus when the transmission system serving that load bus is operating under constrained conditions, which shall be calculated and allocated as specified in Section 5.1 of this Schedule. Revised: June 26, 1998 Effective: September 17, 1998 5a 1.3.35 Transmission Congestion Credit. "Transmission Congestion Credit" shall mean the allocated share of total Transmission Congestion Charges credited to each holder of Fixed Transmission Rights, calculated and allocated as specified in Section 5.2 of this Schedule. 1.3.36 Transmission Customer. "Transmission Customer" shall mean an entity using Point-to-Point Transmission Service. 1.3.37 Transmission Forced Outage. "Transmission Forced Outage" shall mean an immediate removal from service of a transmission facility by reason of an Emergency or threatened Emergency, unanticipated failure, or other cause beyond the control of the owner or operator of the transmission facility, as specified in the relevant portions of the PJM Manuals. A removal from service of a transmission facility at the request of the Office of the Interconnection to improve transmission capability shall not constitute a Forced Transmission Outage. 1.3.37a Transmission Loading Relief. "Transmission Loading Relief" shall mean NERC's procedures for preventing operating security limit violations, as implemented by PJM as the security coordinator responsible for maintaining transmission security for the PJM Control Area. 1.3.37b Transmission Loading Relief Customer. "Transmission Loading Relief Customer" shall mean an entity that, in accordance with Section 1.10.6A, has elected to pay Transmission Congestion Charges during Transmission Loading Relief in order to continue energy schedules over contract paths outside the PJM Control Area that are increasing the cost of energy in the PJM Control Area. 1.3.38 Transmission Planned Outage. "Transmission Planned Outage" shall mean any transmission outage scheduled in advance for a pre-determined duration and which meets the notification requirements for such outages specified in the PJM Manuals. 1.4 Market Buyers. 1.4.1 Qualification. (a) To become a Market Buyer, an entity shall submit an application to the Office of the Interconnection, in such form as shall be established by the Office of the Interconnection. (b) An applicant that is a Load Serving Entity or that will purchase on behalf of or for ultimate delivery to a Load Serving Entity shall establish to the satisfaction of the Office of the Interconnection that the end-users that will be served through energy and related services purchased in the PJM Interchange Energy Market, are located electrically within the PJM Control Area, or will be brought within the PJM Control Area prior to any purchases from the PJM Interchange Energy Market. Such applicant shall further demonstrate that: Fourth Revised: February 12, 1999 Effective: January 19, 1999 6 i) The Load Serving Entity for the end users is obligated to meet the requirements of the Reliability Assurance Agreement; and ii) The Load Serving Entity for the end users has arrangements in place for Network Transmission Service or Point-To-Point Transmission Service for all PJM Interchange Energy Market purchases. (c) An applicant that is not a Load Serving Entity or purchasing on behalf of or for ultimate delivery to a Load Serving Entity shall demonstrate that: i) The applicant has obtained or will obtain Network Transmission Service or Revised: November 19, 1998 Effective: January 19, 1999 6a Point-to-Point Transmission Service for all PJM Interchange Energy Market purchases; and ii) The applicant's PJM Interchange Energy Market purchases will ultimately be delivered to a load in another Control Area that is recognized by NERC and that complies with NERC's standards for operating and planning reliable bulk electric systems. (d) All applicants shall demonstrate that: i) The applicant is capable of complying with all applicable metering, data storage and transmission, and other reliability, operation, planning and accounting standards and requirements for the operation of the PJM Control Area and the PJM Interchange Energy Market; ii) The applicant meets the creditworthiness standards established by the Office of the Interconnection, or has provided a letter of credit or other form of security acceptable to the Office of the Interconnection; and iii) The applicant has paid all applicable fees and reimbursed the Office of the Interconnection for all unusual or extraordinary costs of processing and evaluating its application to become a Market Buyer, and has agreed in its application to subject any disputes arising from its application to the PJM Dispute Resolution Procedures. (e) The applicant shall become a Market Buyer upon a final favorable determination on its application by the Office of the Interconnection as specified below, and execution by the applicant of counterparts of this Agreement. 1.4.2 Submission of Information. The applicant shall furnish all information reasonably requested by the Office of the Interconnection in order to determine the applicant's qualification to be a Market Buyer. The Office of the Interconnection may waive the submission of information relating to any of the foregoing criteria, to the extent the information in the Office of the Interconnection's possession is sufficient to evaluate the application against such criteria. 1.4.3 Fees and Costs. The Office of the Interconnection shall require all applicants to become a Market Buyer to pay a uniform application fee, initially in the amount of $1,500, to defray the ordinary costs of processing such applications. The application fee shall be revised from time to time as the Office of the Interconnection shall determine to be necessary to recover its ordinary costs of processing applications. Any unusual or extraordinary costs incurred by the Office of the Interconnection in processing an application shall be reimbursed by the applicant. 7 1.4.4 Office of the Interconnection Determination. Upon submission of the information specified above, and such other information as shall reasonably be requested by the Office of the Interconnection, the Office of the Interconnection shall undertake an evaluation and investigation to determine whether the applicant meets the criteria specified above. As soon as practicable, but in any event not later than 60 days after submission of the foregoing information, or such later date as may be necessary to satisfy the requirements of the Reliability Assurance Agreement, the Office of the Interconnection shall notify the applicant and the members of the Members Committee of its determination, along with a written summary of the basis for the determination. The Office of the Interconnection shall respond promptly to any reasonable and timely request by a Member for additional information regarding the basis for the Office of the Interconnection's determination, and shall take such action as it shall deem appropriate in response to any request for reconsideration or other action submitted to the Office of the Interconnection not later than 30 days from the initial notification to the Members Committee. 1.4.5 Existing Participants. Any entity that was qualified to participate as a Market Buyer in the PJM Interchange Energy Market under the Operating Agreement of PJM Interconnection L.L.C. in effect immediately prior to the Effective Date shall continue to be qualified to participate as a Market Buyer in the PJM Interchange Energy Market under this Agreement. 1.4.6 Withdrawal. (a) An Internal Market Buyer that is a Load Serving Entity may withdraw from this Agreement by giving written notice to the Office of the Interconnection specifying an effective date of withdrawal not earlier than the effective date of (i) its withdrawal from the Reliability Assurance Agreement, or (ii) the assumption of its obligations under the Reliability Assurance Agreement by an agent that is a Market Buyer. (b) An External Market Buyer or an Internal Market Buyer that is not a Load Serving Entity may withdraw from this Agreement by giving written notice to the Office of the Interconnection specifying an effective date of withdrawal at least one day after the date of the notice. (c) Withdrawal from this Agreement shall not relieve a Market Buyer of any obligation to pay for electric energy or related services purchased from the PJM Interchange Energy Market prior to such withdrawal, to pay its share of any fees and charges incurred or assessed by the Office of the Interconnection prior to the date of such withdrawal, or to fulfill any obligation to provide indemnification for the consequences of acts, omissions or events occurring prior to such withdrawal; and provided, further, that withdrawal from this Agreement shall not relieve any Market Buyer of any obligations it may have under, or constitute withdrawal from, any other Related PJM Agreement. (d) A Market Buyer that has withdrawn from this Agreement may reapply to become a Market Buyer in accordance with the provisions of this Section 1.4, provided it is not in default of any obligation incurred under this Agreement. Revised: June 26, 1998 Effective: September 17, 1998 8 1.5 Market Sellers. 1.5.1 Qualification. A Member that demonstrates to the Office of the Interconnection that the Member meets the standards for the issuance of an order mandating the provision of transmission service under section 211 of the Federal Power Act, as amended by the Energy Policy Act of 1992, may become a Market Seller upon execution of this Agreement and submission to the Office of the Interconnection of the applicable Offer Data in accordance with the provisions of this Schedule. All Members that are Market Buyers shall become Market Sellers upon submission to the Office of the Interconnection of the applicable Offer Data in accordance with the provisions of this Schedule. 1.5.2 Withdrawal. (a) A Market Seller may withdraw from this Agreement by giving written notice to the Office of the Interconnection specifying an effective date of withdrawal at least one day after the date of the notice; provided, however, that withdrawal shall not relieve a Market Seller of any obligation to deliver electric energy or related services to the PJM Interchange Energy Market pursuant to an offer made prior to such withdrawal, to pay its share of any fees and charges incurred or assessed by the Office of the Interconnection prior to the date of such withdrawal, or to fulfill any obligation to provide indemnification for the consequences of acts, omissions, or events occurring prior to such withdrawal; and provided, further, that withdrawal shall not relieve any entity that is a Market Seller and is also a Market Buyer of any obligations it may have as a Market Buyer under, or constitute withdrawal as a Market Buyer from, this Agreement or any other Related PJM Agreement. (b) A Market Seller that has withdrawn from this Agreement may reapply to become a Market Seller at any time, provided it is not in default with respect to any obligation incurred under this Agreement. 1.6 Office of the Interconnection. 1.6.1 Operation of the PJM Interchange Energy Market The Office of the Interconnection shall operate the PJM Interchange Energy Market in accordance with this Agreement. 1.6.2 Scope of Services. The Office of the Interconnection shall, on behalf of the Market Participants, perform the services pertaining to the PJM Interchange Energy Market specified in this Agreement, including but not limited to the following: i) Administer the PJM Interchange Energy Market as part of the PJM Control Area, including scheduling and dispatching of generation resources, accounting for transactions, rendering bills to the Market Participants, receiving payments from and disbursing payments to the Market Participants, maintaining appropriate records, and monitoring the compliance of Market Participants with the provisions of this Agreement, all in accordance with applicable provisions of the Office of the Interconnection Agreement, and the Schedules to this Agreement; Revised: June 26, 1998 Effective: September 17, 1998 9 ii) Review and evaluate the qualification of entities to be Market Buyers or Market Sellers under applicable provisions of this Agreement; iii) Coordinate, in accordance with applicable provisions of this Agreement, the Reliability Assurance Agreement, and the Transmission Owners Agreement, maintenance schedules for generation and transmission resources operated as part of the PJM Control Area; iv) Provide or coordinate the provision of ancillary services necessary for the operation of PJM Control Area or the PJM Interchange Energy Market; v) Determine and declare that an Emergency is expected to exist, exists, or has ceased to exist, in all or any part of the PJM Control Area, or in another Control Area interconnected directly or indirectly with the PJM Control Area, and serve as a primary point of contact for interested state or federal agencies; vi) Enter into (a) agreements for the transfer of energy in conditions constituting an Emergency in the PJM Control Area or in a Control Area interconnected with it, and the mutual provision of other support in such Emergency conditions with other Control Areas interconnected with the PJM Control Area, and (b) purchases of Emergency energy offered by Members from resources that are not Capacity Resources in conditions constituting an Emergency in the PJM Control Area; vii) Coordinate the curtailment or shedding of load, or other measures appropriate to alleviate an Emergency, in order to preserve reliability in accordance with NERC and MAAC principles, guidelines and standards, and to ensure the operation of the PJM Control Area in accordance with Good Utility Practice and the this Agreement; viii) Protect confidential information as specified in this Agreement; and ix) Send a representative to meetings of the Members Committee or other Committees, subcommittees, or working groups specified in this Agreement or formed by the Members Committee when requested to do so by the chair or other head of such committee or other group. 1.6.3 Records and Reports. The Office of the Interconnection shall prepare and maintain such records and prepare such reports, including, but not limited to quarterly budget reports, as are required to document the performance of its obligations to the Market Participants hereunder in a form adopted by the Office of the Interconnection upon consideration of the advice and recommendations of the Members Committee. The Office of the Interconnection shall also produce special reports reasonably requested by the Members Committee and consistent with FERC's standards of conduct; provided, however, the Market Participants shall reimburse the Office of the Interconnection for the costs of producing any such report. Notwithstanding the foregoing, the Office of the Interconnection shall not be required to disclose confidential or commercially sensitive information in any such report. Revised: January 30, 1998 Effective: April 17, 1998 10 1.6.4 PJM Manuals. The Office of the Interconnection shall prepare, maintain and update the PJM Manuals consistent with this Agreement. The PJM Manuals shall be available for inspection by the Market Participants, regulatory authorities with jurisdiction over the LLC or any Member, and the public. 1.7 General. 1.7.1 Market Sellers. Only Market Sellers shall be eligible to submit offers to the Office of the Interconnection for the sale of electric energy or related services in the PJM Interchange Energy Market. Market Sellers shall comply with the prices, terms, and operating characteristics of all Offer Data submitted to and accepted by the PJM Interchange Energy Market. 1.7.2 Market Buyers. Only Market Buyers shall be eligible to purchase energy or related services in the PJM Interchange Energy Market. Market Buyers shall comply with all requirements for making purchases from the PJM Interchange Energy Market. 1.7.3 Agents. A Market Participant may participate in the PJM Interchange Energy Market through an agent, provided that the Market Participant informs the Office of the Interconnection in advance in writing of the appointment of such agent. A Market Participant participating in the PJM Interchange Energy Market through an agent shall be bound by all of the acts or representations of such agent with respect to transactions in the PJM Interchange Energy Market, and shall ensure that any such agent complies with the requirements of this Agreement. 1.7.4 General Obligations of the Market Participants. (a) In performing its obligations to the Office of the Interconnection hereunder, each Market Participant shall at all times (i) follow Good Utility Practice, (ii) comply with all applicable laws and regulations, (iii) comply with the applicable principles, guidelines, standards and requirements of FERC, NERC and MAAC, (iv) comply with the procedures established for operation of the PJM Interchange Energy Market and PJM Control Area and (v) cooperate with the Office of the Interconnection as necessary for the operation of the PJM Control Area in a safe, reliable manner consistent with Good Utility Practice. (b) Market Participants shall undertake all operations in or affecting the PJM Interchange Energy Market and the PJM Control Area, including but not limited to compliance with all Emergency procedures, in accordance with the power and authority of the Office of the Interconnection with respect to the operation of the PJM Interchange Energy Market and the PJM Control Area as established in this Agreement, and as specified in the Schedules to this Agreement and the PJM Manuals. Failure to comply with the foregoing operational requirements shall subject a Market Participant to such reasonable charges or other remedies or sanctions for non-compliance as may be established by the PJM Board, including legal or regulatory proceedings as authorized by the PJM Board to enforce the obligations of this Agreement. (c) The Office of the Interconnection may establish such committees with a 11 representative of each Market Participant, and the Market Participants agree to provide appropriately qualified personnel for such committees, as may be necessary for the Office of the Interconnection to perform its obligations hereunder. (d) All Market Participants shall provide to the Office of the Interconnection the scheduling and other information specified in the Schedules to this Agreement, and such other information as the Office of the Interconnection may reasonably require for the reliable and efficient operation of the PJM Control Area and the PJM Interchange Energy Market, and for compliance with applicable regulatory requirements for posting market and related information. Such information shall be provided as much in advance as possible, but in no event later than the deadlines established by the Schedules to this Agreement, or by the Office of the Interconnection in conformance with such Schedules. Such information shall include, but not be limited to, maintenance and other anticipated outages of generation or transmission facilities, scheduling and related information on bilateral transactions and self-scheduled resources, and implementation of active load management, interruption of load, and other load reduction measures. The Office of the Interconnection shall abide by appropriate requirements for the non-disclosure and protection of any confidential or proprietary information given to the Office of the Interconnection by a Market Participant. Each Market Participant shall maintain or cause to be maintained compatible information and communications systems, as specified by the Office of the Interconnection, required to transmit scheduling, dispatch, or other time-sensitive information to the Office of the Interconnection in a timely manner. (e) Each Market Participant shall install and operate, or shall otherwise arrange for, metering and related equipment capable of recording and transmitting all voice and data communications reasonably necessary for the Office of the Interconnection to perform the services specified in this Agreement. A Market Participant that elects to be separately billed for its PJM Interchange shall, to the extent necessary, be individually metered in accordance with Section 14 of this Agreement, or shall agree upon an allocation of PJM Interchange between it and the Market Participant through whose meters the unmetered Market Participant's PJM Interchange is delivered. The Office of the Interconnection shall be notified of the allocation by the foregoing Market Participants. (f) Each Market Participant shall operate, or shall cause to be operated, any generating resources owned or controlled by such Market Participant that are within the PJM Control Area or otherwise supplying energy to or through the PJM Control Area in a manner that is consistent with the standards, requirements or directions of the Office of the Interconnection and that will permit the Office of the Interconnection to perform its obligations under this Agreement; provided, however, no Market Participant shall be required to take any action that is inconsistent with Good Utility Practice or applicable law. (g) Each Market Participant shall follow the directions of the Office of the Interconnection to take actions to prevent, manage, alleviate or end an Emergency in a manner consistent with this Agreement and the procedures of the PJM Control Area as specified in the PJM Manuals. (h) Each Market Participant shall obtain and maintain all permits, licenses or approvals required for the Market Participant to participate in the PJM Interchange Energy Market in the manner contemplated by this Agreement. Revised: June 26, 1998 Effective: September 17, 1998 12 1.7.5 Market Operations Center. Each Market Participant shall maintain a Market Operations Center, or shall make appropriate arrangements for the performance of such services on its behalf. A Market Operations Center shall meet the performance, equipment, communications, staffing and training standards and requirements specified in this Agreement for the scheduling and completion of transactions in the PJM Interchange Energy Market and the maintenance of the reliable operation of the PJM Control Area, and shall be sufficient to enable (i) a Market Seller to perform all terms and conditions of its offers to the PJM Interchange Energy Market, and (ii) a Market Buyer to conform to the requirements for purchasing from the PJM Interchange Energy Market. 1.7.6 Scheduling and Dispatching. (a) The Office of the Interconnection shall schedule and dispatch generation economically on the basis of least-cost, security-constrained dispatch and the prices and operating characteristics offered by Market Sellers, continuing until sufficient generation is dispatched to serve the PJM Interchange Energy Market energy purchase requirements under normal system conditions of the Market Buyers, as well as the requirements of the PJM Control Area for ancillary services provided by such generation, in accordance with this Agreement. Scheduling and dispatch shall be conducted in accordance with this Agreement. (b) The Office of the Interconnection shall undertake to identify any conflict or incompatibility between the scheduling or other deadlines or specifications applicable to the PJM Interchange Energy Market, and any relevant procedures of another Control Area, or any tariff (including the PJM Tariff). Upon determining that any such conflict or incompatibility exists, the Office of the Interconnection shall propose tariff or procedural changes, and undertake such other efforts as may be appropriate, to resolve any such conflict or incompatibility. 1.7.7 Pricing. The price paid for energy bought and sold in the PJM Interchange Energy Market will reflect the hourly Locational Marginal Price at each load and generation bus, determined by the Office of the Interconnection in accordance with this Agreement. Transmission Congestion Charges, which shall be determined by differences in Locational Marginal Prices in an hour caused by transmission constraints, shall be calculated and collected, and the revenues therefrom shall be disbursed, by the Office of the Interconnection in accordance with this Schedule. 1.7.8 Generating Market Buyer Resources. A Generating Market Buyer may elect to self-schedule its generation resources up to that Generating Market Buyer's Equivalent Load, in accordance with and subject to the procedures specified in this Schedule, and the accounting and billing requirements specified in Section 3 to this Schedule. 1.7.9 Delivery to an External Market Buyer. A purchase of Spot Market Energy by an External Market Buyer shall be delivered to a bus or busses at the border of the PJM Control Area specified by the Office of the Interconnection, or to load in the Control Area that is not served by Network Transmission Service, using Point-to-Point Transmission Service paid for by the External Market Buyer. Further delivery of such energy shall be the responsibility of the External Market Buyer. 13 1.7.10 Other Transactions. (a) Market Participants may enter into bilateral contracts for the purchase or sale of electric energy to or from each other or any other entity, subject to the obligations of Market Participants to make Capacity Resources available for dispatch by the Office of the Interconnection. Bilateral arrangements that contemplate the physical transfer of energy to or from a Market Participant shall be reported to and coordinated with the Office of the Interconnection in accordance with this Schedule. (b) Market Participants shall have Spot Market Backup with respect to all bilateral transactions that are not dynamically scheduled pursuant to Section 1.12 and that are curtailed or interrupted for any reason (except for curtailments or interruptions through active load management for load located within the PJM Control Area). (c) To the extent the Office of the Interconnection dispatches a Generating Market Buyer's generation resources, such Generating Market Buyer may elect to net the output of such resources against its hourly Equivalent Load. Such a Generating Market Buyer shall be deemed a buyer from the PJM Interchange Energy Market to the extent of its PJM Interchange Imports, and shall be deemed a seller to the PJM Interchange Energy Market to the extent of its PJM Interchange Exports. 1.7.11 Emergencies. The Office of the Interconnection, with the assistance of the Members' dispatchers as it may request, shall be responsible for monitoring the operation of the PJM Control Area, for declaring the existence of an Emergency, and for directing the operations of Market Participants as necessary to manage, alleviate or end an Emergency. The standards, policies and procedures of the Office of the Interconnection for declaring the existence of an Emergency, including but not limited to a Minimum Generation Emergency, and for managing, alleviating or ending an Emergency, shall apply to all Members on a non- discriminatory basis. Actions by the Office of the Interconnection and the Market Participants shall be carried out in accordance with this Agreement, the NERC Operating Policies, MAAC reliability principles and standards, Good Utility Practice, and the PJM Manuals. A declaration that an Emergency exists or is likely to exist by the Office of the Interconnection shall be binding on all Market Participants until the Office of the Interconnection announces that the actual or threatened Emergency no longer exists. Consistent with existing contracts, all Market Participants shall comply with all directions from the Office of the Interconnection for the purpose of managing, alleviating or ending an Emergency. The Market Participants shall authorize the Office of the Interconnection to purchase or sell energy on their behalf to meet an Emergency, and otherwise to implement agreements with other Control Areas interconnected with the PJM Control Area for the mutual provision of service to meet an Emergency, in accordance with this Agreement. 1.7.12 Fees and Charges. Each Market Participant shall pay all fees and charges of the Office of the Interconnection for operation of the PJM Interchange Energy Market as determined by and allocated to the Market Participant by the Office of the Interconnection in accordance with Schedule 3. Revised: June 16, 1999 Effective: August 16, 1999 14 1.7.13 Relationship to PJM Control Area. The PJM Interchange Energy Market operates within and subject to the requirements for the operation of the PJM Control Area. Revised: June 26, 1998 Effective: September 17, 1998 14a 1.7.14 PJM Manuals. The Office of the Interconnection shall be responsible for maintaining, updating, and promulgating the PJM Manuals as they relate to the operation of the PJM Interchange Energy Market. The PJM Manuals, as they relate to the operation of the PJM Interchange Energy Market, shall conform and comply with this Agreement, NERC operating policies, and MAAC reliability principles, guidelines and standards, and shall be designed to facilitate administration of an efficient energy market within industry reliability standards and the physical capabilities of the PJM Control Area. 1.7.15 Corrective Action. Consistent with Good Utility Practice, the Office of the Interconnection shall be authorized to direct or coordinate corrective action, whether or not specified in the PJM Manuals, as necessary to alleviate unusual conditions that threaten the integrity or reliability of the PJM Control Area or the regional power system. 1.7.16 Recording. Subject to the requirements of applicable State or federal law, all voice communications with the Office of the Interconnection Control Center may be recorded by the Office of the Interconnection and any Market Participant communicating with the Office of the Interconnection Control Center, and each Market Participant hereby consents to such recording. 1.7.17 Operating Reserves. (a) The following procedures shall apply to any generation unit subject to the dispatch of the Office of the Interconnection for which construction commenced before July 9, 1996. (b) The Office of the Interconnection shall schedule to the Operating Reserve and load-following objectives of the PJM Control Area and the PJM Interchange Energy Market in scheduling resources pursuant to this Schedule. A table of Operating Reserve objectives is calculated seasonally for various peak load levels and eight weekly periods and is published in the PJM Manuals. Reserve levels are probabilistically determined based on the season's historical load forecasting error and expected generation mix (including typical Planned and Forced/Unplanned Outages). Generating Units with quick start capability, as specified in the PJM Manuals, that are dispatched to maintain reliability by providing or maintaining spinning reserves or providing load following capability shall receive energy payments at the levels specified below. The energy payments specified below shall be considered the offered price for Spot Market Energy for purposes of Section 3.2.3(b) of this Schedule. The price offered or paid for the energy of units so dispatched shall not be considered in determining Locational Marginal Prices. Second Revised: April 27, 1999 Effective: April 1, 1999 15 (c) Payments for energy produced by a quick start generating unit dispatched as specified above shall be at the higher of the applicable Locational Marginal Price or one of the amounts specified below, as specified in advance by the Market Seller for the affected unit: (i) The weighted average Locational Marginal Price at the generation bus at which energy from the capped resource was delivered during a specified number of hours during which the resource was dispatched for energy in economic merit order, the specified number of hours to be determined by the Office of the Interconnection and to be a number of hours sufficient to result in a price cap that reflects reasonably contemporaneous competitive market conditions for that unit; (ii) The incremental operating cost of the generation resource as determined in accordance with Schedule 2 of this Agreement and the PJM Manuals, plus 10% of such costs; or (iii) An amount determined by agreement between the Office of the Interconnection and the Market Seller. 1.7.18 Regulation. (a) Regulation shall be supplied from generators located within the metered electrical boundaries of the PJM Control Area. Generating Market Buyers, and Market Sellers offering Regulation, shall comply with applicable standards and requirements for Regulation capability and dispatch specified in the PJM Manuals. (b) The Office of the Interconnection shall obtain and maintain an amount of Regulation equal to the PJM Control Area Regulation objective as specified in the PJM Manuals. (c) The Regulation range of a unit shall be at least twice the amount of Regulation assigned. (d) A unit capable of automatic energy dispatch that is also providing Regulation shall have its energy dispatch range reduced by twice the amount of the Regulation provided. The amount of Regulation provided by a unit shall serve to redefine the Normal Minimum Generation and Normal Maximum Generation energy limits of that unit, in that the amount of Regulation shall be added to the unit's Normal Minimum Generation energy limit, and subtracted from its Normal Maximum Generation energy limit. Revised: April 27, 1999 Effective: April 1, 1999 15a (e) Qualified Regulation must satisfy the verification tests described in the PJM Manuals. 1.7.19 Ramping. A generator dispatched by the Office of the Interconnection pursuant to a control signal appropriate to increase or decrease the generator's megawatt output level shall be able to change output at the ramping rate specified in the Offer Data submitted to the Office of the Interconnection for that generator. 1.7.20 Communication and Operating Requirements. (a) Market Participants. Each Market Participant shall have, or shall arrange to have, its transactions in the PJM Interchange Energy Market subject to control by a Market Operations Center, with staffing and communications systems capable of real-time communication with the Office of the Interconnection during normal and Emergency conditions and of control of the Market Participant's relevant load or facilities sufficient to meet the requirements of the Market Participant's transactions with the PJM Interchange Energy Market, including but not limited to the following requirements as applicable. (b) Market Sellers selling from resources within the PJM Control Area shall: report to the Office of the Interconnection sources of energy available for operation; supply to the Office of the Interconnection all applicable Offer Data; report to the Office of the Interconnection units that are self-scheduled; report to the Office of the Interconnection bilateral sales transactions to buyers not within the PJM Control Area; confirm to the Office of the Interconnection bilateral sales to Market Buyers within the PJM Control Area; respond to the Office of the Interconnection's directives to start, shutdown or change output levels of generation units, or change scheduled voltages or reactive output levels; continuously maintain all Offer Data concurrent with on- line operating information; and ensure that, where so equipped, generating equipment is operated with control equipment functioning as specified in the PJM Manuals. (c) Market Sellers selling from resources outside the PJM Control Area shall: provide to the Office of the Interconnection all applicable Offer Data, including offers specifying amounts of energy available, hours of availability and prices of energy and other services; respond to Office of the Interconnection directives to schedule delivery or change delivery schedules; and communicate delivery schedules to the Market Seller's Control Area. (d) Market Participants that are Load Serving Entities or purchasing on behalf of Load Serving Entities shall: provide to the Office of the Interconnection forecasts of load to be served as required by the Office of the Interconnection; respond to Office of the Interconnection directives for load management steps; report to the Office of the Interconnection Capacity Resources to satisfy capacity obligations that are available for pool operation; report to the Office of the Interconnection all bilateral purchase transactions; respond to other Office of the Interconnection directives such as those required during Emergency operation. (e) Market Participants that are not Load Serving Entities or purchasing on behalf of Load Serving Entities shall: provide to the Office of the Interconnection requests to purchase specified amounts of energy for each hour of the Operating Day during which it intends to purchase from the PJM Interchange Energy Market, along with Dispatch Rate levels above which it does not desire to purchase; respond to other Office of the Interconnection directives such as those required during Emergency operation. Revised: June 26, 1998 Effective: September 17, 1998 16 1.7.21 Multi-settlement System. The PJM Interchange Energy Market shall be enhanced by an amendment to this Schedule, to be filed with FERC not later than December 31, 1997, that will provide for the implementation of a multi-settlement system as soon thereafter as shall be determined by the Office of the Interconnection to be reasonably practical. Such a system will provide an opportunity for Market Participants to commit and obtain commitments to energy prices and transmission congestion charges at certain specified deadlines in advance of the Office of the Interconnection's real-time dispatch. The Members specified in Section 11.5(c) of the Agreement, working with the Office of the Interconnection, shall develop the details of the implementation of such a multi-settlement system. 1.8 Selection, Scheduling and Dispatch Procedure Adjustment Process. 1.8.1 PJM Dispute Resolution Agreement. Subject to the condition specified below, any Member adversely affected by a decision of the Office of the Interconnection with respect to the operation of the PJM Interchange Energy Market, including the qualification of an entity to participate in that market as a buyer or seller, make seek such relief as may be appropriate under the PJM Dispute Resolution Procedures on the grounds that such decision does not have an adequate basis in fact or does not conform to the requirements of this Agreement. 1.8.2 Market or Control Area Hourly Operational Disputes. (a) Market Participants shall comply with all determinations of the Office of the Interconnection on the selection, scheduling or dispatch of resources in the PJM Interchange Energy Market, or to meet the operational requirements of the PJM Control Area. Complaints arising from or relating to such determinations shall be brought to the attention of the Office of the Interconnection not later than the end of the fifth business day after the end of the Operating Day to which the selection or scheduling relates, or in which the scheduling or dispatch took place, and shall include, if practicable, a proposed resolution of the complaint. Upon receiving notification of the dispute, the Office of the Interconnection and the Market Participant raising the dispute shall exert their best efforts to obtain and retain all data and other information relating to the matter in dispute, and to notify other Market Participants that are likely to be affected by the proposed resolution. Subject to confidentiality or other non-disclosure requirements, representatives of the Office of the Interconnection, the Market Participant raising the dispute, and other interested Market Participants, shall meet within three business days of the foregoing notification, or at such other or further times as the Office of the Interconnection and the Market Participants may agree, to review the relevant facts, and to seek agreement on a resolution of the dispute. (b) If the Office of the Interconnection determines that the matter in dispute discloses a defect in operating policies, practices or procedures subject to the discretion of the Office of the Interconnection, the Office of the Interconnection shall implement such changes as it deems appropriate and shall so notify the Members Committee. Alternatively, the Office of the Interconnection may notify the Members Committee of a proposed change and solicit the comments or other input of the Members. (c) If either the Office of the Interconnection, the Market Participant raising 17 the dispute, or another affected Market Participant believes that the matter in dispute has not been adequately resolved, or discloses a need for changes in standards or policies established in or pursuant to the Operating Agreement, any of the foregoing parties may make a written request for review of the matter by the Members Committee, and shall include with the request the forwarding party's recommendation and such data or information (subject to confidentiality or other non-disclosure requirements) as would enable the Members Committee to assess the matter and the recommendation. The Members Committee shall take such action on the recommendation as it shall deem appropriate. (d) Subject to the right of a Market Participant to obtain correction of accounting or billing errors, the LLC or a Market Participant shall not be entitled to actual, compensatory, consequential or punitive damages, opportunity costs, or other form of reimbursement from the LLC or any other Market Participant for any loss, liability or claim, including any claim for lost profits, incurred as a result of a mistake, error or other fault by the Office of the Interconnection in the selection, scheduling or dispatch of resources. 1.9 Prescheduling. The following procedures and principles shall govern the prescheduling activities necessary to plan for the reliable operation of the PJM Control Area and for the efficient operation of the PJM Interchange Energy Market. 1.9.1 Outage Scheduling. The Office of the Interconnection shall be responsible for coordinating and approving requests for outages of generation and transmission facilities as necessary for the reliable operation of the PJM Control Area, in accordance with the PJM Manuals. The Office of the Interconnection shall maintain records of outages and outage requests of these facilities. 1.9.2 Planned Outages. (a) A Generator Planned Outage shall be included in Generator Planned Outage schedules established prior to the scheduled start date for the outage, in accordance with standards and procedures specified in the PJM Manuals. (b) The Office of the Interconnection shall conduct Generator Planned Outage scheduling for Capacity Resources in accordance with the Reliability Assurance Agreement and the PJM Manuals and in consultation with the Members owning or controlling the output of Capacity Resources. A Market Participant shall not be expected to submit offers for the sale of energy or other services, or to satisfy delivery obligations, from all or part of a generation resource undergoing an approved Generator Planned Outage. If the Office of the Interconnection determines that approval of a Generator Planned Outage would significantly affect the reliable operation of the PJM Control Area, the Office of the Interconnection may withhold approval or withdraw a prior approval. Approval for a Generator Planned Outage of a Capacity Resource shall be withheld or withdrawn only as necessary to ensure the adequacy of reserves or the reliability of the PJM Control Area in connection with anticipated implementation or avoidance of Emergency procedures. If the Office of the Interconnection withholds or withdraws approval, it shall coordinate with the Market Participant owning or controlling the resource to reschedule the Generator Planned Outage of the Capacity Resource at the earliest practical time. The Office of the Interconnection shall if possible propose alternative schedules with the intent of minimizing 18 the economic impact on the Market Participant of a Generator Planned Outage. (c) The Office of the Interconnection shall conduct Planned Transmission Outage scheduling in accordance with procedures specified in the Transmission Owners Agreement and the PJM Manuals. If the Office of the Interconnection determines that transmission maintenance schedules proposed by one or more Members would significantly affect the efficient and reliable operation of the PJM Control Area, the Office of the Interconnection may propose alternative schedules, but such alternative shall minimize the economic impact on the Member or Members whose maintenance schedules the Office of the Interconnection proposes to modify. The Office of the Interconnection shall coordinate resolution of outage or other planning conflicts that may give rise to unreliable system conditions. The Members shall comply with all maintenance schedules established by the Office of the Interconnection. 1.9.3 Generator Maintenance Outages A Market Participant may request approval for a Generator Maintenance Outage of any Capacity Resource from the Office of the Interconnection in accordance with the timetable and other procedures specified in the PJM Manuals. The Office of the Interconnection shall approve requests for Generator Maintenance Outages for a Capacity Resource unless the outage would threaten the adequacy of reserves in, or the reliability of, the PJM Control Area. A Market Participant shall not be expected to submit offers for the sale of energy or other services, or to satisfy delivery obligations, from a generation resource undergoing an approved full or partial Generator Maintenance Outage. 1.9.4 Forced Outages (a) Each Market Seller that owns or controls a pool-scheduled resource, or Capacity Resource whether or not pool-scheduled, shall: (i) advise the Office of the Interconnection of a Generator Forced Outage suffered or anticipated to be suffered by any such resource as promptly as possible; (ii) provide the Office of the Interconnection with the expected date and time that the resource will be made available; and (iii) make a record of the events and circumstances giving rise to the Generator Forced Outage. A Market Seller shall not be expected to submit offers for the sale of energy or other services, or satisfy delivery obligations, from a generation resource undergoing a Generator Forced Outage. A Capacity Resource that does not deliver all or part of its scheduled energy shall be deemed to have experienced a Generator Forced Outage with respect to such undelivered energy, in accordance with standards and procedures for full and partial Generator Forced Outages specified in the Reliability Assurance Agreement and the PJM Manuals. (b) The Office of the Interconnection shall receive notification of Forced Transmission Outages, and information on the return to service, of Transmission Facilities in the PJM Control Area in accordance with standards and procedures specified in the Transmission Owners Agreement and the PJM Manuals. 19 1.9.5 Market Participant Responsibilities. Each Market Participant making a bilateral sale covering a period greater than the following Operating Day from a generating resource located within the PJM Control Area for delivery outside the PJM Control Area shall furnish to the Office of the Interconnection, in the form and manner specified in the PJM Manuals, information regarding the source of the energy, the load sink, the energy schedule, and the amount of energy being delivered. 1.9.6 Internal Market Buyer Responsibilities. Each Internal Market Buyer making a bilateral purchase covering a period greater than the following Operating Day shall furnish to the Office of the Interconnection, in the form an manner specified in the PJM Manuals, information regarding the source of the energy, the load sink, the energy schedule, and the amount of energy being delivered. Each Internal Market Buyer shall provide the Office of the Interconnection with details of any load management agreements with customers that allow the Office of the Interconnection to reduce load under specified circumstances. 1.9.7 Market Seller Responsibilities (a) Not less than 30 days before a Market Seller's initial offer to sell energy from a given generation resource on the PJM Interchange Energy Market, the Market Seller shall furnish to the Office of the Interconnection the information specified in the Offer Data for new generation resources. (b) Market Sellers authorized and intending to request market-based start-up and no-load fees in their Offer Data shall submit a specification of such fees to the Office of the Interconnection for each generating unit as to which the Market Seller intends to request such fees. Any such specification shall be submitted on or before March 31 for the period April 1 through September 30, and on or before September 30 for the period October 1 through March 31, and shall remain in effect without change throughout each such period for which a specification was submitted. The Office of the Interconnection shall reject any request for start-up and no-load fees in a Market Seller's Offer Data that does not conform to the Market Seller's specification on file with the Office of the Interconnection. 1.9.8 Office of the Interconnection Responsibilities (a) The Office of the Interconnection shall perform seasonal operating studies to assess the forecasted adequacy of generating reserves and of the transmission system, in accordance with the procedures specified in the PJM Manuals. (b) The Office of the Interconnection shall maintain and update tables setting forth Operating Reserve and other reserve objectives as specified in the PJM Manuals. (c) The Office of the Interconnection shall receive and process requests for firm and non-firm transmission service in accordance with procedures specified in the PJM Tariff. (d) The Office of the Interconnection shall maintain such data and information relating to generation and transmission facilities in the PJM Control Area as may be necessary or appropriate to conduct the scheduling and dispatch of the PJM Interchange Energy Market and PJM Control Area. 20 (e) The Office of the Interconnection shall coordinate with other interconnected Control Area as necessary to manage, alleviate or end an Emergency. 1.10 Scheduling. The following scheduling procedures and principles shall govern the commitment of resources to the PJM Interchange Energy Market over a period extending from one week to one day prior to the Operating Day that transactions are to take place. Scheduling encompasses the day-ahead and hourly scheduling process, through which the Office of the Interconnection determines, based on changing forecasts of conditions and actions by Market Participants and system constraints, a plan to serve the hourly energy and reserve requirements of the Internal Market Buyers and the purchase requests of the External Market Buyers in the least costly manner, subject to maintaining the reliability of the PJM Control Area. Scheduling shall be conducted as specified below, subject to the following condition. If the Office of the Interconnection's forecast for the next seven days projects a likelihood of Emergency conditions, the Office of the Interconnection may commit, for all or part of such seven day period, to the use of generation resources with notification or start-up times greater than one day as necessary in order to alleviate or mitigate such Emergency, in accordance with the Market Sellers' offers for such units for such periods and the specifications in the PJM Manuals. 1.10.1 Day-Ahead Scheduling. The following actions shall occur not later than 12:00 noon on the day before the Operating Day for which transactions are being scheduled. (a) Each Market Participant that is a Load Serving Entity or purchasing on behalf of a Load Serving Entity shall submit to the Office of the Interconnection forecasts of its customer loads for the next Operating Day as required by the PJM Manuals. If a Market Participant expects to curtail load at a specific Dispatch Rate, it should specify the Dispatch Rate and estimated load curtailment. (b) Each Market Participant that is not a Load Serving Entity or purchasing on behalf of a Load Serving Entity shall submit to the Office of the Interconnection requests to purchase specified amounts of energy for each hour of the Operating Day during which it intends to purchase from the PJM Interchange Energy Market, along with Dispatch Rate levels above which it does not desire to purchase, in accordance with the specifications set forth in the PJM Manuals. (c) Each Generating Market Buyer shall submit to the Office of the Interconnection: (i) hourly schedules for resource increments, including hydropower units, self-scheduled by the Market Buyer to meet its Equivalent Load; and (ii) the Dispatch Rate at which each such self-scheduled resource will disconnect or reduce output, or confirmation of the Market Buyer's intent not to reduce output. (d) All Market Participants shall submit to the Office of the Interconnection schedules for any bilateral transactions involving use of generation or Transmission Facilities as specified below, and shall inform the Office of the Interconnection if the parties to the transaction are not willing to incur Transmission Congestion Charges in order to complete any such scheduled bilateral transaction. Scheduling of bilateral transactions shall be conducted in accordance with the specifications in the PJM Manuals and the following requirements: Revised: June 26, 1998 Effective: September 17, 1998 21 i) Internal Market Buyers shall submit schedules for all bilateral purchases for delivery within the PJM Control Area, whether from generation resources inside or outside the PJM Control Area; ii) Market Sellers shall submit schedules for bilateral sales to entities outside the PJM Control Area from generation within the PJM Control Area that is not dynamically scheduled to such entities pursuant to Section 1.12; and iii) In addition to the foregoing schedules for bilateral transactions, Market Participants shall submit confirmations of each scheduled bilateral transaction from each other party to the transaction in addition to the party submitting the schedule, or the adjacent Control Area. (e) Market Sellers wishing to sell on the PJM Interchange Energy Market shall submit offers for the supply of energy (including energy from hydropower units), Regulation, Operating Reserves or other services for the following Operating Day. Offers shall be submitted to the Office of the Interconnection in the form specified by the Office of the Interconnection and shall contain the information specified in the Office of the Interconnection's Offer Data specification, as applicable. Market Sellers owning or controlling the output of a Capacity Resource that has not been rendered unavailable by a Generation Planned Outage, a Generator Maintenance Outage, or a Generation Forced Outage shall submit offers for the available capacity of such Capacity Resource, including any portion that is self-scheduled by the Generating Market Buyer claiming the resource as a Capacity Resource. The submission of offers for resource increments that are not Capacity Resources shall be optional, but any such offers must contain the information specified in the Office of the Interconnection's Offer Data specification, as applicable. Energy offered from generation resources that are not Capacity Resources shall not be supplied from resources that are included in or otherwise committed to supply the Operating Reserves of another Control Area. The foregoing offers: i) Shall specify the generation resource and energy for each hour in the offer period; ii) Shall specify the amounts and prices for the entire Operating Day for each resource component offered by the Market Seller to the Office of the Interconnection; iii) If based on energy from a specific generating unit, may specify start-up and no-load fees equal to the specification of such fees for such unit on file with the Office of the Interconnection; iv) Shall set forth any special conditions upon which the Market Seller proposes to supply a resource increment, including any curtailment rate specified in a bilateral contract for the output of the resource, or any cancellation fees; Second Revised: June 16, 1999 Effective: August 16, 1999 22 v) May include a schedule of offers for prices and operating data contingent on acceptance by the deadline specified in this Schedule, with a second schedule applicable if accepted after the foregoing deadline; vi) Shall constitute an offer to submit the resource increment to the Office of the Interconnection for scheduling and dispatch in accordance with the terms of the offer, which offer shall remain open through the Operating Day for which the offer is submitted; Revised: June 26, 1998 Effective: September 17, 1998 22a vii) Shall be final as to the price or prices at which the Market Seller proposes to supply energy or other services to the PJM Interchange Energy Market, such price or prices being guaranteed by the Market Seller for the period extending through the end of the following Operating Day; and viii) Shall not exceed an energy offer price of $1,000/megawatt-hour. (f) A Market Seller that wishes to sell Regulation service shall submit an offer for Regulation that shall specify the MW of Regulation being offered and the Regulation Class from which such Regulation is being offered. The range of costs defining Regulation Classes, and the average cost for each Regulation Class, shall be determined periodically by the Office of the Interconnection on the basis of prior energy bid prices and appropriate fuel indices, in accordance with procedures specified in the PJM Manuals. Qualified Regulation capability must satisfy the verification tests specified in the PJM Manuals. (g) Each Market Seller owning or controlling the output of a Capacity Resource shall submit a forecast of the availability of each such Capacity Resource for the next seven days. A Market Seller (i) may submit a non- binding forecast of the price at which it expects to offer a generation resource increment to the Office of the Interconnection over the next seven days, and (ii) shall submit a binding offer for energy, along with start-up and no-load fees, if any, for the next seven days or part thereof, for any generation resource with minimum notification or start-up requirement greater than 24 hours. (h) Each offer by a Market Seller of a Capacity Resource shall remain in effect for subsequent Operating Days until superseded or canceled. (i) The Office of the Interconnection shall post on the PJM Open Access Same-time Information System its estimate of the combined hourly load of the Market Buyers for the next four days, and peak load forecasts for an additional three days. 1.10.2 Pool-Scheduled Resources. Pool-scheduled resources shall be governed by the following principles and procedures. (a) Pool-scheduled resources shall be selected by the Office of the Interconnection on the basis of the prices offered for energy and related services, start-up, no-load and cancellation fees, and the specified operating characteristics, offered by Market Sellers to the Office of the Interconnection by the 12:00 noon offer deadline. (b) A resource that is scheduled by a Market Participant to support a bilateral sale, or that is self-scheduled by a Generating Market Buyer, shall not be selected by the Office of the Interconnection as a pool-scheduled resource except in an Emergency. (c) Market Sellers offering energy from hydropower or other facilities with fuel or environmental limitations may submit data to the Office of the Interconnection that is sufficient to enable the Office of the Interconnection to determine the available operating hours of such facilities. (d) The Market Seller of a resource selected as a pool-scheduled resource shall receive payments or credits for energy or related services, or for start-up and no-load fees, from the Office of the Interconnection on behalf of the Market Buyers in accordance with Section 3 Revised: March 17, 1998 Effective: April 1, 1998 23 of this Schedule 1. Alternatively, the Market Seller shall receive, in lieu of start-up and no-load fees, its actual costs incurred, if any, up to a cap of the resource's start-up cost, if the Office of the Interconnection cancels its selection of the resource as a pool-scheduled resource and so notifies the Market Seller before the resource is synchronized. (e) Market Participants shall make available their pool-scheduled resources to the Office of the Interconnection for coordinated operation to supply the needs of the PJM Control Area for Operating Reserves. 1.10.3 Self-scheduled Resources. Self-scheduled resources shall be governed by the following principles and procedures. (a) Each Generating Market Buyer shall use all reasonable efforts, consistent with Good Utility Practice, not to self-schedule resources in excess of its Equivalent Load. (b) The offered prices of resources that are self-scheduled, or otherwise not following the dispatch orders of the Office of the Interconnection, shall not be considered by the Office of the Interconnection in determining Locational Marginal Prices. (c) Market Participants shall make available their self-scheduled resources to the Office of the Interconnection for coordinated operation to supply the needs of the PJM Control Area for Operating Reserves. 1.10.4 Capacity Resources. (a) A Capacity Resource selected as a pool-scheduled resource shall be made available for scheduling and dispatch at the direction of the Office of the Interconnection. A Capacity Resource that does not deliver energy as scheduled shall be deemed to have experienced a Generator Forced Outage to the extent of such energy not delivered. (b) Energy from a Capacity Resource that has not been selected as a pool-scheduled resource may be sold on a bilateral basis by the Market Seller, or may be self-scheduled. A Capacity Resource that has not been selected as a pool-scheduled resource and that has been sold on a bilateral basis must be made available upon request to the Office of the Interconnection for scheduling and dispatch if the Office of the Interconnection declares a Maximum Generation Emergency. Any such resource so scheduled and dispatched shall receive the applicable Locational Marginal Price for energy delivered. (c) A Capacity Resource that has been self-scheduled shall not receive payments or credits for start-up or no-load fees. Revised: March 17, 1998 Effective: April 1, 1998 24 1.10.5 External Resources. (a) External Resources may submit offers to the PJM Interchange Energy Market, in accordance with the day-ahead scheduling process specified above. An External Resource selected as a pool-scheduled resource shall be made available for scheduling and dispatch at the direction of the Office of the Interconnection, and except as specified below shall be compensated on the same basis as other pool-scheduled resources. External Resources that are not capable of dynamic dispatch shall, if selected by the Office of the Interconnection on the basis of the Market Seller's Offer Data, be block loaded on an hourly scheduled basis. Market Sellers shall offer External Resources to the PJM Interchange Energy Market on either a resource-specific or an aggregated resource basis. (b) Offers for External Resources from an aggregation of two or more generating units shall so indicate, and shall specify, in accordance with the Offer Data requirements specified by the Office of the Interconnection: (i) energy prices; (ii) hours of energy availability; (iii) a minimum dispatch level; (iv) a maximum dispatch level; and (v) unless such information has previously been made available to the Office of the Interconnection, sufficient information, as specified in the PJM Manuals, to enable the Office of the Interconnection to model the flow into the PJM Control Area of any energy from the External Resources scheduled in accordance with the Offer Data. If a Market Seller submits more than one offer on an aggregated resource basis, the withdrawal of any such offer shall be deemed a withdrawal of all higher priced offers for the same period. (c) Offers for External Resources on a resource-specific basis shall specify the resource being offered, along with the information specified in the Offer Data as applicable. Second Revised: November 19, 1998 Effective: December 1, 1998 25 1.10.6 External Market Buyers. (a) Deliveries to an External Market Buyer not subject to dynamic dispatch by the Office of the Interconnection shall be delivered on a block loaded basis to the load bus or busses at the border of the PJM Control Area, or in the PJM Control Area with respect to an External Market Buyer's load within the PJM Control Area not served by Network Service, at which the energy is delivered to or for the External Market Buyer. External Market Buyers shall be charged the Locational Marginal Price for energy at the foregoing load bus or busses. (b) An External Market Buyer's hourly schedules for energy purchased from the PJM Interchange Energy Market shall conform to the ramping and other applicable requirements of the interconnection agreement between the PJM Control Area and the Control Area to which, whether as an intermediate or final point of delivery, the purchased energy will initially be delivered. (c) The Office of the Interconnection shall curtail deliveries to an External Market Buyer if necessary to maintain appropriate reserve levels for the PJM Control Area as defined in the PJM Manuals, or to avoid shedding load in the PJM Control Area. 1.10.6A Transmission Loading Relief Customers. (a) An entity that desires to elect to pay Transmission Congestion Charges in order to continue its energy schedules during an Operating Day over contract paths outside the PJM Control Area in the event that PJM initiates Transmission Loading Relief that otherwise would cause PJM to request security coordinators to curtail such Member's energy schedules shall: (i) enter its election on OASIS by 12:00 p.m. of the day before the Operating Day, in accordance with procedures established by PJM, which election shall be applicable for the entire Operating Day; and (ii) if PJM initiates Transmission Loading Relief, provide to PJM, at such time and in accordance with procedures established by PJM, the hourly integrated energy schedules that impacted the PJM Control Area (as indicated from the NERC Interchange Distribution Calculator) during the Transmission Loading Relief. Third Revised: February 12, 1999 Effective: January 19, 1999 26 (b) If an entity has made the election specified in Section (a), then PJM shall not request security coordinators to curtail such entity's energy transactions, except as may be necessary to respond to Emergencies. (c) In order to make elections under this Section 1.10.6A, an entity must (i) have met the creditworthiness standards established by the Office of the Interconnection or provided a letter of credit or other form of security acceptable to the Office of the Interconnection, and (ii) have executed either the Agreement, a Service Agreement under the PJM Tariff, or other agreement committing to pay all Transmission Congestion Charges incurred under this Section. 1.10.7 Bilateral Transactions. Bilateral transactions as to which the parties have notified the Office of the Interconnection by 12:00 p.m. of the day before the Operating Day that they are not willing to incur Transmission Congestion Charges shall be curtailed by the Office of the Interconnection as necessary to reduce or alleviate transmission congestion. Bilateral transactions willing to incur congestion charges shall continue to be implemented during periods of congestion, except as may be necessary to respond to Emergencies. Second Revised: February 12, 1999 Effective: January 19, 1999 26a 1.10.8 Office of the Interconnection Responsibilities. (a) The Office of the Interconnection shall use its best efforts to determine the least-cost means of satisfying the projected hourly requirements for energy, Operating Reserves, and other ancillary services of the Market Buyers, including the reliability requirements of the PJM Control Area. In making this determination, the Office of the Interconnection shall take into account: (i) the Office of the Interconnection's forecasts of PJM Interchange Energy Market and PJM Control Area energy requirements, giving due consideration to the energy requirement forecasts and purchase requests submitted by Market Buyers; (ii) the offers submitted by Market Sellers; (iii) the availability of limited energy resources; (iv) the capacity, location, and other relevant characteristics of self-scheduled resources; (v) the objectives of the PJM Control Area for Operating Reserves, as specified in the PJM Manuals; (vi) the requirements of the PJM Control Area for Regulation and other ancillary services, as specified in the PJM Manuals; (vii) the benefits of avoiding or minimizing transmission constraint control operations, as specified in the PJM Manuals; and (viii) such other factors as the Office of the Interconnection reasonably concludes are relevant to the foregoing determination. The Office of the Interconnection shall develop a schedule of generation resources based on the foregoing determination. The Office of the Interconnection shall report the planned schedule for a hydropower resource to the operator of that resource as necessary for plant safety and security, and legal limitations on pond elevations. (b) Not later than 4:00 p.m. of the day before each Operating Day, or such earlier deadline as may be specified by the Office of the Interconnection in the PJM Manuals, the Office of the Interconnection shall: (i) post on the PJM Open Access Same-time Information System its forecast of the location and duration of any expected transmission congestion, and of the range of differences in Locational Marginal Prices between major subareas of the PJM Control Area expected to result from such transmission congestion; and (ii) inform each Market Seller whether its offer or offers have been accepted. (c) The Office of the Interconnection shall revise its schedule of generation resources to reflect updated projections of load, conditions affecting electric system operations in the PJM Control Area, the availability of and constraints on limited energy and other resources, transmission constraints, and other relevant factors. The Office of the Interconnection shall post on the PJM Open Access Same-time Information System at times specified in the PJM Manuals a revised forecast of the location and duration of any expected transmission congestion, and of the range of differences in Locational Marginal Prices between major subareas of the PJM Control Area expected to result from such transmission congestion. 1.10.9 Hourly Scheduling (a) Following the initial posting of the Office of the Interconnection's transmission congestion forecast, and subject to the right of the Office of the Interconnection to schedule and dispatch pool-scheduled resources and to direct that schedules be changed in an Emergency, a Market Participant may adjust the schedule of a resource under its dispatch control on an hour-to-hour basis beginning at 10:00 p.m. of the day before each Operating Day, provided that the Office of the Interconnection is notified not later than 60 minutes prior to the hour in which the adjustment is to take effect, as follows: i) A Generating Market Buyer may self-schedule any of its resource 27 increments, including hydropower resources, not previously designated as self-scheduled and not selected as a pool- scheduled resource; ii) A Market Participant may request the scheduling of a non-firm bilateral transaction; or iii) A Market Participant may request the scheduling of deliveries or receipts of Spot Market Energy; or iv) A Generating Market Buyer may remove from service a resource increment, including a hydropower resource, that it had previously designated as self-scheduled, provided that the Office of the Interconnection shall have the option to schedule energy from any such resource increment that is a Capacity Resource at the price offered in the scheduling process, with no obligation to pay any start-up fee. (b) An External Market Buyer may refuse delivery of some or all of the energy it requested to purchase by notifying the Office of the Interconnection of the adjustment in deliveries not later than 60 minutes prior to the hour in which the adjustment is to take effect. 1.11 Dispatch. The following procedures and principles shall govern the dispatch of the resources available to the Office of the Interconnection. 1.11.1 Resource Output. The Office of the Interconnection shall have the authority to direct any Market Seller to adjust the output of any pool-scheduled resource increment within the operating characteristics specified in the Market Seller's offer. The Office of the Interconnection may cancel its selection of, or otherwise release, pool-scheduled resources, subject to an obligation to pay any applicable start-up, no-load or cancellation fees. The Office of the Interconnection shall adjust the output of pool-scheduled resource increments as necessary: (a) to maintain reliability, and subject to that constraint, to minimize the cost of supplying the energy, reserves, and other services required by the Market Buyers and the operation of the PJM Control Area; (b) to balance load and generation, maintain scheduled tie flows, and provide frequency support within the PJM Control Area; and (c) to minimize unscheduled interchange not frequency related between the PJM Control Area and other Control Areas. 1.11.2 Operating Basis. In carrying out the foregoing objectives, the Office of the Interconnection shall conduct the operation of the PJM Control Area in accordance with the PJM Manuals, and shall: (i) utilize available generating reserves and obtain required replacements; and (ii) monitor the availability of adequate reserves. Revised: November 19, 1998 Effective: December 1, 1998 28 1.11.3 Pool-dispatched Resources (a) The Office of the Interconnection shall implement the dispatch of energy from pool-scheduled resources with limited energy by direct request. In implementing mandatory or economic use of limited energy resources, the Office of the Interconnection shall use its best efforts to select the most economic hours of operation for limited energy resources, in order to make optimal use of such resources consistent with the dynamic load-following requirements of the PJM Control Area and the availability of other resources to the Office of the Interconnection. (b) The Office of the Interconnection shall implement the dispatch of energy from other pool-dispatched resource increments, including generation increments from Capacity Resources the remaining increments of which are self- scheduled, by sending appropriate signals and instructions to the entity controlling such resources, in accordance with the PJM Manuals. Each Market Seller shall ensure that the entity controlling a pool-dispatched resource offered or made available by that Market Seller complies with the energy dispatch signals and instructions transmitted by the Office of the Interconnection. 1.11.3a Maximum Generation Emergency If the Office of the Interconnection declares a Maximum Generation Emergency, all deliveries to load that is served by Point-to-Point Transmission Service outside the PJM Control Area from Capacity Resources may be interrupted in order to serve load in the PJM Control Area. 1.11.4 Regulation (a) A Market Buyer may satisfy its Regulation obligation from its own resources capable of performing Regulation service, by contractual arrangements with other Market Participants able to provide Regulation service, or by purchases from the PJM Interchange Energy Market. (b) The Office of the Interconnection shall obtain Regulation service from the least-cost alternatives available from either pool-scheduled or self-scheduled resources as needed to meet PJM Control Area requirements not otherwise satisfied by the Market Buyers. (c) The Office of the Interconnection shall dispatch resources for Regulation by sending Regulation signals and instructions to resources from which Regulation service has been offered by Market Sellers, in accordance with the PJM Manuals. Market Sellers shall comply with Regulation dispatch signals and instructions transmitted by the Office of the Interconnection and, in the event of conflict, Regulation dispatch signals and instructions shall take precedence over energy dispatch signals and instructions. Market Sellers shall exert all reasonable efforts to operate, or ensure the operation of, their resources supplying load in the PJM Control Area as close to desired output levels as practical, consistent with Good Utility Practice. 1.11.5 PJM Open Access Same-time Information System. The Office of the Interconnection shall update the information posted on the PJM Open Access Same-time Information System to reflect its dispatch of generation resources. Revised: June 26, 1998 Effective: September 17, 1998 29 1.12 Dynamic Scheduling. (a) An entity that owns or controls a generating resource in the PJM Control Area may electrically remove all or part of the generating resource's output from the PJM Control Area through dynamic scheduling of the output to load outside the PJM Control Area. Such output shall not be available for economic dispatch by the Office of the Interconnection. (b) An entity requesting dynamic scheduling shall be responsible for arranging for the provision of signal processing and communications from the generator to the Office of the Interconnection and the other participating control area and complying with any other procedures established by the Office of the Interconnection regarding dynamic scheduling as set forth in the PJM Manuals. (c) An entity requesting dynamic scheduling shall be responsible for reserving amounts of firm transmission service necessary to deliver the range of the dynamic transfer and any required ancillary services. Revised: June 16, 1999 Effective: August 16, 1999 29a 2. CALCULATION OF LOCATIONAL MARGINAL PRICES 2.1 Introduction. The Office of the Interconnection shall calculate the price of energy at the load busses and generation busses in the PJM Control Area and at the interface busses between the PJM Control Area and adjacent Control Areas on the basis of Locational Marginal Prices. Locational Marginal Prices determined in accordance with this Section shall be calculated every five minutes and integrated hourly values of such calculations shall be the basis of sales and purchases of energy in the PJM Interchange Energy Market and of Transmission Congestion Charges under the PJM Tariff. 2.2 General. The Office of the Interconnection shall determine the least cost security- constrained dispatch, which is the least costly means of serving load at different locations in the PJM Control Area based on actual operating conditions existing on the power grid and on the prices at which Market Sellers have offered to supply energy in the PJM Interchange Energy Market. Locational Marginal Prices for the generation and load busses in the PJM Control Area, including interconnections with other Control Areas, will be calculated based on the actual economic dispatch and the prices of energy offers. The process for the determination of Locational Marginal Prices shall be as follows: (a) To determine actual operating conditions on the power grid in the PJM Control Area, the Office of the Interconnection shall use a computer model of the interconnected grid that uses available metered inputs regarding generator output, loads, and power flows to model remaining flows and conditions, producing a consistent representation of power flows on the network. The computer model employed for this purpose, referred to as the State Estimator program, is a standard industry tool and is described in Section 2.3 below. It will be used to obtain information regarding the output of generation supplying energy to the PJM Control Area, loads at buses in the PJM Control Area, transmission losses, and power flows on binding transmission constraints for use in the calculation of Locational Marginal Prices. Additional information used in the calculation, including Dispatch Rates and real time schedules for external transactions between PJM and other Control Areas, will be obtained from the Office of the Interconnection's dispatchers. (b) Using the prices at which energy is offered by Market Sellers to the PJM Interchange Energy Market, the Office of the Interconnection shall determine the offers of energy that will be considered in the calculation of Locational Marginal Prices. As described in Section 2.4 below, every offer of energy by a Market Seller from a resource that is following economic dispatch instructions of the Office of the Interconnection will be utilized in the calculation of Locational Marginal Prices. (c) Based on the system conditions on the PJM power grid, determined as described in (a), and the eligible energy offers, determined as described in (b), the Office of the Interconnection shall determine the least costly means of obtaining energy to serve the next increment of load at each bus in the PJM Control Area, in the manner described in Section 2.5 below. The result of that calculation shall be a set of Locational Marginal Prices based on the system conditions at the time. 30 2.3 Determination of System Conditions Using the State Estimator. Power system operations, including, but not limited to, the determination of the least costly means of serving load, depend upon the availability of a complete and consistent representation of generator outputs, loads, and power flows on the network. In calculating Locational Marginal Prices, the Office of the Interconnection shall obtain a complete and consistent description of conditions on the electric network in the PJM Control Area by using the most recent power flow solution produced by the State Estimator, which is also used by the Office of the Interconnection for other functions within power system operations. The State Estimator is a standard industry tool that produces a power flow model based on available real-time metering information, information regarding the current status of lines, generators, transformers, and other equipment, bus load distribution factors, and a representation of the electric network, to provide a complete description of system conditions, including conditions at busses for which real-time information is unavailable. The current version of the State Estimator includes over 1600 busses in the PJM Control Area, as well as interface busses with adjacent Control Areas. The Office of the Interconnection shall obtain a State Estimator solution every five minutes, which shall provide the megawatt output of generators and the loads at busses in the PJM Control Area, transmission line losses, and actual flows or loadings on constrained transmission facilities. External transactions between PJM and other Control Areas shall be included in the Locational Marginal Price calculation on the basis of the real time transaction schedules implemented by the Office of the Interconnection's dispatcher. 2.4 Determination of Energy Offers Used in Calculating Locational Marginal Prices. (a) To determine the energy offers submitted to the PJM Interchange Energy Market that shall be used to calculate the Locational Marginal Prices, the Office of the Interconnection shall determine which resources are following its economic dispatch instructions. A resource will be considered to be following economic dispatch instructions and shall be included in the calculation of Locational Marginal Prices if: i) the price bid by a Market Seller for energy from the resource is less than or equal to the Dispatch Rate for the area of the PJM Control Area in which the resource is located; or ii) the resource is specifically requested to operate by the Office of the Interconnection's dispatcher. (b) In determining whether a resource satisfies the condition described in (a), the Office of the Interconnection will determine the bid price associated with an energy offer by comparing the actual megawatt output of the resource with the Market Seller's offer price curve. Because of practical generator response limitations, a resource whose megawatt output is not ten percent more than the megawatt level specified on the offer price curve for the applicable Dispatch Rate shall be deemed to be following economic dispatch instructions, but the energy price offer used in the calculation of Locational Marginal Prices shall not exceed the applicable Dispatch Rate. Units that must be run for local area protection shall not be considered in the calculation of Locational Marginal Prices. 31 2.5 Calculation of Locational Marginal Prices. (a) The Office of the Interconnection shall determine the least costly means of obtaining energy to serve the next increment of load at each bus in the PJM Control Area represented in the State Estimator and each interface bus between the PJM Control Area and an adjacent Control Area, based on the system conditions described by the most recent power flow solution produced by the State Estimator program and the energy offers determined to be eligible for consideration under Section 2.4. This calculation shall be made by applying an incremental linear optimization method to minimize energy costs, given actual system conditions, a set of energy offers, and any binding transmission constraints that may exist. In performing this calculation, the Office of the Interconnection shall calculate the cost of serving an increment of load at each bus from each resource associated with an eligible energy offer as the sum of: (1) the price at which the Market Seller has offered to supply an additional increment of energy from the resource, and (2) the effect on transmission congestion costs (whether positive or negative) associated with increasing the output of the resource, based on the effect of increased generation from that resource on transmission line loadings. The energy offer or offers that can serve an increment of load at a bus at the lowest cost, calculated in this manner, shall determine the Locational Marginal Price at that bus. (b) The calculation set forth in (a) shall be performed every five minutes, using the Office of the Interconnection's Locational Marginal Price program, producing a set of Locational Marginal Prices based on system conditions during the preceding interval. The prices produced at five-minute intervals during an hour will be integrated to determine the Locational Marginal Prices for that hour, which will determine prices in the PJM Interchange Energy Market and Transmission Congestion Costs under the PJM Tariff. 2.6 Performance Evaluation. The Office of the Interconnection shall undertake an evaluation of the foregoing procedures for the determination of Locational Marginal Prices, as well as the procedures for determining and allocating Fixed Transmission Rights and associated Transmission Congestion Charges and Credits, not less often than every two years, in accordance with the PJM Manuals. To the extent practical, the Office of the Interconnection shall retain all data needed to perform comparisons and other analyses of locational marginal pricing. The Office of the Interconnection shall report the results of its evaluation to the Market Participants, along with its recommendations, if any, for changes in the procedures. 32 3. ACCOUNTING AND BILLING 3.1 Introduction. This schedule sets forth the accounting and billing principles and procedures for the purchase and sale of services on the PJM Interchange Energy Market and for the operation of the PJM Control Area. 3.2 Market Buyers. 3.2.1 Spot Market Energy. (a) At the end of each hour during an Operating Day, the Office of the Interconnection shall calculate the load payment for each Market Buyer's load bus. The load payment at each bus shall be the product of the Market Buyer's megawatts of load at such load bus in the hour times the Locational Marginal Price at the bus. The megawatts of load at each load bus shall be the sum of the megawatts of load for that bus of that Market Buyer as determined by the State Estimator, plus an allocated share of transmission losses, plus any megawatts of that Market Buyer's bilateral sales to purchasers outside the PJM Control Area attributable to that bus. The total load payment for each Market Buyer shall be the sum of the load payments for each of a Market Buyer's load busses. (b) At the end of each hour during an Operating Day, the Office of the Interconnection shall calculate the generation revenue for each Generating Market Buyer's generation bus. The generation revenue at each generation bus shall be the product of the Generating Market Buyer's megawatts of generation at such generation bus in the hour times the Locational Marginal Price at the bus. The megawatts of generation at each generation bus shall be the sum of the megawatts of generation for that bus of that Generating Market Buyer as determined by the State Estimator, plus any megawatts of bilateral purchases of that Generating Market Buyer from sellers outside the PJM Control Area attributable to that bus. The total generation revenue for each Generating Market Buyer shall be the sum of the generation revenues for each of the Generating Market Buyer's generation busses. (c) At the end of each hour during an Operating Day, the Office of the Interconnection shall calculate a net bill for each Market Buyer, determined as the difference between its total load payment and its total generation revenue. The portions of the net bill attributable to net hourly PJM Interchange and to Transmission Congestion Charges shall be determined as set forth below. (d) At the end of each hour during an Operating Day, the Office of the Interconnection shall calculate the total amount of net hourly PJM Interchange for each Market Buyer, including Generating Market Buyers, in accordance with the PJM Manuals. For Internal Market Buyers that are Load Serving Entities or purchasing on behalf of Load Serving Entities, this calculation shall include determination of the net energy flows from: (i) tie lines; (ii) any generation resource the output of which is controlled by the Market Buyer but delivered to it over another entity's Transmission Facilities; (iii) any generation resource the output of which is controlled by another entity but which is directly interconnected with the Market Buyer's transmission system; (iv) deliveries pursuant to bilateral energy sales; (v) receipts pursuant to bilateral energy purchases; and (vi) the Market Buyer's allocated share of energy purchased from another Control Area in connection with a Minimum Generation Second Revised: September 24, 1998 Effective: January 1, 1999 33 Emergency in such other Control Area as specified in Section 3.2.6(c). For Electric Distributors that report hourly net energy flows from metered tie lines, this calculation also shall include 500 kV transmission losses and Inadvertent Interchange allocated to the Electric Distributor and shall exclude the energy delivered to load of other Network Customers and Transmission Customers. For External Market Buyers and Internal Market Buyers that are not Load Serving Entities or purchasing on behalf of Load Serving Entities, this calculation shall determine the energy delivered pursuant to the Market Buyer's purchase requests. (e) The Office of the Interconnection shall calculate Locational Marginal Prices for each load and generation bus in the PJM Control Area, in accordance with Section 2 of this Schedule. (f) An Internal Market Buyer shall be charged for Spot Market Energy purchases to the extent of its hourly net PJM Interchange Imports, determined as specified above. An External Market Buyer shall be charged for its Spot Market Energy purchases based on the energy delivered to it, determined as specified above. The Office of the Interconnection shall calculate an hourly weighted average Locational Marginal Price for each such Market Buyer, based on the Locational Marginal Price at each load bus and the Market Buyer's load at that bus. The total charge shall be the Market Buyer's total net PJM Interchange Imports times the weighted average Locational Marginal Price. (g) A Generating Market Buyer shall be credited as a Market Seller for sales of Spot Market Energy to the extent of its hourly net PJM Interchange Exports, determined as specified above. The total credit shall be the sum of the credits determined by the product of (i) the hourly net amount of energy of PJM Interchange Exports at the applicable generation bus from each of the Generating Market Buyer's generation resources determined to be making such deliveries, times (ii) the hourly Locational Marginal Price at that generation bus. The generation resources determined to be making deliveries into PJM Interchange of such Generating Market Buyer shall be those that have the highest Locational Marginal Prices of the Market Seller's generation resources. 3.2.2 Regulation. (a) Each Internal Market Buyer that is a Load Serving Entity shall have an hourly Regulation objective equal to its pro rata share of the PJM Control Area Regulation requirements for the hour, based on the Market Buyer's total load in the PJM Control Area for the hour. (b) A Generating Market Buyer supplying Regulation at the direction of the Office of the Interconnection in excess of its hourly Regulation obligation shall be credited for each increment of such Regulation at the price in that hour for the Regulation Class from which Third Revised: November 19, 1998 Effective: December 1, 1998 34 the Regulation was supplied, as determined by the Office of the Interconnection in accordance with procedures specified in the PJM Manuals. An Internal Market Buyer that does not meet its hourly Regulation obligation shall be charged for Regulation dispatched by the Office of the Interconnection to meet such obligation at the average price paid by the Office of the Interconnection for Regulation. 3.2.3 Operating Reserves. (a) A Market Seller's pool-scheduled resources capable of providing operating reserves shall be credited as specified below based on the prices offered for the operation of such resource, provided that the resource was available for the entire time specified in the Offer Data for such resource. (b) At the end of each Operating Day, the following determination shall be made for each synchronized pool-scheduled resource of each Market Seller: the total offered price for start-up and no-load fees and Spot Market Energy, determined on the basis of the resource's actual output or available and requested time and type of operation, shall be compared to the total value of that resource's Spot Market Energy. If the total offered price exceeds the total value, the difference shall be credited to the Market Seller. Market Sellers shall also be credited on the basis of their offered prices for synchronized condensing for any hydropower or combustion turbine units operated as synchronous condensers at the request of Office of the Interconnection but producing no energy. (c) A Market Seller's pool scheduled resource the output of which is reduced or suspended at the request of the Office of the Interconnection for the purpose of maintaining reliability within the PJM Control Area, shall be credited in an amount equal to (PAG - AG) x LT x (ULMP - UB) where: PAG equals the actual generation of the unit for the five minute period preceding the request; AG equals the actual generation of the unit until PJM cancels the request to reduce output; LT equals the length of time that the request to reduce output was effective; ULMP equals the LMP at the unit's bus; UB equals the unit bid for that unit whose output is reduced or suspended; and where ULMP - UB shall not be negative. (d) The sum of the foregoing credits, plus any cancellation fees paid in accordance with Section 1.10.2(d), less any payments received from another Control Area for Operating Reserves, shall be the cost of Operating Reserves for the PJM Control Area for each Operating Day. Fifth Revised: September 3, 1999 Effective: September 4, 1999 35 (e) The cost of Operating Reserves for each Operating Day shall be allocated and charged to each Market Participant in proportion to the sum of its (i) deliveries of energy to load in the PJM Control Area in megawatt-hours during that Operating Day; and (ii) deliveries of energy sales from within the PJM Control Area to load outside the PJM Control Area in megawatt-hours during that Operating Day, but not including its bilateral transactions that are dynamically scheduled to load outside the PJM Control Area pursuant to Section 1.12. 3.2.4 Transmission Congestion. Each Market Buyer shall be charged or credited for Transmission Congestion Charges as specified in Section 5 of this Schedule. 3.2.5 Transmission Losses. (a) Whenever the Office of the Interconnection has in place appropriate computer hardware, software, and other necessary resources to account for marginal losses in the dispatch of energy and the calculation of Locational Marginal Prices, loss accounting shall be determined on that basis, and the provisions of this Section shall be revised accordingly. Until such time, the following accounting provisions for losses shall apply. (b) Each Internal Market Buyer that is a Load Serving Entity or purchasing on behalf of a Load Serving Entity shall be credited in an amount equal to its pro rata share of the hourly total amounts collected from Transmission Customers either as charges for transmission losses in the PJM Control Area as specified in Section 3.4.2 or for transmission losses supplied in kind in accordance with Section 3.4.2(c) based on the Locational Marginal Second Revised: September 3, 1999 Effective: September 4, 1999 35a Price at the interface where such losses were delivered. This credit shall be determined by the ratio of the Internal Market Buyer's total hourly load, divided by the total hourly load in the PJM Control Area. (c) PJM Control Area 500 kV losses shall be allocated to each Electric Distributor that reports hourly net energy flows from metered tie lines in proportion to its hourly load in the PJM Control Area. 3.2.6 Emergency Energy. (a) Internal Market Buyers shall be allocated a proportionate share of the net cost of Emergency energy purchased by the Office of the Interconnection. Such allocated share shall be determined in proportion to the amount of net PJM Interchange Imports by each Internal Market Buyer during the hour of each such energy purchase. (b) Net revenues in excess of Locational Marginal Prices attributable to sales of energy in connection with Emergencies to other Control Areas shall be credited to Internal Market Buyers in proportion to the amount of net PJM Interchange Imports by each Internal Market Buyer during each hour of such energy sales. (c) The costs, revenues, and energy associated with hourly energy purchased from another Control Area in connection with a Minimum Generation Emergency in such other Control Area, shall be allocated to each Internal Market Buyer in proportion to its load in the PJM Control Area during the hour of such purchases. 3.2.7 Billing. (a) The Office of the Interconnection shall prepare a billing statement each billing cycle for each Market Buyer in accordance with the charges and credits specified in Sections 3.2.1 through 3.2.6 of this Schedule, and showing the net amount to be paid or received by the Market Buyer. Billing statements shall provide sufficient detail, as specified in the PJM Manuals, to allow verification of the billing amounts and completion of the Market Buyer's internal accounting. (b) If deliveries to a Market Buyer that has PJM Interchange meters in accordance with Section 14 of the Operating Agreement include amounts delivered for a Market Participant that does not have PJM Interchange meters separate from those of the metered Market Buyer, the Office of the Interconnection shall prepare a separate billing statement for the unmetered Market Participant based on the allocation of deliveries agreed upon between the Market Buyer and the unmetered Market Participant specified by them to the Office of the Interconnection. 3.3 Market Sellers. Except as provided in the following sentence, the accounting and billing principles and procedures applicable to Generating Market Buyers functioning as Market Sellers shall be as set forth in Section 3.2. This Section sets forth the accounting and billing principles and procedures applicable to all other Market Sellers, and to Generating Market Buyers functioning as Market Sellers with respect to any matters not specified in Section 3.2. Second Revised: September 24, 1998 Effective: January 1, 1999 36 3.3.1 Spot Market Energy. (a) At the end of each hour during an Operating Day, the Office of the Interconnection shall determine the total net amount of hourly energy delivered to the PJM Control Area by each pool-scheduled or pool-dispatched resource of each Market Seller, in accordance with the PJM Manuals and the calculation described in Section 3.2.1(d). (b) The Office of the Interconnection shall calculate Locational Marginal Prices for each generation and load bus in the PJM Control Area, including the bus at each point of interconnection between the PJM Control Area and each adjacent Control Area, in accordance with Section 2 of this Schedule. (c) A Market Seller shall be credited for sales of Spot Market Energy to the extent of its hourly net deliveries of energy to the PJM Control Area from the Market Seller's pool-scheduled or pool-dispatched resources. For pool-scheduled resources that are External Resources, the Office of the Interconnection shall model, based on an appropriate flow analysis, the hourly amounts delivered from each such resource to the corresponding interface point between the PJM Control Area and adjacent Control Areas. The total credit for each Market Seller shall be the sum of its credits determined by the product of (i) the hourly net amount of energy delivered to the PJM Control Area at the applicable generation or interface bus from each of the Market Seller's pool- scheduled or pool-dispatched resources, times (ii) the hourly Locational Marginal Price at that bus. 3.3.2 Regulation. Each Market Seller that is also an Internal Market Buyer shall have an hourly Regulation objective as specified in Section 3.2.2(a), and shall be credited or charged in connection therewith as specified in Section 3.2.2(b). All other Market Sellers supplying Regulation at the direction of the Office of the Interconnection shall be credited for each increment of such Regulation at the price in that hour for the Regulation Class from which the Regulation was supplied, as determined by the Office of the Interconnection in accordance with procedures specified in the PJM Manuals. 3.3.3 Operating Reserves. A Market Seller shall be credited for its pool-scheduled resources based on the prices offered for the operation of such resource, provided that the resource was available for the entire time specified in the Offer Data for such resource, in accordance with the procedures set forth in Section 3.2.3(b). 3.3.4 Emergency Energy. The costs and net revenues associated with hourly energy sales to other Control Areas in connection with a Minimum Generation Emergency in the PJM Control Area shall be allocated to Market Sellers in proportion to their sales to the PJM Interchange Energy Market from generation resources within the metered boundaries of the PJM Control Area in each hour in which such energy was sold to other Control Areas. Revised: November 19, 1998 Effective: November 1, 1998 37 3.3.5 Billing. The Office of the Interconnection shall prepare a billing statement each billing cycle for each Market Seller in accordance with the charges and credits specified in Sections 3.3.1 through 3.3.4 of this Schedule, and showing the net amount to be paid or received by the Market Seller. Billing statements shall provide sufficient detail, as specified in the PJM Manuals, to allow verification of the billing amounts and completion of the Market Seller's internal accounting. 3.4 Transmission Customers. 3.4.1 Transmission Congestion. Each Transmission Customer shall be charged and credited for Transmission Congestion Charges as specified in Section 5 of this Schedule. 3.4.2 Transmission Losses (a) Whenever the Office of the Interconnection has in place appropriate computer hardware, software, and other necessary resources to account for marginal losses in the dispatch of energy and the calculation of Locational Marginal Prices, loss accounting shall be determined on that basis, and the provisions of this Section shall be revised accordingly. Until such time, the following accounting provisions for losses shall apply. (b) Transmission Customers shall be charged for transmission losses in an amount equal to the product of (i) the Transmission Customer's megawatt- hours of deliveries using Point-to-Point Transmission Service, times (ii) the appropriate loss factor for deliveries using Point-to-Point Transmission Service, times (iii) the weighted average Locational Marginal Price for all load busses in the PJM Control Area. The foregoing average hourly loss factor shall be: (i) determined by the Office of the Interconnection from time to time as conditions affecting losses shall warrant; and (ii) calculated separately for on-peak and off-peak hours on the basis of the average ratio of losses to load served in each such period. (c) A Transmission Customer may elect to pay for losses in kind, rounded off to the nearest whole megawatt, rather than as specified above if its total deliveries in an hour using Point-to-Point Transmission Service are greater than 200 megawatts. If it so elects, the Transmission Customer's specified source for the energy to be delivered using Point-to-Point Transmission Service may be scheduled to supply to the PJM Control Area boundary an amount of energy equal to the delivery schedule plus the amount of losses determined by applying the appropriate hourly loss factor as specified above to the delivered amount. 3.4.3 Billing. The Office of the Interconnection shall prepare a billing statement each billing cycle for each Transmission Customer in accordance with the charges and credits specified in Sections 3.4.1 through 3.4.2 of this Schedule, and showing the net amount to be paid or received by the Transmission Customer. Billing statements shall provide sufficient detail, as specified in the PJM Manuals, to allow verification of the billing amounts and completion of the Transmission Customer's internal accounting. Revised: June 26, 1998 Effective: September 1, 1998 38 3.5 Other Control Areas. 3.5.1 Energy Sales. To the extent appropriate in accordance with Good Utility Practice, the Office of the Interconnection may sell energy to an interconnected Control Area as necessary to alleviate or end an Emergency in that Control Area. Such sales shall be made (i) only to Control Areas that have undertaken a commitment pursuant to a written agreement with the LLC to sell energy on a comparable basis to the PJM Control Area, and (ii) only to the extent consistent with the maintenance of reliability in the PJM Control Area. The Office of the Interconnection may decline to make such sales to a Control Area that the Office of the Interconnection determines does not have in place and implement Emergency procedures that are comparable to those followed in the PJM Control Area. If the Office of the Interconnection sells energy to an interconnected Control Area as necessary to alleviate or end an Emergency in that Control Area, such energy shall be sold at 150% of the Locational Marginal Price at the bus or busses at the border of the PJM Control Area at which such energy is delivered. 3.5.2 Operating Margin Sales. The extent appropriate in accordance with Good Utility Practice, the Office of the Interconnection may sell Operating Margin to an interconnected Control Area as requested to alleviate an operating contingency resulting from the affect of the purchasing Control Area's operations on the dispatch of resources in the PJM Control Area. Such sales shall be made only to Control Areas that have undertaken a commitment pursuant to a written agreement with the Office of the Interconnection (i) to purchase Operating Margin whenever the purchasing Control Area's operations will affect the dispatch of resources in the PJM Control Area, and (ii) to sell Operating Margin on a comparable basis to the LLC. 3.5.3 Transmission Congestion. Each Control Area purchasing Operating Margin shall be assessed Transmission Congestion Charges as specified in Section 5.1.5 of this Schedule. 3.5.4 Billing. The Office of the Interconnection shall prepare a billing statement each billing cycle for each Control Area to which Emergency energy or Operating Margin was sold, and showing the net amount to be paid by such Control Area. Billing statements shall provide sufficient detail, as specified in the PJM Manuals, to allow verification of the billing amounts. 3.6 Metering Reconciliation. 3.6.1 Meter Correction Billing. Metering errors and corrections will be reconciled at the end of each month by a meter correction charge or credit. The monthly meter correction charge or credit shall be determined by the product of the positive or negative deviation in energy amounts, times the weighted average Locational Marginal Price for all load busses in the PJM Control Area. Revised: March 17, 1998 Effective: April 1, 1998 39 3.6.2 Meter Corrections Between Market Participants. If a Market Participant or the Office of the Interconnection discovers a meter error affecting an interchange of energy with another Market Participant and makes the error known to such other Market Participant prior to the completion by the Office of the Interconnection of the accounting for the interchange, and if both Market Participants are willing to adjust hourly load records to compensate for the error and such adjustment does not affect other parties, an adjustment in load records may be made by the Market Participants in order to correct for the meter error, provided corrected information is furnished to the Office of the Interconnection in accordance with the Office of the Interconnection's accounting deadlines. No such adjustment may be made if the accounting for the Operating Day in which the interchange occurred has been completed by the Office of the Interconnection. 3.6.3 500 kV Meter Errors. Billing cycle accounting for 500 kV transmission losses shall be adjusted to account for errors in meters on 500 kV Transmission Facilities. 3.6.4 Meter Corrections Between Control Areas. An error between accounted for and metered interchange between a Party in the PJM Control Area and an entity in another Control Area shall be corrected by adjusting the hourly meter readings. If this is not practical, the error shall be accounted for by a correction at the end of the billing cycle. The Market Participant with ties to such other Control Area experiencing the error shall account for the full amount of the discrepancy and an appropriate debit or credit shall be applied equally among all Market Buyers. The Office of the Interconnection will adjust the actual interchange between the PJM Control Area and the other Control Area to maintain a proper record of inadvertent energy flow. Meter corrections on the 500 kV system between the PJM Control Area and other Control Areas shall be accounted for through the internal 500 kV system meter error allocation at the end of the billing cycle. 3.6.5 Meter Correction Data. Meter error data shall be submitted to the Office of the Interconnection not later than noon on the second working day of the Office of the Interconnection after the end of the billing cycle applicable to the meter correction. 3.6.6 Correction Limits. A Market Participant may not assert a claim for an adjustment in billing as a result of a meter error for any error discovered more than two years after the date on which the metering occurred. Any claim for an adjustment in billing as a result of a meter error shall be limited to bills for transactions occurring in the most recent annual accounting period of the billing Market Participant in which the meter error occurred, and the prior annual accounting period. 40 4. RATE TABLE 4.1 Offered Price Rates. Spot Market Energy, Regulation, Operating Reserve, and Transmission Congestion are based on offers to the Office of the Interconnection specified in this Agreement. 4.2 Transmission Losses. Average loss factors shall be as specified in the PJM Tariff. 4.3 Emergency Energy Purchases. The pricing for Emergency energy purchases will be determined by the Office of the Interconnection and: (a) an adjacent Control Area, in accordance with an agreement between the Office of the Interconnection and such adjacent Control Area, or (b) a Member, in accordance with arrangements made by the Office of Interconnection to purchase energy offered by such Member from resources that are not Capacity Resources. Revised: January 30, 1998 Effective: April 1, 1998 41 5. CALCULATION OF TRANSMISSION CONGESTION CHARGES AND CREDITS 5.1 Transmission Congestion Charge Calculation 5.1.1 Calculation by Office of the Interconnection. When the transmission system is operating under constrained conditions, the Office of the Interconnection shall calculate Transmission Congestion Charges for each Network Service User, the PJM Interchange Energy Market, and each Transmission Customer. 5.1.2 General. The basis for the Transmission Congestion Charges shall be the Locational Marginal Prices determined in accordance with Section 2 of this Schedule. 5.1.3 Network Service User Calculation. Each Network Service User shall be charged for the increased cost of energy incurred by it during each constrained hour to deliver the output of its firm Capacity Resources or other owned or contracted for resources, its firm bilateral purchases, and its non-firm bilateral purchases as to which it has elected to pay Transmission Congestion Charges. The Transmission Congestion Charge for deliveries from each such source shall be the Network Service User's hourly net bill less its hourly net PJM Interchange payments or sales as determined in accordance with Section 3.2.1 or Sections 3.3 and 3.3.1 of this Schedule. 5.1.4 Transmission Customer Calculation. Each Transmission Customer using Firm Point-to-Point Transmission Service (as defined in the PJM Tariff), and each Transmission Customer using Non-Firm Point-to-Point Transmission Service (as defined in the PJM Tariff) that has elected to pay Transmission Congestion Charges, shall be charged for the increased cost of energy during constrained hours for the delivery of energy using Point-to-Point Transmission Service. The Transmission Congestion Charge for each such delivery shall be the delivery amount multiplied by the difference between the Locational Marginal Price at the delivery interface and the Locational Marginal Price at the source interface, or for Market Sellers using point-to-point transmission service for deliveries out of the PJM Control Area from generating resources within the PJM Control Area shall be the amount of its net bill less its net hourly PJM Interchange payments or sales as determined in accordance with Section 3.3 of this Schedule. 5.1.5 Operating Margin Customer Calculation. Each Control Area purchasing Operating Margin shall be assessed Transmission Congestion Charges for any the increase in the cost of energy resulting from the provision of Operating Margin. The Transmission Congestion Charge shall be the amount of Operating Margin purchased in an hour multiplied by the difference in the Locational Marginal Price at what would be the delivery interface and the Locational Marginal Price at what would be the source interface, if the operating contingency that was the basis for the purchase of Operating Margin had occurred in that hour. Operating Margin may be allocated among multiple source and delivery interfaces in accordance with an applicable load flow study. 42 5.1.6 Transmission Loading Relief Customer Calculation (a) Each Transmission Loading Relief Customer shall be assessed Transmission Congestion Charges for any increase in the cost of energy in the PJM Control Area resulting from its energy schedules over contract paths outside the PJM Control Area during Transmission Loading Relief. (b) The Transmission Congestion Charge shall be the total amount of energy specified in such energy schedules multiplied by the difference between a Locational Marginal Price calculated by the Office of the Interconnection for the energy schedule source location specified in the NERC Interchange Distribution Calculator and a Locational Marginal Price calculated by the Office of the Interconnection for the energy schedule sink location specified in the NERC Interchange Distribution Calculator. Transmission Congestion Charges that are less than zero shall be set equal to zero for Transmission Loading Relief Customers. (c) The Office of the Interconnection will determine the Locational Marginal Prices at the energy schedule source and sink locations external to PJM with reference to and based solely on the prices of energy in the PJM Control Area and at the interface buses between the PJM Control Area and adjacent Control Areas and the system conditions and actual power flow distributions as described by the PJM State Estimator program. The Office of the Interconnection will determine the Locational Marginal Prices at the external energy schedule source and sink locations and the resulting Congestion Charge based on the portion of the energy schedule that flows through the PJM Control Area as reflected by the flow distributions from the PJM State Estimator program. 5.1.7 Total Transmission Congestion Charges. The total Transmission Congestion Charges collected by the Office of the Interconnection each hour will be the sum of the amounts determined as specified in this Schedule. The Office of the Interconnection shall collect Transmission Congestion Charges for each hour the transmission system operates under constrained conditions. 5.2 Transmission Congestion Credit Calculation. 5.2.1 Eligibility. Each holder of a Fixed Transmission Right shall receive as a Transmission Congestion Credit a proportional share of the total Transmission Congestion Charges collected for each constrained hour. 5.2.2 Fixed Transmission Rights. (a) Transmission Congestion Credits will be calculated based upon the Fixed Transmission Rights held at the time of the constrained hour. Initial assignments of Fixed Transmission Rights shall be made to each Network Service User and Transmission Customer as specified below. 43 (b) On a periodic schedule established by the Office of the Interconnection, each Network Service User shall designate a subset of its Network Resources for which Fixed Transmission Rights will be assigned. Fixed Transmission Rights shall be assigned for each Network Resource in a number of megawatts equal to or less than the installed capacity summer megawatt rating of each designated Network Resource, determined at the PJM Control Area transmission bus at which the designated Network Resource is connected. Each Fixed Transmission Right shall be to the aggregate load busses of the Network Service User in a Zone or, with respect to Non-Zone Network Load, to the border of the PJM Control Area. The sum of each Network Service User's assigned Fixed Transmission Rights for a Zone must be equal to or less than the Network Service User's peak load for that Zone as determined under Section 34.1 of the Tariff. The sum of each Network Service User's Fixed Transmission Rights for Non-Zone Network Load must be equal to or less than the Network Service User's transmission responsibility for Non-Zone Network Load as determined under Section 34.1 of the Tariff. (c) Each Transmission Customer receiving firm Point-to-Point Transmission Service shall be assigned Fixed Transmission Rights; provided, however, that a Transmission Customer may notify the Office of Interconnection that it does not wish to receive any FTRs or wishes to receive FTRs only for certain Point or Points of Receipt and Point or Points of Delivery, in which event no FTRs or such reduced amount of FTRs shall be issued to the Transmission Customer. The Fixed Transmission Right for each instance of Point-to-Point Transmission Service shall be a number of megawatts equal to the megawatts of firm service being provided between the receipt and delivery points as to which the Transmission Customer has firm Point-to-Point Transmission Service. (d) A Fixed Transmission Right, or the right to Transmission Congestion Credits attributable to a Fixed Transmission Right, may be sold or otherwise transferred by agreement, subject to compliance with such procedures as may be established by the Office of the Interconnection for verification of the rights of the purchaser or transferee. 43a 5.2.4 Target Allocation for Network Service Users. A target allocation of Transmission Congestion Credits for each Network Service User shall be determined for each of its Fixed Transmission Rights. Each Fixed Transmission Right shall be multiplied by the percent of the Network Service User's annual peak load assigned to each load bus multiplied by the difference calculated as the Network Service User's load bus Locational Marginal Price minus the generation bus Locational Marginal Price of the Network Resource associated with the Fixed Transmission Right. The total target allocation for each Fixed Transmission Right is the sum of the target allocations for each load bus. The total target allocation for each Network Service User for each hour is the sum of the total target allocations for each of the Network Service User's Fixed Transmission Rights. 5.2.4 Target Allocation for other Holders. A target allocation of Transmission Congestion Credits for each Transmission Customer or entity holding an FTR acquired by other means shall be determined for each Fixed Transmission Right. Each Fixed Transmission Right shall be multiplied by the hourly Locational Marginal Price differences for the receipt and delivery points associated with the Fixed Transmission Right, calculated as the Locational Marginal Price at the delivery point(s) minus the Locational Marginal Price at the receipt point(s). The total target allocation for the Transmission Customer for each hour shall be the sum of the target allocations associated with all of the Transmission Customer's Fixed Transmission Rights. 5.2.5 Calculation of Transmission Congestion Credits (a) The total of all the target allocations determined as specified above shall be compared to the total Transmission Congestion Charges in each hour. If the total of the target allocations is less than the total of the Transmission Congestion Charges, the Transmission Congestion Credit for each Network Service User and Transmission Customer shall be equal to its target allocation. All remaining Transmission Congestion Charges shall be distributed as described below in Section 5.2.6 "Distribution of Excess Congestion Charges." (b) If the total of the target allocations is greater than the total Transmission Congestion Charges for the hour, each holder of Fixed Transmission Rights shall receive a share of the total Transmission Congestion Charges in proportion to its target allocations. 5.2.6 Distribution of Excess Congestion Charges (a) Excess Transmission Congestion Charges accumulated in a month shall be distributed to each holder of Fixed Transmission Rights in proportion to, but not more than, any deficiency in the share of Transmission Congestion Charges received by the holder during that month as compared to its total target allocations for the month. (b) Any excess Transmission Congestion Charges remaining at the end of a month shall be distributed to Network Service Users and Transmission Customers purchasing Firm Point-to-Point Transmission Service in proportion to their Demand Charges for Network Service and their charges for Reserved Capacity for Firm Point-to-Point Transmission Service. 44 5.3 Unscheduled Transmission Service (Loop Flow) (a) When there are agreements between the Members (or the Office of the Interconnection on behalf of the Members) and others for compensation to be paid or received for unscheduled transmission service (loop flow) into or out of the PJM Control Area, the net compensation received shall be included in the total Transmission Congestion Charges that are distributed in accordance with Section 5.2. (b) With respect to payments by the Office of the Interconnection to the New York Power Pool for the installation and operation of phase angle regulating facilities at Ramapo to control or limit unscheduled transmission service (loop flow), each Transmission Owner with revenue requirements under the PJM Tariff shall pay a share of the charges on a transmission revenue requirements ratio share basis. 44a 6. "MUST-RUN" FOR RELIABILITY GENERATION 6.1 Introduction. The following procedures shall apply to any generation resource subject to the dispatch of the Office of the Interconnection that (a) is a generation resource for which construction commenced before July 9, 1996, and (b) as a result of transmission constraints, the Office of the Interconnection determines, in the exercise of Good Utility Practice, must be run in order to maintain the reliability of service in the PJM Control Area. The provisions of this Schedule shall otherwise apply to the scheduling, dispatch, operation and accounting treatment of such resources, to the extent not inconsistent with the provisions of this Section 6. 6.2 Identification of Facility Outages. Not later than one hour prior to the deadline specified in Section 1.10.1 of this Schedule, the Office of the Interconnection shall identify on the PJM Open Access Same-Time Information System any facility outage or other system condition which it has determined may give rise to a transmission constraint that may require, in order to maintain system reliability, the dispatch of one or more generation resources that otherwise would not be dispatched based on the merits of their offers to the PJM Interchange Energy Market. 6.3 Dispatch for Local Reliability. 6.3.1 Request and Dispatch. In addition to the dispatch of generation by the Office of the Interconnection to maintain reliability on transmission facilities directly monitored by it, a Member that owns or leases with rights equivalent to ownership Transmission Facilities as defined in this Agreement or the Transmission Owners Agreement and that operates a local control center in accordance with Section 11.3.3 of this Agreement or a Market Operations Center in accordance with Section 1.7.5 of this Schedule, may request the Office of the Interconnection to dispatch generation in order to maintain reliability on any such Transmission Facilities that are not then directly monitored by the Office of the Interconnection, subject to the rules and procedures in Section 6.3.2. The Office of the Interconnection shall dispatch generation to maintain reliability on such Transmission Facilities by incorporating the facilities in the State Estimator program described in Section 2.3 as set forth below, unless the Office of the Interconnection determines that such dispatch would adversely affect reliability in the PJM Control Area or would otherwise not be in accordance with Good Utility Practice. 45 6.3.2 Designation of Facilities. The following rules and procedures shall apply to a Member request that the Office of the Interconnection dispatch generation on one or more Transmission Facilities that are not then directly monitored by the Office of the Interconnection. a) The Transmission Facilities that are the subject of the request must be among the facilities that comprise the Transmission System under the PJM Tariff; b) The Member shall provide modeling information for such Transmission Facilities and provide sufficient telemetry to the Office of the Interconnection such that power flows are observable by the State Estimator program described in Section 2.3; provided, however, that if an unreliable constrained condition exists and time does not permit such modeling and telemetry, the Member and the Office of the Interconnection may agree to use a representative surrogate for such Transmission Facilities in order to allocate the costs of the dispatch of generation using Locational Marginal Prices to maintain reliability on such Transmission Facilities, provided further that the Member shall expeditiously provide the modeling data and install the necessary facilities to incorporate the Transmission Facilities into the State Estimator program; c) The request shall constitute a request that such Transmission Facilities become and remain monitored by the Office of the Interconnection and subject to its dispatch control for a period of not less than ninety (90) days; d) The Member shall comply with all other operating procedures established by the Office of the Interconnection regarding dispatch for local reliability as set forth in the PJM Manuals. 6.4 Price Caps. 6.4.1 Applicability. (a) Except as specified below, if in the day-ahead schedule determined by the Office of the Interconnection in accordance with Sections 1.10.8(a) and (b) of this Schedule any generation resource may be dispatched out of economic merit order to maintain system reliability as a result of limits on transmission capability, the prices for energy offered by such resource shall be capped at the levels specified below. If the Office of the Interconnection is able to do so, such prices shall be capped only during each hour when the transmission limit affects the schedule of the affected resource, and otherwise shall be capped for the entire Operating Day. The energy prices as capped shall be used to determine any Locational Marginal Price affected by the price of such resource. 45a (b) The energy bid price offered by any generation resource requested to be dispatched in accordance with Section 6.3 of this Schedule shall be capped at the levels specified below. If the Office of the Interconnection is able to do so, such prices shall be capped only during each hour when the affected resource is so scheduled, and otherwise shall be capped for the entire Operating Day. The energy prices as capped shall be used to determine any Locational Marginal Price affected by the price of such resource. (c) Generation resources subject to a price cap shall be paid for energy at the applicable Locational Marginal Price. (d) Price caps shall not be applicable to generation resources used to relieve the Western, Central and Eastern reactive limits in the PJM Control Area. In addition, price caps shall not be applicable to generation resources used to relieve any other transmission limit as to which the FERC has authorized the use of market based rates. 6.4.2 Level. The price cap shall be one of the amounts specified below, as specified in advance by the market Seller for the affected unit: (i) The weighted average Locational Marginal Price at the generation bus at which energy from the capped resource was delivered during a specified number of hours during which the resource was dispatched for energy in economic merit order, the specified number of hours to be determined by the Office of the Interconnection and to be a number of hours sufficient to result in a price cap that reflects reasonably contemporaneous competitive market conditions for that unit; (ii) The incremental operating cost of the generation resource as determined in accordance with Schedule 2 of this Agreement and the PJM Manuals, plus 10% of such costs; or (iii) An amount determined by agreement between the Office of the Interconnection and the Market Seller. 45b 7. FIXED TRANSMISSION RIGHTS AUCTIONS 7.1 Auctions of Fixed Transmission Rights. Periodic auctions to allow Market Participants to acquire or sell Fixed Transmission Rights shall be conducted by the Office of the Interconnection in accordance with the provisions of this Section. 7.1.1 Auction Period and Scope of Auctions. The period covered by an auction shall be the one-month period next following the date that the auction is conducted. The Office of the Interconnection shall offer for sale in the auction any remaining Fixed Transmission Rights capability for the month after taking into account all of the Fixed Transmission Rights already outstanding at the time of the auction. In addition, any holder of a Fixed Transmission Right for the period covered by an auction may offer such Fixed Transmission Right for sale in such auction. Each monthly auction will consist of a separate auction for on-peak Fixed Transmission Rights and a separate auction for off-peak Fixed Transmission Rights. Market Participants may bid for and acquire any number of Fixed Transmission Rights, provided that all Fixed Transmission Rights awarded are simultaneously feasible with each other and with all Fixed Transmission Rights outstanding at the time of the auction and not sold into the auction. 7.1.2 Frequency and Time of Auctions. Fixed Transmission Rights auctions shall be held monthly. The bid and offer period shall open at 12:00 midnight (Eastern Prevailing Time) on the fifteenth (15th) business day preceding the month for which Fixed Transmission Rights are being auctioned and shall close at 12:00 midnight (Eastern Prevailing Time) on the tenth (10th) business day preceding the month for which Fixed Transmission Rights are being auctioned. 7.1.3. Duration of Fixed Transmission Rights. Each Fixed Transmission Right acquired in a Fixed Transmission Rights auction shall entitle the holder to credits of Transmission Congestion Charges for the one-month period for which the Fixed Transmission Rights were auctioned. 46 7.2 Fixed Transmission Rights Characteristics. 7.2.1 Reconfiguration of Fixed Transmission Rights. Through an appropriate linear programming model, the Office of the Interconnection shall reconfigure the Fixed Transmission Rights offered or otherwise available for sale in any auction to maximize the value to the bidders of the Fixed Transmission Rights sold, provided that any Fixed Transmission Rights acquired at auction shall be simultaneously feasible in combination with those Fixed Transmission Rights outstanding at the time of the auction and not sold in the auction. The linear programming model shall, while respecting transmission constraints and the maximum MW quantities of the bids and offers, select the set of simultaneously feasible Fixed Transmission Rights with the highest net total auction value as determined by the bids of buyers and taking into account the reservation prices of the sellers. 7.2.2 Specified Buses. Auction bids for Fixed Transmission Rights may specify any combination of receipt and delivery buses represented in the State Estimator model for which the Office of the Interconnection calculates and posts Locational Marginal Prices. Auction bids may specify receipt and delivery points from locations outside of the PJM Control Area to locations inside the PJM Control Area, from locations within the PJM Control Area to locations outside of the PJM Control Area, or to and from locations within the PJM Control Area. 7.2.3 Transmission Congestion Charges. Fixed Transmission Rights, whether acquired at auction or otherwise, shall entitle holders thereof to credits only for Transmission Congestion Charges, and shall not confer a right to credits for payments arising from or relating to transmission congestion made to any entity other than the Office of the Interconnection. 7.3 Auction Procedures. 7.3.1 Role of the Office of the Interconnection. Fixed Transmission Rights auctions shall be conducted by the Office of the Interconnection in accordance with standards and procedures set forth in the PJM Manuals, such standards and procedures to be consistent with the requirements of this Schedule. 47 7.3.2 Notice of Offer. A holder of a Fixed Transmission Right wishing to offer the Fixed Transmission Right for sale shall notify the Office of the Interconnection of any Fixed Transmission Rights to be offered. Each Fixed Transmission Right sold in an auction shall, at the end of the period for which the Fixed Transmission Rights were auctioned, revert to the offering holder or the entity to which the offering holder has transferred such Fixed Transmission Right, subject to the term of the Fixed Transmission Right itself and to the right of such holder or transferee to offer the Fixed Transmission Right in the next or any subsequent auction during the term of the Fixed Transmission Right. 7.3.3 Pending Applications for Firm Service. (a) Prior to the start of each auction bidding period, the Office of the Interconnection shall exert reasonable effort to complete its review of pending applications for Network Transmission Service and Firm Point-to-Point Transmission Service and to ascertain the corresponding Fixed Transmission Rights to be assigned to the entities receiving such service, subject to compliance with all applicable deadlines and other procedures by the applicant. Fixed Transmission Rights so assigned shall be included in the simultaneous feasibility test performed by the Office of the Interconnection for the auction. (b) Fixed Transmission Rights may be assigned to entities requesting Network Transmission Service or Firm Point-to-Point Transmission Service only if such Fixed Transmission Rights are simultaneously feasible with all outstanding Fixed Transmission Rights, including Fixed Transmission Rights effective for the then-current auction period. If an assignment of Fixed Transmission Rights pursuant to a pending application for Network Transmission Service or Firm Point-to-Point Transmission Service cannot be completed prior to an auction, Fixed Transmission Rights attributable to such transmission service shall not be assigned for the then-current auction period. If a Fixed Transmission Right cannot be assigned for this reason, the applicant may withdraw its application, or request that the Fixed Transmission Right be assigned effective with the start of the next auction period. 7.3.4 On-Peak and Off-Peak Periods. The Office of the Interconnection will conduct separate auctions simultaneously for on-peak and off-peak periods. On-Peak Fixed Transmission Rights shall cover the periods from 7:00 a.m. up to the hour ending at 11:00 p.m. on Mondays through Fridays, except holidays as defined in the PJM Manuals. Off-Peak Fixed Transmission Rights shall cover the periods from 11:00 p.m. up to the hour ending 7:00 a.m. on Mondays through Fridays and all hours on Saturdays, Sundays, and holidays as defined in the PJM Manuals. Each bid shall specify whether it is for an on-peak or off-peak period. 48 7.3.5 Offers and Bids. (a) Offers to sell and bids to purchase Fixed Transmission Rights shall be submitted during the period set forth in Section 7.1.2, and shall be in the form specified by the Office of the Interconnection in accordance with the requirements set forth below. (b) Offers to sell shall identify the specific Fixed Transmission Right, by megawatt quantity and receipt and delivery points, offered for sale. An offer to sell a specified megawatt quantity of Fixed Transmission Rights shall constitute an offer to sell a quantity of Fixed Transmission Rights equal to or less than the specified quantity. An offer to sell may not specify a minimum quantity being offered. Each offer may specify a reservation price, below which the offeror does not wish to sell the Fixed Transmission Right. Offers submitted by entities holding rights to Fixed Transmission Rights acquired other than by assignment in connection with reservations of Network Transmission Service or Firm Point-to-Point Transmission Service shall be subject to such reasonable standards for the verification of the rights of the offeror as may be established by the Office of the Interconnection. Offers shall be subject to such reasonable standards for the creditworthiness of the offeror or for the posting of security for performance as the Office of the Interconnection shall establish. (c) Bids to purchase shall specify the megawatt quantity, price per megawatt, and receipt and delivery points of the Fixed Transmission Right that the bidder wishes to purchase. A bid to purchase a specified megawatt quantity of Fixed Transmission Rights shall constitute a bid to purchase a quantity of Fixed Transmission Rights equal to or less than the specified quantity. A bid to purchase may not specify a minimum quantity that the bidder wishes to purchase. A bid may specify as receipt or delivery points any bus for which the Office of the Interconnection calculates and posts Locational Marginal Prices in accordance with Section 2 of this Schedule and may include Fixed Transmission Rights for which the associated Transmission Congestion Credits may have negative values. Bids shall be subject to such reasonable standards for the creditworthiness of the bidder or for the posting of security for performance as the Office of the Interconnection shall establish. (d) Bids and offers shall be specified to the nearest tenth of a megawatt and shall be greater than zero. 49 7.3.6 Determination of Winning Bids and Clearing Price. (a) At the close of the bidding period each month, the Office of the Interconnection will create a base Fixed Transmission Rights power flow model that includes all outstanding Fixed Transmission Rights that have been approved and confirmed for any portion of the month for which the auction was conducted and that were not offered for sale in the auction. The base Fixed Transmission Rights model also will include estimated uncompensated parallel flows into each interface point of the PJM Control Area and estimated scheduled transmission outages. (b) In accordance with the requirements of Section 7.4 of this Schedule and subject to all applicable transmission constraints and reliability requirements, the Office of the Interconnection shall determine the simultaneous feasibility of all outstanding Fixed Transmission Rights not offered for sale in the auction and of all Fixed Transmission Rights that could be awarded in the auction for which bids were submitted. The winning bids shall be determined from an appropriate linear programming model that, while respecting transmission constraints and the maximum MW quantities of the bids and offers, selects the set of simultaneously feasible Fixed Transmission Rights with the highest net total auction value as determined by the bids of buyers and taking into account the reservation prices of the sellers. In the event that there are two or more identical bids for the selected Fixed Transmission Rights and there are insufficient Fixed Transmission Rights to accommodate all of the identical bids, then each such bidder will receive a pro rata share of the Fixed Transmission Rights that can be awarded. (c) Fixed Transmission Rights shall be sold at the market-clearing price for Fixed Transmission Rights between specified pairs of receipt and delivery points, as determined by the bid value of the marginal Fixed Transmission Right that could not be awarded because it would not be simultaneously feasible. The linear programming model shall determine the clearing prices of all Fixed Transmission Rights paths based on the bid value of the marginal Fixed Transmission Rights, which are those Fixed Transmission Rights with the highest bid values that could not be awarded fully because they were not simultaneously feasible, and based on the flow sensitivities of each Fixed Transmission Rights path relative to the marginal Fixed Transmission Rights paths flow sensitivities on the binding transmission constraints. 7.3.7 Announcement of Winners and Prices. Within two (2) business days after the close of an auction, the Office of the Interconnection shall post the winning bidders, the megawatt quantity, and the receipt and delivery points for each Fixed Transmission Right awarded in the auction and the price at which each Fixed Transmission Right was awarded. Results of the on-peak auction and off-peak auction will be posted separately. The Office of the Interconnection shall not disclose the price specified in any bid to purchase or the reservation price specified in any offer to sell. 50 7.3.8 Auction Settlements. All buyers and sellers of Fixed Transmission Rights between the same points of receipt and delivery shall pay or be paid the market-clearing price, as determined in the auction, for such Fixed Transmission Rights. 7.3.9 Allocation of Auction Revenues. All auction revenues, net of payments to entities selling Fixed Transmission Rights into the auction, shall be allocated among the Regional Transmission Owners in proportion to their respective transmission revenue requirements. 7.4 Simultaneous Feasibility. The Office of the Interconnection shall make the simultaneous feasibility determinations specified herein using appropriate powerflow models of contingency-constrained dispatch. Such determinations shall take into account outages of both individual generation units and transmission facilities and shall be based on reasonable assumptions about the configuration and availability of transmission capability during the period covered by the auction that are not inconsistent with the determination of the deliverability of Capacity Resources under the Reliability Assurance Agreement. The goal of the simultaneous feasibility determination shall be to ensure that there are sufficient revenues from Transmission Congestion Charges to satisfy all Fixed Transmission Rights obligations for the auction period under expected conditions. 51 SCHEDULE 2 ---------- Revision No. 2 COMPONENTS OF COST ------------------ Issued: June 2, 1997 Effective: January 1, 1998 (a) Each Market Participant obligated to sell operating capacity on the PJM Interchange Energy Market at cost-based rates shall include the following components or their equivalent in the determination of costs for operating capacity supplied to or from the Interconnection: (1) Boilers ------- Firing-up cost; No-load cost during period of operation; Peak-prepared-for maintenance cost; Incremental labor cost; and Other incremental operating costs. (2) Machines -------- Starting cost from cold to synchronized operation; No-load cost during period of operation; Incremental labor cost; and Other incremental operating costs. (b) Each Member obligated to sell energy on the PJM Interchange Energy Market at cost-based rates shall include the following components or their equivalent in the determination of costs for energy supplied to the Interconnection: Incremental fuel cost; Incremental maintenance cost; Incremental labor cost; and Other incremental operating costs. (c) All fuel costs shall employ the marginal fuel price experienced by the Member. (d) The PJM Board, upon consideration of the advice and recommendations of the Members Committee, shall from time to time define in detail the method of determining the costs entering into the said components, and the Members shall adhere to such definitions in the preparation of incremental costs used on the Interconnection. 1 SCHEDULE 2 -- EXHIBIT A ---------- --------- EXPLANATION OF THE TREATMENT OF THE COSTS OF -------------------------------------------- EMISSION ALLOWANCES ------------------- Issued: June 2, 1997 Effective: January 1, 1998 The cost of emission allowances is included in "Other Incremental Operating Costs" pursuant to Schedule 2. The replacement cost of emission allowances will be used to recover the cost of emission allowances consumed as a result of producing energy for the Interconnection. Index - ----- Consistent with definitions promulgated by the PJM Board upon consideration of the advice and recommendations of the Members Committee under Schedule 2, each Member subject to Schedule 2 will determine and provide to the Interconnection its replacement cost of emission allowances, such cost to be an amount not exceeding the market price index published by Cantor-Fitzgerald Environmental Brokerage Services ("EBS"), or a PJM Board approved index in the event that EBS should cease publication of such index. As with all other components of cost required for accounting under this Agreement, each Member subject to Schedule 2 will use the same replacement cost of emissions allowances, so determined, as it uses for coordinating operation of its generating facilities hereunder. For each Member subject to Schedule 2, the cost of emissions allowances is included in the cost of energy supplied to or received from the Interconnection. Payment - ------- The Members subject to Schedule 2 waive the right of payment-in-kind for emission allowances for transactions wholly between the parties. Cash payments for emission allowances consumed in providing energy for the Interconnection shall be incorporated into and conducted pursuant to the billing procedures for energy prescribed by this Agreement. Calculation of Emission Allowance Amount and Cost - ------------------------------------------------- Pursuant to the letter from the PJM Interconnection to FERC dated June 26, 1995, the calculation of an annual average for the cost of emission allowances, described below, is required due to the profile of the PJM physical system and PJM Energy Management software system. Approximately five hundred and forty generating units comprise the PJM system, of which 9 units are Phase I units. Current real-time operational software and hardware tools used in the transaction of energy do not identify individual units, and therefore do not identify Phase I units. (The pool has contracted with a vendor to supply a new Energy Management System to be installed over the next several years.) It is currently not possible for system operators to provide actual individual unit emission allowance costs in real time transaction quotations. An average emission allowance cost based on a standard production cost study case will be used to calculate the average cost of emission allowances for each pool megawatt produced. This cost for the current year is less than 0.2 dollars per megawatt-hour. In summary, for the above-mentioned reasons, it is not practical nor cost effective to provide actual individual emission allowance costs in real-time transaction quotations. Therefore, 1 the annual average method is proposed. The Emission Allowances (Tons of SO\\2\\) associated with a transaction will be calculated by multiplying the magnitude of a transaction (MWhr) by an Emissions per MWHr Factor (Tons of SO\\2\\ per MWhr): Emission Transaction Emissions Allowances = Magnitude x per MWhr Used Factor (Tons of S0\\2\\) (MWhr) (Tons of S0\\2\\ per MWhr) The Emissions per MWHr Factor will be calculated by dividing the forecast annual emissions from all Phase I units (Tons of S0\\2\\) by the Forecast Annual Total PJM Energy Production (MWhr): Emissions per MWhr = Forecast Annual Phase I Unit Emissions (Tons of S0\\2\\) ------------------------------------------------------- Factor Forecast Annual Total PJM Energy Production (MWhr) (Tons of S0\\2\\ per MWhr) Likewise, the cost (Dollars) of the Emission Allowances for a transaction will be calculated by multiplying the transaction magnitude (MWhr) by a Charge per MWhr Factor (Dollars per MWHr). Cost of Emission Transaction Charge Allowances Used = Magnitude x per MWhr Factor (Dollars) (MWhr) (Dollars per MWhr) The Charge per MWhr Factor will be calculated by multiplying, for each Member subject to Schedule 2, its Forecast Annual Emissions (Tons of S0\\2\\) by its respective Emissions Allowance Replacement Cost (Dollars per Ton of S0\\2\\) to yield each the forecasted annual cost of emissions (Dollars). Then, the total of forecasted annual cost of emissions for each Member subject to Schedule 2 is divided by the Forecast Annual Total PJM Energy Production (MWhr) to determine the Charge per MWHr Factor (Dollars per MWHr). Charge per MWhr Factor = the sum of(A x B) , where: ------- C A = Member's Forecasted Annual Emissions, (Tons of S0\\2\\) B = Emission Allowance Replacement Cost, (Dollars per Ton of SO\\2\\, per company) C = Forecast Annual PJM Energy Production, (MWhr) 2 SCHEDULE 3 ---------- Revision No. 6 ALLOCATION OF THE COST AND EXPENSES ----------------------------------- OF THE OFFICE OF THE INTERCONNECTION ------------------------------------ Issued: June 2, 1997 Effective: January 1, 1998 (a) Each group of Affiliates, each group of Related Parties, and each Member that is not in such a group shall pay an annual membership fee, the proceeds of which shall be used to defray the costs and expenses of the LLC, including the Office of the Interconnection. The amount of the annual fee as of the Effective Date shall be $5,000. The amount of the annual membership fee shall be adjusted from time to time by the PJM Board to keep pace with inflation. (b) All remaining costs of the operation of the LLC and the Office of the Interconnection and the expenses, including, without limitation, the costs of any insurance and any claims not covered by insurance, associated therewith as provided in this Agreement shall be costs of Scheduling, System Control and Dispatching Service under the PJM Tariff and shall be recovered pursuant to the PJM Tariff. (c) An entity accepted for membership in the LLC shall pay all costs and expenses associated with additions and modifications to its own metering, communication, computer, and other appropriate facilities and procedures needed to effect the inclusion of the entity in the operation of the Interconnection. 1 SCHEDULE 4 ---------- Revision No. 1 STANDARD FORM OF AGREEMENT TO BECOME A MEMBER OF THE LLC -------------------------------------------------------- Issued: June 2, 1997 Effective: January 1, 1998 Any entity which wishes to become a Member of the LLC shall, pursuant to Section 11.6 of this Agreement, tender to the President an application, upon the acceptance of which it shall execute a supplement to this Agreement in the following form: Additional Member Agreement --------------------------- 1. This Additional Member Agreement (the "Supplemental Agreement"), dated as of __________________, is entered into among _____________ and the President of the LLC acting on behalf of its Members. 2. _____________ has demonstrated that it meets all of the qualifications required of a Member to the Operating Agreement. If expansion of the PJM Control Area is required to integrate ____________________'s facilities, a copy of Attachment J from the PJM Tariff marked to show changes in Control Area boundaries is attached hereto. ____________________ agrees to pay for all required metering, telemetering and hardware and software appropriate for it to become a member. 3. ______________________ agrees to be bound by and accepts all the terms of the Operating Agreement as of the above date. 4. _________________________ hereby gives notice that the name and address of its initial representative to the Members Committee under the Operating Agreement shall be: __________________________________________________________________ 5. The President of the LLC is authorized under the Operating Agreement to execute this Supplemental Agreement on behalf of the Members and to file it with regulatory authorities having jurisdiction. 6. The Operating Agreement is hereby amended to include ___________ as a Member of the LLC thereto, effective as of ___________________, _____. IN WITNESS WHEREOF, _______________________ and the Members of the LLC have caused this Supplemental Agreement to be executed by their duly authorized representatives. 1 Members of the LLC By: Name: Title: President By: Name: Title: 2 SCHEDULE 5 ----------- Revision No. 1 PJM DISPUTE RESOLUTION PROCEDURES --------------------------------- Issued: June 2, 1997 Effective: January 1, 1998 1. DEFINITIONS 1.1 Alternate Dispute Resolution Committee. "Alternate Dispute Resolution Committee" shall mean the Committee established pursuant to Section 5 of this Schedule. 1.2 MAAC Dispute Resolution Committee. "MAAC Dispute Resolution Committee" shall mean the committee established by the Mid-Atlantic Area Council to administer its industry-specific mechanism for resolving certain types of wholesale electricity disputes. 1.3 Related PJM Agreements. "Related PJM Agreements" shall mean this Agreement, the Transmission Owners Agreement, and the Reliability Assurance Agreement. 2. PURPOSES AND OBJECTIVES 2.1 Common and Uniform Procedures. The PJM Dispute Resolution Procedures are intended to establish common and uniform procedures for resolving disputes arising under the Related PJM Agreements. To the extent any of the foregoing agreements or the PJM Tariff contain dispute resolution provisions expressly applicable to disputes arising thereunder, however, this Agreement shall not supplant such provisions, which shall apply according to their terms. 2.2 Interpretation. To the extent permitted by applicable law, the PJM Dispute Resolution Procedures are to be interpreted to effectuate the objectives set forth in Section 2.1. To the extent permitted by these PJM Dispute Resolution Procedures, the Alternate Dispute Resolution Committee shall coordinate with the MAAC Dispute Resolution Committee, where appropriate, in order to conserve administrative resources and to avoid duplication of dispute resolution staffing. NEGOTIATION AND MEDIATION 3.1 When Required. The parties to a dispute shall undertake good-faith negotiations to resolve any dispute as to a matter governed by one of the Related PJM Agreements. Each party to a dispute shall designate an executive with authority to resolve the matter in dispute to participate in such negotiations. Any dispute as to a matter governed by one of the Related PJM Agreements that has not been resolved through good-faith negotiation shall be subject to non-binding mediation prior to the initiation of arbitral, regulatory, judicial, or other dispute resolution proceedings as may be appropriate as provided by these PJM Dispute Resolution Procedures. 3.2 Procedures. 3.2.1 Initiation. If a dispute that is subject to the mediation procedures specified herein has not been resolved through good-faith negotiation, a party to the dispute shall notify the Alternate Dispute Resolution Committee in writing of the existence and nature of the dispute prior to commencing any other form of proceeding for resolution of the dispute. The Alternate Dispute Resolution Committee shall have ten calendar days from the date it first receives notification of the existence of a dispute from any of the parties to the dispute in which to distribute to the parties a list of mediators. 3.2.2 Selection of Mediator. The Chair of the Alternate Dispute Resolution Committee shall distribute to the parties by facsimile or other electronic means a list containing the names of seven mediators with mediation experience, or with technical or business experience in the electric power industry, or both, as it shall deem appropriate to the dispute. The Chair of the Alternate Dispute Resolution Committee may draw from the lists of mediators maintained by the MAAC Dispute Resolution Committee, as the Chair shall deem appropriate. The persons on the proposed list of mediators shall have no official, financial, or personal conflict of interest with respect to the issues in controversy, unless the interest is fully disclosed in writing to all participants in the mediation process and all such participants waive in writing any objection to the interest. The parties shall alternate in striking names from the list with the last name on the list becoming the mediator. The determination of which party shall have the first strike off the list shall be determined by lot. The parties shall have ten calendar days to complete the mediator selection process, unless the time is extended by mutual agreement. 3.2.3 Advisory Mediator. If the Alternate Dispute Resolution Committee deems it appropriate, it shall distribute two lists, one containing the names of seven mediators with mediation experience, and one containing the names of seven mediators with technical or business experience in the electric power industry. In connection with circulating the foregoing lists, the Alternate Dispute Resolution Committee shall specify one of the lists as containing the proposed mediators, and the other as a list of proposed advisors to assist the mediator in resolving the dispute. The parties shall then utilize the alternative strike procedure set forth above until one name remains on each list, with the last named persons serving as the mediator and advisor. 2 3.2.4 Mediation Process. The disputing parties shall attempt in good faith to resolve their dispute in accordance with procedures and a timetable established by the mediator. In furtherance of the mediation efforts, the mediator may: (a) Require the parties to meet for face-to-face discussions, with or without the mediator; (b) Act as an intermediary between the disputing parties; (c) Require the disputing parties to submit written statements of issues and positions; (d) If requested by the disputing parties at any time in the mediation process, provide a written recommendation on resolution of the dispute including, if requested, the assessment by the mediator of the merits of the principal positions being advanced by each of the disputing parties; and (e) Adopt, when appropriate, the Center for Public Resources Model ADR Procedures for the Meditation of Business Disputes (as revised from time to time) to the extent such Procedures are not inconsistent with any rule, standard, or procedure adopted by the Alternate Dispute Resolution Committee or with any provision of this Agreement. 3.2.5 Mediator's Assessment. (a) If a resolution of the dispute is not reached by the thirtieth day after the appointment of the mediator or such later date as may be agreed to by the parties, if not previously requested to do so the mediator shall promptly provide the disputing parties with a written, confidential, non-binding recommendation on resolution of the dispute, including the assessment by the mediator of the merits of the principal positions being advanced by each of the disputing parties. The recommendation may incorporate or append, if and as the mediator may deem appropriate, any recommendations or any assessment of the positions of the parties by the advisor, if any. Upon request, the mediator shall provide any additional recommendations or assessments the mediator shall deem appropriate. (b) At a time and place specified by the mediator after delivery of the foregoing recommendation, the disputing parties shall meet in a good faith attempt to resolve the dispute in light of the recommendation of the mediator. Each disputing party shall be represented at the meeting by a person with authority to settle the dispute, along with such other persons as each disputing party shall deem appropriate. If the disputing parties are unable to resolve the dispute at or in connection with this meeting, then: (i) any disputing party may commence such arbitral, judicial, regulatory or other proceedings as may be appropriate as provided in the PJM Dispute Resolution Procedures; and (ii) the recommendation of the mediator, and any statements made by any party in the mediation process, shall have no further force or effect, and shall not be admissible for any purpose, in any subsequent arbitral, administrative, judicial, or other proceeding. 3 3.3 Costs. Except as specified in Section 4.13, the costs of the time, expenses, and other charges of the mediator and any advisor, and of the mediation process, shall be borne by the parties to the dispute, with each side in a mediated matter bearing one-half of such costs, and each party bearing its own costs and attorney's fees incurred in connection with the mediation. 4. ARBITRATION 4.1 When Required. Any dispute as to a matter: (i) governed by one of the Related PJM Agreements that has not been resolved through the mediation procedures specified herein, (ii) involving a claim that one or more of the parties owes or is owed a sum of money, and (iii) the amount in controversy is less than $1,000,000.00, shall be subject to binding arbitration in accordance with the procedures specified herein. If the parties so agree, any other disputes as to a matter governed by a Related PJM Agreement may be submitted to binding arbitration in accordance with the procedures specified herein. 4.2 Binding Decision. Except as specified in Section 4.1, the resolution by arbitration of any dispute under this Agreement shall not be binding. 4.3 Initiation. A party or parties to a dispute which is subject to the arbitration procedures specified herein shall send a written demand for arbitration to the Chair of the Alternate Dispute Resolution Committee with a copy to the other party or parties to the dispute. The demand for arbitration shall state each claim for which arbitration is being demanded, the relief being sought, a brief summary of the grounds for such relief and the basis for the claim, and shall identify all other parties to the dispute. 4.4 Selection of Arbitrator(s). The parties to a dispute for which arbitration has been demanded may agree on any person to serve as a single arbitrator, or shall endeavor in good faith to agree on a single arbitrator from a list of arbitrators prepared for the dispute by the Alternate Dispute Resolution Committee and delivered to the parties by facsimile or other electronic means promptly after receipt by the Alternate Dispute Resolution Committee of a demand for arbitration. The Alternate Dispute Resolution Committee may draw from the lists of arbitrators maintained by the MAAC Dispute Resolution Committee, as the Alternate Dispute Resolution Committee deems appropriate. If the parties are unable to agree on a single arbitrator by the fourteenth day following delivery of the foregoing list of arbitrators or such other date as agreed to by the parties, then not later than the end of the seventh business day thereafter the party or parties demanding arbitration on the one hand, and the party or parties responding to the demand for arbitration on the other, shall each designate an arbitrator from a list for the dispute prepared by the Alternate Dispute Resolution Committee. The arbitrators so chosen shall then choose a third arbitrator. 4 4.5 Procedures. The Alternate Dispute Resolution Committee shall compile and make available to the arbitrator(s) and the parties standard procedures for the arbitration of disputes, which procedures (i) shall include provision, upon good cause shown, for intervention or other participation in the proceeding by any party whose interests may be affected by its outcome, (ii) shall conform to the requirements specified in these PJM Dispute Resolution Procedures, and (iii) may be modified or adopted for use in a particular proceeding as the arbitrator(s) deem appropriate. To the extent deemed appropriate by the Alternate Dispute Resolution Committee, the procedures adopted by the Alternate Dispute Resolution Committee shall be based on the American Arbitration Association Rules, to the extent such Rules are not inconsistent with any rule, standard or procedure adopted by the Alternate Dispute Resolution Committee, or with any provision of these PJM Dispute Resolution Procedures. Upon selection of the arbitrator(s), arbitration shall go forward in accordance with applicable procedures. 4.6 Summary Disposition and Interim Measures. 4.6.1 Lack of Good Faith Basis. The procedures for arbitration of a dispute shall provide a means for summary disposition of a demand for arbitration, or a response to a demand for arbitration, that in the reasoned opinion of the arbitrator(s) does not have a good faith basis in either law or fact. If the arbitrator(s) determine(s) that a demand for arbitration or response to a demand for arbitration does not have a good faith basis in either law or fact, the arbitrator(s) shall have discretion to award the costs of the time, expenses, and other charges of the arbitrator(s) to the prevailing party. 4.6.2 Discovery Limits. The procedures for the arbitration of a dispute shall provide a means for summary disposition without discovery of facts if there is no dispute as to any material fact, or with such limited discovery as the arbitrator(s) shall determine is reasonably likely to lead to the prompt resolution of any disputed issue of material fact. 4.6.3 Interim Decision. The procedures for the arbitration of a dispute shall permit any party to a dispute to request the arbitrator(s) to render a written interim decision requiring that any action or decision that is the subject of a dispute not be put into effect, or imposing such other interim measures as the arbitrator(s) deem necessary or appropriate, to preserve the rights and obligations secured by any of the Related PJM Agreements during the pendency of the arbitration proceeding. The parties shall be bound by such written decision pending the outcome of the arbitration proceeding. 5 4.7 Discovery of Facts. 4.7.1 Discovery Procedures. The procedures for the arbitration of a dispute shall include adequate provision for the discovery of relevant facts, including the taking of testimony under oath, production of documents and other things, and inspection of land and tangible items. The nature and extent of such discovery shall be determined as provided herein and shall take into account (i) the complexity of the dispute, (ii) the extent to which facts are disputed, and (iii) the amount in controversy. The forms and methods for taking such discovery shall be as described in the Federal Rules of Civil Procedure, except as modified by the procedures established by the Alternate Dispute Resolution Committee, the arbitrator(s) or agreement of the parties. 4.7.2 Procedures Arbitrator. The sole arbitrator, or the arbitrator selected by the arbitrators chosen by the parties, as the case may be (such arbitrator being hereafter referred to as the "Procedures Arbitrator"), shall be responsible for establishing the timing, amount, and means of discovery, and for resolving discovery and other pre-hearing disagreement. If a dispute involves contested issues of fact, promptly after the selection of the arbitrator(s) the Procedures Arbitrator shall convene a meeting of the parties for the purpose of establishing a schedule and plan of discovery and other pre-hearing actions. 4.8 Evidentiary Hearing. The procedures for the arbitration of a dispute shall provide for an evidentiary hearing, with provision for the cross-examination of witnesses, unless all parties consent to the resolution of the matter on the basis of a written record. The forms and methods for taking evidence shall be as described in the Federal Rules of Evidence, except as modified by the procedures established by the Alternate Dispute Resolution Committee, the arbitrator(s) or agreement of the parties. The arbitrator(s) may require such written or other submissions from the parties as shall be deemed appropriate, including submission of the direct testimony of witnesses in written form. The arbitrator(s) may exclude any evidence that is irrelevant, immaterial, unduly repetitious or prejudicial, or privileged. Any party or parties may arrange for the preparation of a record of the hearing, and shall pay the costs thereof. Such party or parties shall have no obligation to provide or agree to the provision of a copy of the record of the hearing to any party that does not pay an equal share of the cost of the record. At the request of any party, the arbitrator(s) shall determine a fair and equitable allocation of the costs of the preparation of a record between or among the parties to the proceeding willing to share such costs. 6 4.9 Confidentiality. 4.9.1 Designation. Any document or other information obtained in the course of an arbitral proceeding and not otherwise available to the receiving party, including any such information contained in documents or other means of recording information created during the course of the proceeding, may be designated "Confidential" by the producing party. The party producing documents or other information marked "Confidential" shall have twenty days from the production of such material to submit a request to the Procedures Arbitrator to establish such requirements for the protection of such documents or other information designated as "Confidential" as may be reasonable and necessary to protect the confidentiality and commercial value of such information and the rights of the parties, which requirements shall be binding on all parties to the dispute. Prior to the decision of the Procedures Arbitrator on a request for confidential treatment, documents or other information designated as "Confidential" shall not be used by the receiving party or parties, or the arbitrator(s), or anyone working for or on behalf of any of the foregoing, for any purpose other than the arbitration proceeding, and shall not be disclosed in any form to any person not involved in the arbitration proceeding without the prior written consent of the party producing the information or as permitted by the Procedures Arbitrator. 4.9.2 Compulsory Disclosure. Any party receiving a request or demand for disclosure, whether by compulsory process, discovery request, or otherwise, of documents or information obtained in the course of an arbitration proceeding that have been designated "Confidential" and that are subject to a non-disclosure requirement under these PJM Dispute Resolution Procedures or a decision of the Procedures Arbitrator, shall immediately inform the party from which the information was obtained, and shall take all reasonable steps, short of incurring sanctions or other penalties, to afford the person or entity from which the information was obtained an opportunity to protect the information from disclosure. Any party disclosing information in violation of these PJM Dispute Resolution Procedures or requirements established by the Procedures Arbitrator shall thereby waive any right to introduce or otherwise use such information in any judicial, regulatory, or other legal or dispute resolution proceeding, including the proceeding in which the information was obtained. 4.9.3 Public Information. Nothing in the Related PJM Agreements shall preclude the use of documents or information properly obtained outside of an arbitral proceeding, or otherwise public, for any legitimate purpose, notwithstanding that the information was also obtained in the course of the arbitral proceeding. 7 4.10 Timetable. Promptly after the selection of the arbitrator(s), the arbitrator(s) shall set a date for the issuance of the arbitral decision, which shall be not later than eight months (or such earlier date as may be agreed to by the parties to the dispute) from the date of the selection of the arbitrator(s), with other dates, including the dates for an evidentiary hearing or other final submissions of evidence, set in light of this date. The date for the evidentiary hearing or other final submission of evidence shall not be changed absent extraordinary circumstances. The arbitrator(s) shall have the power to impose sanctions, including dismissal of the proceeding for dilatory tactics or undue delay in completing the arbitral proceedings. 4.11 Advisory Interpretations. Except as to matters subject to decision in the arbitration proceeding, the arbitrator(s) may request as may be appropriate from any committee or subcommittee established under a Related PJM Agreement or by the Office of the Interconnection, an interpretation of any Related PJM Agreements, or of any standard, requirement, procedure, tariff, Schedule, principle, plan or other criterion or policy established by any committee or subcommittee. Except to the extent that the Office of the Interconnection is itself a party to a dispute, the arbitrator(s) may request the advice of the Office of the Interconnection with respect to any matter relating to a responsibility of the Office of the Interconnection under the Agreement or with respect to any of the Related PJM Agreements, or to the PJM Manuals. Any such interpretation or advice shall not relieve the arbitrator(s) of responsibility for resolving the dispute or deciding the arbitration proceeding in accordance with the standards specified herein. 4.12 Decisions. The arbitrator(s) shall issue a written decision, including findings of fact and the legal basis for the decision. The arbitral decision shall be based on (i) the evidence in the record, (ii) the terms of the Related PJM Agreements, as applicable, (iii) applicable United States federal and state law, including the Federal Power Act and any applicable FERC regulations and decisions, and international treaties or agreements as applicable, and (iv) relevant decisions in previous arbitration proceedings. The arbitrator(s) shall have no authority to revise or alter any provision of the Related PJM Agreements. Any arbitral decision issued pursuant to these PJM Dispute Resolution Procedures that affects matters subject to the jurisdiction of FERC under Section 205 of the Federal Power Act shall be filed with FERC. 4.13 Costs. Unless the arbitrator(s) shall decide otherwise, the costs of the time, expenses, and other charges of the arbitrator(s) shall be borne by the parties to the dispute, with each side on an arbitrated issue bearing its pro-rata share of such costs, and each party to an arbitral proceeding shall bear its own costs and fees. The arbitrator(s) may award all or a portion of the costs of the time, expenses, and other charges of the arbitrator(s), the costs of arbitration, attorney"s fees, and the costs of mediation, if any, to any party that substantially prevails on an issue determined by the arbitrator(s) to have been raised without a substantial basis. 8 4.14 Enforcement. If the decision of the arbitrator(s) is binding, the judgment may be entered on such arbitral award by any court having jurisdiction thereof; provided, however, that within one year of the issuance of the arbitral decision any party affected thereby may request FERC or any other federal, state, regulatory or judicial authority having jurisdiction to vacate, modify, or take such other action as may be appropriate with respect to any arbitral decision that is based upon an error of law, or is contrary to the statutes, rules, or regulations administered or applied by such authority. Any party making or responding to, or intervening in proceedings resulting from, any such request, shall request the authority to adopt the resolution, if not clearly erroneous, of any issue of fact expressly or necessarily decided in the arbitral proceeding, whether or not the party participated in the arbitral proceeding. 5. ALTERNATE DISPUTE RESOLUTION COMMITTEE 5.1 Membership. 5.1.1 Representatives. The Alternate Dispute Resolution Committee shall be composed of two representatives selected by each of the following: (i) the Office of the Interconnection; (ii) the Members Committee; (iii) the parties to the Reliability Assurance Agreement; and (iv) the parties to the Transmission Owners Agreement. 5.1.2 Term. Representatives on the Alternate Dispute Resolution Committee shall serve for terms of three years and may serve additional terms. 5.2 Voting Requirements. Approval or adoption of measures by the Alternate Dispute Resolution Committee shall require two-thirds of the votes of the representatives present and voting. Two-thirds of the representatives on the Alternate Dispute Resolution Committee shall constitute a quorum for the conduct of business. 5.3 Officers. At the first meeting of the Alternate Dispute Resolution Committee, the representatives to the Alternate Dispute Resolution Committee shall choose a Chair and Vice Chair from among the representatives on the Committee. The Chair of the Alternate Dispute Resolution Committee shall preside at meetings of the Committee, and shall have the power to call meetings of the Committee and to exercise such other powers as are specified in this Agreement or are authorized by the Alternate Dispute Resolution Committee. The Vice Chair shall preside at meetings of the Alternate Dispute Resolution Committee in the absence of the Chair, and shall exercise such other powers as are delegated by the Chair. 9 5.4 Meetings. The Alternate Dispute Resolution Committee shall meet at such times and places as determined by the Committee, or at the call of the Chair. The Chair shall call a meeting of the Alternate Dispute Resolution Committee upon the request of two or more representatives on the Alternate Dispute Resolution Committee. 5.5 Responsibilities. The duties of the Alternate Dispute Resolution Committee include but are not limited to the following: i) Maintain a list of persons qualified by temperament and experience, and with technical or legal expertise in matters likely to be the subject of disputes, to serve as mediators or arbitrators under these PJM Dispute Resolution Procedures; ii) Determine the rates and other costs and charges that shall be paid to mediators, advisors and arbitrators for or in connection with their services; iii) Determine whether mediation is not warranted in a particular dispute; iv) Provide to disputing parties lists of mediators, advisors or arbitrators to resolve particular disputes; v) Compile and make available to parties to disputes, arbitrators, and other interested persons suggested procedures for the arbitration of disputes in accordance with Section 4.5; vi) Maintain and make available to parties to disputes, mediators, advisors, arbitrators, and other interested persons the written decisions required by Section 4.12; vii) Establish such procedures and schedules, in addition to those specified herein, as it shall deem appropriate to further the prompt, efficient, fair and equitable resolution of disputes; and viii) Provide such oversight and supervision of the dispute resolution processes and procedures instituted pursuant to the Related PJM Agreements as may be appropriate to facilitate the prompt, efficient, fair and equitable resolution of disputes. 10 SCHEDULE 6 ---------- Revision No. 1 REGIONAL TRANSMISSION EXPANSION PLANNING PROTOCOL ------------------------------------------------- Issued: June 2, 1997 Effective: January 1, 1998 1. REGIONAL TRANSMISSION EXPANSION PLANNING PROTOCOL Purpose and Objectives This Regional Transmission Expansion Planning Protocol shall govern the process by which the Members shall rely upon the Office of the Interconnection to prepare a plan for the enhancement and expansion of the Transmission Facilities in order to meet the demands for firm transmission service in the PJM Control Area. The Regional Transmission Expansion Plan to be developed shall enable the transmission needs in the PJM Control Area to be met on a reliable, economic and environmentally acceptable basis. 1.2 Conformity with NERC and MAAC Criteria (a) NERC establishes Planning Principles and Guides to promote the reliability and adequacy of the North American bulk power supply as related to the operation and planning of electric systems. (b) MAAC is responsible for ensuring the adequacy, reliability and security of the bulk electric supply systems in the MAAC region through coordinated operations and planning of generation and transmission facilities. Toward that end, it has adopted the NERC Planning Principles and Guides and has established detailed Reliability Principles and Standards for Planning the Bulk Electric Supply System of the MAAC Group. (c) The Regional Transmission Expansion Plan shall conform with the applicable reliability principles, guidelines and standards of NERC and MAAC in accordance with the procedures detailed in the PJM Manuals. 1.3 Establishment of Committees (a) The Regional Transmission Owners shall supply representatives to the Planning Committee to provide the data, information, and analysis support necessary to perform studies as required. As used herein, "Regional Transmission Owner" shall be defined as it is in the PJM Open Access Transmission Tariff ("PJM Tariff"). (b) The Transmission Expansion Advisory Committee established by the Office of the Interconnection will provide input to the development of the Regional Transmission Expansion Plan. The Transmission Expansion Advisory Committee will invite participation by: (i) all Transmission Customers, as that term is defined in the PJM Tariff, and applicants for transmission service; (ii) any other entity proposing to provide Transmission Facilities to be integrated into the PJM Control Area; (iii) all Members; (iv) the agencies and offices of consumer advocates of the States in the PJM Control Area exercising regulatory authority over the rates, terms or conditions of electric service or the planning, siting, construction or operation of electric facilities and (v) any other interested entities or persons. 1.4 Contents of the Regional Transmission Expansion Plan (a) The Office of the Interconnection shall prepare the Regional Transmission Expansion Plan, which shall consolidate the transmission needs of the region into a single plan which is assessed on the basis of maintaining the PJM Control Area"s reliability in an economic and environmentally acceptable manner. (b) The Regional Transmission Expansion Plan shall reflect transmission enhancements and expansions, load and capacity forecasts and generation additions and retirements for the ensuing ten years. (c) The Regional Transmission Expansion Plan shall, as a minimum, include a designation of the Regional Transmission Owner or Owners or other entity that will own a transmission facility and how all reasonably incurred costs are to be recovered. (d) The Regional Transmission Expansion Plan shall (i) avoid unnecessary duplication of facilities; (ii) avoid the imposition of unreasonable costs on any Regional Transmission Owner or any user of Transmission Facilities; (iii) take into account the legal and contractual rights and obligations of the Regional Transmission Owners; (iv) provide, if appropriate, alternative means for meeting transmission needs in the PJM Control Area; and (v) provide for coordination with existing transmission systems and with appropriate interregional and local expansion plans. 1.5 Procedure for Development of the Regional Transmission Expansion Plan 1.5.1 Commencement of the Process (a) The Office of the Interconnection shall initiate the enhancement and expansion study process if (i) required as a result of a need for transfer capability identified by the Office of the Interconnection in its evaluation of requests for firm transmission service with a term of one year or more or as a result of the Office of the Interconnection's on-going evaluation of transmission system adequacy and performance; (ii) identified as a result of the MAAC reliability assessment or more stringent local reliability criteria, if any; (iii) constraints or available transfer capability shortage are identified by the Office of the Interconnection as a result of generation additions or retirements, evaluation of load forecasts or proposals for the addition of Transmission Facilities in the PJM Control Area; or (iv) expansion of the transmission system is proposed by the Regional Transmission Owners or others. (b) The Office of the Interconnection shall notify the Transmission Expansion Advisory Committee of the commencement of an enhancement and expansion study. The Transmission Expansion Advisory Committee shall notify the Office of the Interconnection in writing of any additional transmission considerations to be included. Revised: September 24, 1998 Effective: January 1, 1999 2 1.5.2 Development of Scope, Assumptions and Procedures Once the need for an enhancement and expansion study has been established, the Office of the Interconnection shall consult with the Transmission Expansion Advisory Committee to prepare the study"s scope, assumptions and procedures. 1.5.3 Scope of Studies In general, enhancement and expansion studies shall include: (a) An identification of existing and projected electric system limitations, with accompanying simulations to identify the costs of controlling those limitations. Potential enhancements and expansions will be proposed to mitigate limitations controlled by non-economic means. (b) Evaluation and analysis of potential enhancements and expansions, including alternatives thereto, needed to mitigate such limitations. (c) Engineering studies needed to determine the effectiveness and compliance (with reliability criteria) of recommended enhancements and expansions. 1.5.4 Supply of Data (a) The Regional Transmission Owners shall provide to the Office of the Interconnection on an annual basis a 10-year forecast of summer and winter load and resources expected to be served by, or use, their Transmission Facilities. The forecast shall include to the extent known or reasonably capable of forecast: (i) a description of the total load to be served from each substation; (ii) the amount of any interruptible loads included in the total load (including conditions under which an interruption can be implemented and any limitations on the duration and frequency of interruptions); and (iii) a description of all generation resources to be located in the geographic region encompassed by the Regional Transmission Owner"s transmission facilities, including unit sizes, VAR capability, operating restrictions, and any must-run unit designations required for system reliability or contract reasons. The data required under this section shall be provided in the form and manner specified by the Office of the Interconnection. (b) In addition to the foregoing, the Regional Transmission Owners, those entities requesting transmission service and any other entities proposing to provide Transmission Facilities to be integrated into the PJM Control Area shall supply any other information and data reasonably required by the Office of the Interconnection to perform the enhancement and expansion study. 1.5.5 Coordination of the Regional Transmission Expansion Plan (a) The Regional Transmission Expansion Plan shall be developed in coordination with the transmission systems of the surrounding regional reliability councils and with the local transmission providers. (b) The Regional Transmission Expansion Plan shall be developed by the Office of the Interconnection in consultation with the Transmission Expansion Advisory Committee during the enhancement and expansion study process. Revised: September 24, 1998 Effective: January 1, 1999 3 1.5.6 Development of the Recommended Regional Transmission Expansion Plan (a) Upon completion of its studies and analysis, the Office of the Interconnection shall prepare a recommended enhancement and expansion plan for review by the Transmission Expansion Advisory Committee. The recommended plan shall include recommendations for cost responsibility, except for directly assigned costs, for any enhancement or expansion, based on the planning analysis and other input from participants, including any indications of a willingness to bear cost responsibility for an enhancement or expansion. (b) For the purposes of Section 1.5.6(a), any allocation of costs to all of the Regional Transmission Owners shall be proportional to the load within the Zones. Load shall be measured consistent with the loads utilized to develop the rates included in Attachment H to the PJM Tariff. (c) Any Regional Transmission Owner and other participants on the Revised: September 24, 1998 Effective: January 1, 1999 3a Transmission Expansion Advisory Committee may offer an alternative. (d) If the Office of the Interconnection adopts the alternative, based upon its review of the relative costs and benefits, the ability of the alternative to supply the required level of transmission service, and its impact on the reliability of the Transmission Facilities, the Office of the Interconnection shall make any necessary changes to the recommended plan. (e) If, based upon its review of the relative costs and benefits, the ability of the alternative to supply the required level of transmission service, and the alternative"s impact on the reliability of the Transmission Facilities, the Office of the Interconnection does not adopt such alternative, the Regional Transmission Owner or Owners whose alternative or alternatives have not been accepted or to whom cost responsibility has been assigned and other participants on the Transmission Expansion Advisory Committee may require that its or their alternative(s) be submitted to Alternative Dispute Resolution. 1.6 Approval of the Final Regional Transmission Expansion Plan (a) The PJM Board shall approve the final Regional Transmission Expansion Plan, including any alternatives therein, in accordance with the requirements of this Section 1.6. (b) If the facilities to be provided in the Regional Transmission Expansion Plan are acceptable, but the Regional Transmission Owners and other entities who have indicated a willingness to bear some or all of the cost responsibility cannot unanimously agree on the allocation of the costs of enhancements or expansions, the cost responsibility shall be allocated (a) to those entities who have indicated a willingness to bear some or all of the cost of responsibility, and (b) among the Regional Transmission Owners in accordance with the following guidelines : i) All of the costs of Transmission Facilities (other than transformers) with a nominal operating voltage of 500 kV or higher shall be allocated to all of the Regional Transmission Owners; ii) One-half of the costs of Transmission Facilities (other than transformers) with a nominal operating voltage of 230 kV or 345 kV shall be allocated to all Regional Transmission Owners and one-half of the costs of such facilities shall be allocated to the Regional Transmission Owners in whose Zone, as that term is defined in the PJM Tariff, the enhancement or expansion is to be located; iii) All of the costs of Transmission Facilities (other than transformers) with a nominal operating voltage below 230 kV shall be allocated to the Regional Transmission Owner or Owners in whose Zone the enhancement or expansion is located; iv) One-half of the costs of transformers shall be allocated in accordance with the methodology specified in (a), (b), or (c) above, based upon the voltage at the high side of the transformer and one-half of the costs shall be allocated in accordance with the methodology specified in (a), (b), and (c) above based upon the voltage at the low side of the transformer, unless the low side of the transformer is less than 100 kV, in which case all of the costs of the transformer shall be allocated to the Regional Transmission Owner or 4 Owners in whose Zone the transformer is located. If a Regional Transmission Expansion Plan is not approved, or if the transmission service requested by any entity is not included in an approved Regional Transmission Expansion Plan, nothing herein shall limit in any way the right of any entity to seek relief pursuant to the provisions of Section 211 of the Federal Power Act. (d) Following PJM Board approval, the final Regional Transmission Expansion Plan shall be submitted to MAAC for verification that all enhancements or expansions conform to all MAAC Reliability Principles and Standards. 1.7 Obligation to Build (a) Subject to the requirements of applicable law, government regulations and approvals, including, without limitation, requirements to obtain any necessary state or local siting, construction and operating permits, to the availability of required financing, to the ability to acquire necessary right- of-way, and to the right to recover, pursuant to appropriate financial arrangements and tariffs or contracts, all reasonably incurred costs, plus a reasonable return on investment, Regional Transmission Owners designated as the appropriate entities to construct and own or finance enhancements or expansions specified in the Regional Transmission Expansion Plan shall construct and own or finance such facilities or enter into appropriate contracts to fulfill such obligations. (b) Nothing herein shall prohibit any Regional Transmission Owner from seeking to recover the cost of enhancements or expansions on an incremental cost basis or from seeking approval of such rate treatment from any regulatory agency with jurisdiction over such rates. 1.8 Relationship to the PJM Control Area Open Access Transmission PJM Tariff Nothing herein shall modify the rights and obligations of an Eligible Customer or a Transmission Customer, as those terms are defined in the PJM Tariff, with respect to required studies and completion of necessary enhancements or expansions. An Eligible Customer or Transmission Customer electing to follow the procedures in the PJM Tariff instead of the procedures provided herein, shall also be responsible for the related costs. The enhancement and expansion study process under this Protocol shall be funded as a part of the operating budget of the Office of the Interconnection. Revised: March 31, 1999 Effective: April 1, 1999 5 SCHEDULE 7 ---------- Revision No. 1 UNDERFREQUENCY RELAY OBLIGATIONS AND CHARGES -------------------------------------------- Issued: June 2, 1997 Effective: January 1, 1998 1. UNDERFREQUENCY RELAY OBLIGATION 1.1 Application. The obligations of this Schedule apply to each Member that is an Electric Distributor, whether or not that Member participates in the Electric Distributor sector on the Members Committee or meets the eligibility requirements for any other sector of the Members Committee. 1.2 Obligations. Each Electric Distributor shall install or contractually arrange for underfrequency relays to interrupt at least 30 percent of its peak load with 10 percent of the load interrupted at each of three frequency levels: 59.3 Hz, 58.9 Hz and 58.5 Hz. Upon the request of the Reliability Committee, each Electric Distributor shall document that it has complied with the requirement for underfrequency load shedding relays. 2. UNDERFREQUENCY RELAY CHARGES If an Electric Distributor is determined to not have the required underfrequency relays, it shall pay an underfrequency relay charge of: Charge = D x R x 365 where D = the amount, in megawatts, the Electric Distributor is deficient; and R = the daily rate per megawatt, which shall be based on the annual carrying charges for a new combustion turbine generator, installed and connected to the transmission system, which daily deficiency rate as of the Effective Date shall be $58.400/per kilowatt-year or $160 per megawatt-day. 1 3. DISTRIBUTION OF UNDERFREQUENCY RELAY CHARGES 3.1 Share of Charges. Each Electric Distributor that has complied with the requirements for underfrequency relays imposed by this Agreement during a Planning Period, without incurring an underfrequency relay charge, shall share in any underfrequency relay charges paid by any other Electric Distributor that has failed to satisfy said obligation during such Planning Period. Such shares shall be in proportion to the number of megawatts of a Electric Distributor"s load in the most recently completed month at the time of the peak for the PJM Control Area during that month rounded to the next higher whole megawatt, as established initially on the Effective Date and as updated at the beginning of each month thereafter. 3.2 Allocation by the Office of the Interconnection. In the event all of the Electric Distributors have incurred underfrequency relay charges during a Planning Period, the underfrequency relay charges shall be distributed among the Electric Distributors on an equitable basis as determined by the Office of the Interconnection. 2 SCHEDULE 8 ---------- Revision No. 1 DELEGATION OF RELIABILITY RESPONSIBILITIES ------------------------------------------ Issued: June 2, 1997 Effective: January 1, 1998 1. DELEGATION The following responsibilities shall be delegated to the Office of the Interconnection by the parties to the Reliability Assurance Agreement. 2. NEW PARTIES With regard to the addition, withdrawal or removal of a party to the Reliability Assurance Agreement, the Office of the Interconnection shall: (a) Receive and evaluate the information submitted by entities that plan to serve loads within the PJM Control Area, including entities whose participation in the Agreement will expand the boundaries of the PJM Control Area, such evaluation to be conducted in accordance with the requirements of the Reliability Assurance Agreement; and (b) Evaluate the effects of the withdrawal or removal of a party from the Reliability Assurance Agreement. 3. IMPLEMENTATION OF RELIABILITY ASSURANCE AGREEMENT. With regard to the implementation of the provisions of the Reliability Assurance Agreement, the Office of the Interconnection shall: (a) Receive all required data and forecasts from the parties to the Reliability Assurance Agreement and other owners of Capacity Resources; (b) Perform all calculations and analyses necessary to determine the Forecast Pool Requirement and the capacity obligations imposed under the Reliability Assurance Agreement, including periodic reviews of the capacity benefit margin for consistency with the Reliability Principles and Standards, as the foregoing terms are defined in the Reliability Assurance Agreement; (c) Monitor the compliance of each party to the Reliability Assurance Agreement with its obligations under the Reliability Assurance Agreement; (d) Keep cost records, and bill and collect any costs or charges due from the parties to the Reliability Assurance Agreement and distribute those charges in accordance with the terms of the Reliability Assurance Agreement; (e) Assist with the development of rules and procedures for determining and Revised: November 19, 1998 Effective: September 1, 1998 1 demonstrating the capability of Capacity Resources; (f) Establish the capability and deliverability of Capacity Resources consistent with the requirements of the Reliability Assurance Agreement; (g) Collect and maintain generator availability data; (h) Perform any other forecasts, studies or analyses required to administer the Reliability Assurance Agreement; (i) Coordinate maintenance schedules for generation resources operated as part of the PJM Control Area; (j) Determine and declare that an Emergency exists or has ceased to exist in all or any part of the PJM Control Area or announce that an Emergency exists or ceases to exist in a Control Area interconnected with the PJM Control Area; (k) Enter into agreements for (i) the transfer of energy in Emergencies in the PJM Control Area or in a Control Area interconnected with the PJM Control Area and (ii) mutual support in such Emergencies with other Control Areas interconnected with the PJM Control Area; and (l) Coordinate the curtailment or shedding of load, or other measures appropriate to alleviate an Emergency, to preserve reliability in accordance with FERC, NERC or MAAC principles, guidelines, standards and requirements and the PJM Manuals, and to ensure the operation of the PJM Control Area in accordance with Good Utility Practice. Revised: November 19, 1998 Effective: September 1, 1998 2 SCHEDULE 9 ---------- Revision No. 1 EMERGENCY PROCEDURE CHARGES --------------------------- Issued: June 2, 1997 Effective: January 1, 1998 EMERGENCY PROCEDURE CHARGE Following an Emergency, the compliance of each Member with the instructions of the Office of the Interconnection shall be evaluated by the Office of the Interconnection. If, based on such evaluation, it is determined that a Member failed to comply with the instructions of the Office of the Interconnection to implement voltage reductions or to drop load, that Member shall demonstrate that it employed its best efforts to comply with such instructions. In the event a Member failed to employ its best efforts to comply with the instructions of the Office of the Interconnection, that Member shall pay an emergency procedure charge as follows: (a) For each megawatt of voltage reduction that was not implemented as directed, the Member shall pay 365 times the daily deficiency rate per megawatt based on the annual carrying charges for a new combustion turbine generator, installed and connected to the transmission system, which daily deficiency rate as of the Effective Date shall be $58.400/per kilowatt-year or $160 per megawatt-day; and (b) For each megawatt of load that was not dropped as directed, the Member shall pay 730 times the daily deficiency rate per megawatt based on the annual carrying charges for a new combustion turbine generator, installed and connected to the transmission system, which daily deficiency rate as of the Effective Date shall be $58.400/per kilowatt-year or $160 per megawatt-day. 2. DISTRIBUTION OF EMERGENCY PROCEDURE CHARGES 2.1 Complying Parties. Each Member that has complied with the emergency procedures imposed by this Agreement during an Emergency, without incurring an emergency procedure charge, shall share in any emergency procedure charges paid by any other Member that has failed to satisfy said obligation during such Emergency in an equitable manner to be determined by the PJM Board. 2.2 All Parties. In the event all of the Members have incurred emergency procedure charges with respect to an Emergency, the emergency procedure charges related to that Emergency shall be distributed in an equitable manner as directed by the PJM Board. Effective through March 31, 1998 only. Issued: January 30, 1998 Effective: January 1, 1998 SCHEDULE 10 ACCOUNTING FOR UNSCHEDULED TRANSMISSION SERVICE COMPENSATION ------------------------------------------------------------ (a) Allocation among the Members of compensation paid or received for Unscheduled Transmission Service, as defined in agreements between the Members and others, and the billing within the Interconnection in connection therewith, shall be made in accordance with this schedule. (b) When the Members provide Unscheduled Transmission Service to others, the compensation received, either in dollars or in transmission service availability, shall be allocated initially among the Members in proportion to their Forecast Obligations determined under Schedule 5 to the Reliability Assurance Agreement, dated June 2, 1997, as amended and in effect at the same time the Unscheduled Transmission Service was provided. Each Member shall receive from the billing agent its share of the payment in dollars as so allocated. (c) When the Members receive Unscheduled Transmission Service from others, each Member shall pay to the billing agent its share of the charges by said others or alternatively each Member shall make available its share of transmission service availability due said others as determined in accordance with the agreement between the Members and said others, such shares being initially in proportion to each Member"s respective Forecast Obligations determined under Schedule 5 to the Reliability Assurance Agreement, dated June 2, 1997, as amended and in effect at the time the Unscheduled Transmission Service was received. (d) When the Members enter into a facility agreement with NYPP for the installation and operation of phase angle regulating facilities at Ramapo to control or limit Unscheduled Transmission Service, each Member shall pay to the billing agent its share of the charges in proportion to their Forecast Obligations determined under Schedule 5 to the Reliability Assurance Agreement, dated June 2, 1997, as amended and in effect at the time when such charges were incurred. (e) The foregoing allocation of an accounting for compensation shall be reviewed from time to time and shall be revised upon approval by the PJM Board upon consideration of the advice and recommendations of the Members Committee. Effective through March 31, 1998 only. SCHEDULE 11 ----------- PJM CAPACITY CREDIT MARKETS --------------------------- Issued: October 14, 1998 Effective: October 15, 1998 1. PURPOSES AND OBJECTIVES 1.1 PJM Capacity Credit Markets. This Schedule sets forth the procedures applicable to the operation of the PJM Capacity Credit Markets. The PJM Capacity Credit Markets will allow Market Participants to buy and sell Capacity Credits at market clearing prices that are established by the PJM Capacity Credit Markets and made public by the Office of the Interconnection. The PJM Capacity Credit Markets shall be administered by the Office of Interconnection in accordance with the principles and procedures specified in this Schedule. 1.2 Voluntary Use of PJM Capacity Credit Market. Except as provided in Section 7.4, participation in any PJM Capacity Credit Market is voluntary. 1.3 Use of Capacity Credits. An entity may use Capacity Credits to meet all or part of its capacity obligations imposed under the Reliability Assurance Agreement. Such Capacity Credits may be used by themselves, or along with any other options for meeting capacity obligations imposed under the Reliability Assurance Agreement. 2. DEFINITIONS Unless the context otherwise specifies or requires, capitalized terms used in this Schedule shall have the respective meanings assigned herein or in the Agreement for all purposes of this Schedule (such definitions to be equally applicable to both the singular and the plural forms of the terms defined). 2.1 [Reserved.] 2.2 Buy Bid. "Buy Bid" shall mean a bid to buy Capacity Credits in a PJM Capacity Credit Market. Revised: November 19, 1998 Effective: October 15, 1998 2.3 Capacity Credit. "Capacity Credit" shall, subject to the transition provision specified below, mean an entitlement to a specified number of megawatts of Unforced Capacity from a Capacity Resource for the purpose of satisfying capacity obligations imposed under the Reliability Assurance Agreement, such entitlement not to include any entitlement to the output of the Capacity Resource. 2.4 Capacity Credit Market Implementation Date. "Capacity Credit Market Implementation Date" shall mean the date specified in Section 7.1 of this Schedule. 2.5 Capacity Resources. "Capacity Resources" shall have the meaning specified in the Reliability Assurance Agreement. 2.6 Fixed Block. "Fixed Block" shall mean a Sell Offer or Buy Bid for not more or less than a specified quantity of Capacity Credits. 2.7 Holiday. "Holiday" shall mean a federal or state holiday designated by the Office of the Interconnection for recognition in the conduct of PJM Daily Capacity Credit Markets. 2.8 PJM Capacity Credit Market. "PJM Capacity Credit Market" shall mean the PJM Daily Capacity Credit Market and the PJM Monthly Capacity Credit Market. 2.9 PJM Daily Capacity Credit Market. "PJM Daily Capacity Credit Market" shall mean a competitive market, administered by the Office of the Interconnection in accordance with the provisions of this Schedule, for the purchase and sale of Capacity Credits for the business day following the day on which the market is conducted and for each of any intervening weekend days or Holidays if the market is conducted on a Friday or the day before a Holiday. 2.10 PJM Monthly Capacity Credit Market. "PJM Monthly Capacity Credit Market" shall mean a competitive market, administered by the Office of the Interconnection in accordance with the provisions of this Schedule, for the purchase and sale of Capacity Credits for each or any of the twelve months following the month during which the market is conducted. 2.11 Sell Offer. "Sell Offer" shall mean an offer to sell Capacity Credits in a PJM Capacity Credit Market. Revised: November 19, 1998 Effective: October 15, 1998 2 2.12 Unforced Capacity. "Unforced Capacity" shall have the meaning specified in the Reliability Assurance Agreement. 2.13 Up-To Block. "Up-To Block" shall mean a Sell Offer or Buy Bid for a quantity of Capacity Credits equal to or less than a specified quantity. 3. PARTICIPATION IN THE PJM CAPACITY CREDIT MARKET 3.1 Eligibility. A Member shall become eligible to participate in any of the PJM Capacity Credit Markets by becoming a Market Buyer or a Market Seller, or both as may be appropriate, in accordance with the provisions of Schedule 1 of the Agreement. In order to participate in any of the PJM Capacity Credit Markets, a Market Buyer also either must be (a) an entity that is or will become a Load Serving Entity in the PJM Control Area and a party to the Reliability Assurance Agreement, or (b) have a contractual obligation to sell capacity (including sales for resale) which will be used in the PJM Control Area. A Market Seller may participate in any PJM Capacity Credit Market only to the extent that it has Capacity Credits available to sell in excess of its capacity obligation imposed under the Reliability Assurance Agreement and other contractual obligations to sell capacity (including sales for resale), as determined in accordance with Section 6.1.3. 3.2 Effect of Withdrawal. Withdrawal from the Agreement shall not relieve a Market Participant of any obligation to furnish or pay for Capacity Credits incurred in connection with participation in a PJM Capacity Credit Market prior to such withdrawal, to pay its share of any fees and charges incurred or assessed by the Office of the Interconnection prior to the date of such withdrawal, or to fulfill any obligation to provide indemnification for the consequences of acts, omissions or events occurring prior to such withdrawal; and provided, further, that withdrawal from this Agreement shall not relieve any Market Participant of any obligations it may have under, or constitute withdrawal from, any Related PJM Agreement. 4. RESPONSIBILITIES OF THE OFFICE OF THE INTERCONNECTION 4.1 Operation of the PJM Capacity Credit Market. The Office of the Interconnection shall operate the PJM Capacity Credit Markets in accordance with the provisions of this Schedule and applicable provisions of the Agreement and the Reliability Assurance Agreement. Operation of the PJM Capacity Credit Markets shall include, but not be limited to, provision of the following services: Second Revised: February 12, 1999 Effective: January 19, 1999 3 i) Determining the qualification of entities to become Market Participants; ii) Administering the PJM Capacity Credit Markets; iii) Accounting for PJM Capacity Credit Market transactions, including but not limited to rendering bills to, receiving payments from, and disbursing payments to, participants in the PJM Capacity Credit Markets; iv) Maintaining such records of Sell Offers and Buy Bids, clearing price determinations, and other aspects of PJM Capacity Credit Market transactions, as may be appropriate to the administration of the PJM Capacity Credit Markets; and v) Monitoring compliance of participants in the PJM Capacity Credit Markets with the provisions of this Schedule and the Agreement. 4.2 Records and Reports. The Office of the Interconnection shall prepare and maintain such records as are required for the administration of the PJM Capacity Credit Markets. For each day of operation of the PJM Capacity Credit Markets, the Office of the Interconnection shall publish, as specified below: (i) the price, if determined, at which the PJM Capacity Credit Market cleared; (ii) the total volume of Capacity Credits purchased; and (iii) such other PJM Capacity Credit Market data as may be appropriate to the efficient and competitive operation of the PJM Capacity Credit Markets, consistent with preservation of the confidentiality of commercially sensitive or proprietary information. Publication of the foregoing information shall be by posting on the PJM web site. Such information shall remain available on the PJM web site for twelve months from the date of posting. The Office of the Interconnection shall not disclose commercially sensitive or proprietary information in any report or web site posting. 5. GENERAL PROVISIONS 5.1 Market Sellers. Only Market Sellers shall be eligible to submit Sell Offers. Market Sellers shall comply with the terms and conditions of all Sell Offers, as established by the Office of the Interconnection in accordance with this Schedule and the Agreement. 5.2 Market Buyers. Only Market Buyers shall be eligible to submit Buy Bids. Market Buyers shall comply with the terms and conditions of all Buy Bids, as established by the Office of the Interconnection in accordance with this Schedule and the Agreement. Revised: November 19, 1998 Effective: October 15, 1998 4 5.3 Agents. A Market Participant may participate in the PJM Capacity Credit Markets through an agent, provided that the Market Participant informs the Office of the Interconnection in advance in writing of the appointment of such agent. A Market Participant participating in the PJM Capacity Credit Markets through an agent shall be bound by all of the acts or representations of such agent with respect to transactions in the PJM Capacity Credit Markets, and shall ensure that any such agent complies with the requirements of this Schedule and the Agreement. 5.4 General Obligations of Market Participants. Each Market Participant shall comply with all laws and regulations applicable to the operation of the PJM Capacity Credit Markets and the use of Capacity Credits, and shall comply with all applicable provisions of this Schedule, the Agreement, and the Reliability Assurance Agreement, and all procedures and requirements for the operation of the PJM Capacity Credit Markets and the PJM Control Area established by the Office of the Interconnection in accordance with the foregoing. 5.5 Relationship of Capacity Credits to Capacity Obligations Imposed Under the Reliability Assurance Agreement. A megawatt of Capacity Credit shall satisfy a megawatt of capacity obligation imposed under the Reliability Assurance Agreement. Capacity Credits purchased from a PJM Capacity Credit Market shall not be adjusted for forced outages or other reasons. Because Capacity Credits are based on Capacity Resources, no further capability or deliverability demonstrations beyond those for the related Capacity Resource shall be required. 5.6 Deficiency Charges. If the Office of the Interconnection determines that the first Market Seller in a PJM Capacity Credit Market of a Capacity Credit did not have sufficient Unforced Capacity to support the Capacity Credit transaction at the time for which the Capacity Credit was applicable, any such deficiency shall be satisfied through payment of deficiency charges by such first Market Seller calculated as specified in the Reliability Assurance Agreement. Any amounts collected from such deficiency charges shall be distributed in accordance with the Reliability Assurance Agreement. 5.7 Fixed Transmission Rights. Acquisition of a Capacity Credit shall not entitle the holder to a Fixed Transmission Right. Revised: November 19, 1998 Effective: October 15, 1998 5 5.8 Confidentiality. The following information submitted to the Office of the Interconnection in connection with any PJM Capacity Credit Market shall be deemed confidential information for purposes of Section 18.17 of the Agreement: (i) the terms and conditions of all Sell Offers and Buy Bids; and (ii) the terms and conditions of any bilateral transactions for capacity or Capacity Credits. 6. OPERATION OF THE PJM CAPACITY CREDIT MARKETS 6.1 Content of Sell Offers. 6.1.1 Specifications. Sell Offers shall specify: i) The quantity of Capacity Credits offered, in increments of 0.1 megawatt; ii) The minimum price, in dollars and cents per megawatt per day, that will be accepted by the seller; iii) Whether the offer is for a Fixed Block or an Up-To Block; iv) For a PJM Daily Capacity Credit Market conducted on a Friday or the day before a Holiday, the dates on which the offered Capacity Credits may be used; and v) For a PJM Monthly Capacity Credit Market, the month or months for which the offered Capacity Credits may be used. 6.1.2 Market-based Offers. A Market Seller that is authorized by FERC to sell electric generating capacity at market-based prices, or that is not required to have such authorization, may submit Sell Offers to PJM Capacity Credit Markets that specify market-based prices. 6.1.3 Availability of Capacity Credits for Sale. i) The Office of the Interconnection shall determine the maximum megawatts of Capacity Credits each Market Seller may offer in a PJM Capacity Credit Market, through verification of the availability of megawatts of capacity from: (a) Capacity Resources owned by or under contract to the Market Seller; (b) rights obtained in bilateral transactions; (c) the results of prior PJM Capacity Credit Markets; and (d) such other information as may be available to the Office of the Interconnection. The Office of the Interconnection may reject Sell Offers or portions of Sell Offers for Capacity Credits determined by it not to be available for sale. Revised: November 19, 1998 Effective: October 15, 1998 6 ii) The Office of the Interconnection shall determine the maximum amount of Capacity Credits available for sale in a PJM Capacity Credit Market as of the beginning of the period during which Buy Bids and Sell Offers are accepted for each market. To enable the Office of the Interconnection to make this determination, no bilateral transactions for capacity or Capacity Credits applicable to the period covered by a PJM Capacity Credit Market will be processed from the beginning of the period for submission of Sell Offers and Buy Bids for that market until completion of the clearing determination for that market. Processing of such bilateral transactions will recommence once all sales for that market are deemed final as specified below. iii) In order for a bilateral transaction for the purchase and sale of a Capacity Credit to be processed by the Office of the Interconnection, both parties to the transaction must notify the Office of the Interconnection of the transfer of the Capacity Credit from the seller to the buyer in accordance with procedures established by the Office of the Interconnection. 6.2 Content of Buy Bids. Buy Bids shall specify: i) The quantity of Capacity Credits desired, in increments of 0.1 megawatt; ii) The maximum price, in dollars and cents per megawatt per day, that will be paid by the buyer; iii) Whether the bid is for a Fixed Block or an Up-To Block; iv) For a PJM Daily Capacity Credit Market conducted on a Friday or the day before a Holiday, the dates for which Capacity Credits are desired; and v) For a PJM Monthly Capacity Credit Market, the month or months for which Capacity Credits are desired. 6.3 Submission of Sell Offers and Buy Bids. The submission of Sell Offers and Buy Bids shall be subject to the following requirements: i) A Sell Offer or Buy Bid that fails to specify price or quantity, or the date or months for which Capacity Credits are to be used if applicable, shall be rejected by the Office of the Interconnection. ii) A Sell Offer or Buy Bid that does not specify whether it is for a Full Block or an Up-To Block shall be deemed a Sell Offer or Buy Bid for an Up-To Block. Revised: November 19, 1998 Effective: October 15, 1998 7 iii) All Sell Offers and Buy Bids for a PJM Daily Capacity Market must be received by the Office of the Interconnection during a specified period, as determined by the Office of the Interconnection, on the day on which the market will be conducted. A Sell Offer or Buy Bid may be withdrawn by a notification of withdrawal received by the Office of the Interconnection at any time during the foregoing period, but may not be withdrawn after that period. iv) Sell Offers or Buy Bids for a PJM Daily Capacity Credit Market conducted on a Monday, Tuesday, Wednesday or Thursday that is not the day before a Holiday shall be for Capacity Credits applicable to the following day. v) Sell Offers or Buy Bids for a PJM Daily Capacity Credit Market conducted on a Friday or the day before a Holiday shall designate the date, to and including the next business day, to which the Capacity Credits are applicable. A separate PJM Daily Capacity Credit Market shall be conducted on such Friday or day before a Holiday for Capacity Credits applicable to each following day, to and including the next business day. vi) Sell Offers and Buy Bids for a PJM Monthly Capacity Credit Market must be received by the Office of the Interconnection during a specified period, as determined by the Office of the Interconnection, on the day of each month designated by the Office of the Interconnection for the conduct of a PJM Monthly Capacity Credit Market. A Sell Offer or Buy Bid may be withdrawn by a notification of withdrawal received by the Office of the Interconnection at any time during the foregoing period, but may not be withdrawn after that period. vii) Sell Offers and Buy Bids shall be submitted or withdrawn via the Internet site designated by the Office of the Interconnection; provided, however, that if that Internet site cannot be accessed at any time during the period specified in the foregoing paragraph, a Sell Offer or Buy Bid may be submitted or withdrawn by a facsimile transmitted to the number specified by the Office of the Interconnection. 6.4 Conduct of PJM Capacity Credit Markets. 6.4.1 PJM Daily Capacity Credit Markets. Following the submission of Sell Offers and Buy Bids in accordance with the specified deadline for PJM Daily Capacity Credit Markets, a PJM Daily Capacity Credit Market will be conducted each business day. Each such PJM Daily Capacity Credit Market will clear Sell Offers and Buy Bids for Capacity Credits for use the next business day, and for each of any intervening weekend days or Holidays. Revised: November 19, 1998 Effective: October 15, 1998 8 6.4.2 PJM Monthly Capacity Credit Markets. Following the submission of Sell Offers and Buy Bids in accordance with the specified deadline for PJM Monthly Capacity Credit Markets, a PJM Monthly Capacity Credit Market will be conducted. Each such PJM Monthly Capacity Credit Market will clear Sell Offers and Buy Bids for Capacity Credits for use in each of the following twelve months. 6.5 Market Clearing Procedures. i) For purposes of the rank ordering and market clearing procedures described below, the Office of the Interconnection will: (a) evaluate all Sell Offers for a Fixed Block at the same price as one Sell Offer for a Fixed Block, with the quantity equal to the total quantity of the equally-priced Sell Offers; (b) evaluate all Sell Offers for an Up-To Block at the same price as one Sell Offer for an Up-to Block, with the quantity equal to the total quantity of the equally-priced Sell Offers; (c) evaluate all Buy Bids for a Fixed Block at the same price as one Buy Bid for a Fixed Block, with the quantity equal to the total quantity of the equally-priced Buy Bids; and (d) evaluate all Buy Bids for an Up-To Block at the same price as one Buy Bid for an Up-to Block, with the quantity equal to the total quantity of the equally-priced Buy Bids. ii) The Office of the Interconnection will rank order all Sell Offers and Buy Bids by price. Sell Offers will be ranked by lowest price first and then ranked in ascending price order. Buy Bids will be ranked by highest price first and then ranked in descending price order. Sell Offers or Buy Bids for Fixed Blocks will be given priority in the rank order relative to Sell Offers or Buy Bids for Up-To Blocks of equal price. iii) For purposes of the market clearing procedures described below, the Office of the Interconnection will not split or pro-rate: (a) a Sell Offer for a Fixed Block; (b) a combined set of Sell Offers deemed a single Sell Offer for a Fixed Block as specified above; (c) a Buy Bid for a Fixed Block; or (d) a combined set of Buy Bids deemed a single Buy Bid for a Fixed Block as specified above. iv) The Office of the Interconnection will determine the largest quantity of Sell Offers and Buy Bids for which the price of the marginal Sell Offer is equal to or less than the price of the marginal Buy Bid. If the marginal Sell Offer and the marginal Buy Bid are both for Up-to Blocks, or if either or both are for Fixed Blocks that can be satisfied without splitting or pro rating any such Fixed Block, the market will clear at price specified in the marginal Sell Offer. Revised: November 19, 1998 Effective: October 15, 1998 9 v) If either the marginal Sell Offer or the marginal Buy Bid (including Sell Offers or Buy Bids that are combined as specified above) is for a Fixed Block that could not be purchased or sold in full, then that Sell Offer or Buy Bid will be removed from the rank order and the market clearing price redetermined as specified above. If both the marginal Sell Offer and the marginal Buy Bid (including Sell Offers or Buy Bids that are combined as specified above) are for Fixed Blocks that could not be purchased or sold in full, then both blocks will be removed from the rank order and the market clearing price redetermined as specified above. vi) If a marginal Sell Offer or Buy Bid is a combination of Sell Offers or Buy Bids deemed to be a single Sell Offer or Buy Bid for an Up-To Block as specified above, the quantity purchased or sold will be allocated among the combined Sell Offers or Buy Bids in proportion to the quantities offered in each of the combined Sell Offers or Buy Bids. vii) If all Sell Offers remaining in the rank order are at prices higher than the highest price of any Buy Bid remaining in the rank order, the market will be cleared with no transactions, and a market clearing price will not be determined. 6.6 Settlement Procedures. Upon determination of the market clearing price as specified above: (a) all Sell Offers at a price equal to or less than the market clearing price and not removed from the rank ordering and for which there is sufficient Buy Bid demand at or above the market clearing price will be deemed sold at the market clearing price, and all Buy Bids at a price equal to or greater than the market clearing price and not removed from the rank ordering and for which there is sufficient Sell Offer supply at or below the market clearing price will be deemed satisfied at the market clearing price, with any Up-To Blocks split and pro-rated as may be appropriate; and (b) the accounts of Market Sellers and Market Buyers will be credited or debited accordingly. The foregoing determinations shall be made, and all sales and purchases shall be deemed final, as of specified times, as designated by the Office of the Interconnection, on the day on which each PJM Capacity Market is conducted. 6.7 Billing. The Office of the Interconnection shall prepare a billing statement for each Market Participant in accordance with the charges and credits specified in this Schedule, and showing the net amount to be paid or received by each Market Participant. Billing statements for PJM Daily Capacity Markets shall be rendered following the end of each month for Capacity Credits bought and sold in the month just ended. Billing statements for PJM Monthly Capacity Credit Markets shall be rendered following the end of the month for which the Capacity Credit applies. Billing statements shall provide sufficient detail, as specified in the PJM Manuals, to allow verification of the billing amounts and completion of the Market Participant"s internal accounting. Payment of statements shall be made in accordance with the Agreement. Revised: November 19, 1998 Effective: October 15, 1998 10 6.8 Time Standard. All deadlines for the submission or withdrawal of Sell Offers or Buy Bids, or for other purposes specified in this Schedule, shall be determined by the time observed in the Eastern time zone. 7. EFFECTIVE DATE AND TRANSITION 7.1 Effective Date. The Capacity Credit Market Implementation Date shall be October 15, 1998, or as soon thereafter as the Office of the Interconnection can initiate trading in the PJM Capacity Credit Market. 7.2 Transition Provisions. To the extent that the Office of the Interconnection is not able to administer a PJM Capacity Credit Market in accordance with the standards and procedures specified above at the Capacity Credit Market Implementation Date, the Office of the Interconnection shall implement the foregoing standards and procedures if and to the extent practicable. The Office of the Interconnection shall thereafter conform to each of the standards and procedures specified above as soon as practicable. 7.3 Capacity Credit. Prior to the effective date of the provisions for Unforced Capacity under the Reliability Assurance Agreement, "Capacity Credit" shall mean an entitlement to a specified number of megawatts of Capacity from a Capacity Resource for the purpose of satisfying a capacity obligation imposed under the Reliability Assurance Agreement, and deficiency charges shall be determined in accordance with the then-current Reliability Assurance Agreement. 7.4 Mandatory Sell Offers and Buy Bids. For the Daily Capacity Credit Markets conducted with respect to the Operating Days between January 1, 1999 and May 31, 2000, there shall be the following mandatory Sell Offers and Buy Bids: i) Any Member that owns or has contracted for Capacity Credits or Capacity Resources shall be required to make Sell Offers in each Daily Capacity Credit Market to the full extent of the megawatts of capacity that it has available to sell in excess of its capacity obligations imposed under the Reliability Assurance Agreement and other contractual obligations to sell capacity, as determined in accordance with Section 6.1.3, as of the beginning of the period during which Buy Bids and Sell Offers are accepted. To the extent that any such megawatts of capacity available to a Member are not contained in such Sell Offers, PJM automatically will place for that Member a Sell Offer of an Up-To Block for such remaining amounts of capacity at a price of zero. Revised: May 11, 1999 Effective: June 1, 1999 11 ii) A party to the Reliability Assurance Agreement shall be required to make Buy Bids in each Daily Capacity Credit Market for the amount of capacity that, as of the beginning of the period during which Buy Bids and Sell Offers are accepted, it lacks for purposes of meeting its capacity obligations imposed under the Reliability Assurance Agreement for the Operating Day covered by the Daily Capacity Credit Market. To the extent that a party to the Reliability Assurance Agreement does not place such Buy Bids, PJM automatically will place for that party a Buy Bid of an Up-To Block that, when added to its other Buy Bids, would meet its capacity obligations imposed under the Reliability Assurance Agreement, at a price equal to the then-current deficiency charge under the Reliability Assurance Agreement. iii) A party shall have only one position, either excess of or deficient of capacity obligations imposed under the Reliability Assurance Agreement, as determined by the Office of the Interconnection. Revised: November 19, 1998 Effective: October 15, 1998 12 EX-10.(G) 9 CAPACITY AND ENERGY SALES AGREEMENT (05/25/99) EXHIBIT 10(g) Power Sales Agreement PP&L Sales to UGI Utilities, Inc. Market-Based Rates - -------------------------------------------------------------------------------- This POWER SALES AGREEMENT ("Agreement"), is made and entered into as of May 25, 1999, by and between UGI Utilities, Inc., a Pennsylvania corporation, having offices at 400 Stewart Road, P.O. Box 3200, Wilkes-Barre, PA 18773-3200, hereinafter referred to as "UGI" or "Buyer," and PP&L, Inc., a Pennsylvania corporation, having its principal business at Two North Ninth Street, Allentown, PA 18101-1179, hereinafter referred to as "PP&L" or "Seller" (individually, the "Party" and collectively, the "Parties"). The definitions set forth in the Definitional Annex apply to this Agreement. WHEREAS, on February 19, 1999, PP&L and UGI entered into an "Agreement in Settlement of All Outstanding Litigation Between PP&L, Inc. and UGI Utilities, Inc. - Electric Division" ("1999 Settlement Agreement") under which various litigation between the Parties was settled in full; and WHEREAS, pursuant to the 1999 Settlement Agreement, PP&L and UGI will enter into a new interconnection agreement completely replacing the 1935 Interconnection Agreement between the parties; and WHEREAS, UGI is not an end user of Power and UGI wishes to purchase Power as a wholesale customer; and WHEREAS, PP&L is authorized by FERC to engage in wholesale Power Transactions at market based prices and such Transactions shall be made pursuant to PP&L's FERC Electric Tariff, Volume No. 5; and NOW THEREFORE, in consideration of the mutual agreements, covenants and conditions herein contained, and intending to be legally bound, UGI and PP&L hereby agree as follows: ARTICLE 1 SALE OF CAPACITY CREDITS AND ENERGY 1.1 Capacity Credits. Beginning on the Effective Date, PP&L hereby agrees ---------------- to sell to UGI, and UGI agrees to purchase from PP&L, Capacity Credits in an amount equal to its accounted-for obligation as determined daily by PJM in accordance with Article 7 and Schedule 7 of the PJM Reliability Assurance Agreement, less the PJM qualified Capacity Resource value of UGI's Hunlock Power Station ("Hunlock"), UGI's share of the Conemaugh Power Station ("Conemaugh"), and, through December 31, 1999, the qualified Capacity Resource value of UGI's existing purchase of the output of -1- the Montgomery County Resource Recovery Unit in Montgomery County, Maryland ("Montgomery County Facility"). If Hunlock, Conemaugh, or, prior to December 31, 1999, the Montgomery County Facility, cease to be qualified Capacity Resources accredited to UGI, UGI shall not be obligated to purchase and PP&L shall not be obligated to supply equivalent replacement Capacity Credits or Capacity Resources under this Agreement. 1.2 Energy. PP&L hereby agrees to sell to UGI, and UGI agrees to purchase ------ from PP&L, 32 megawatt hours of energy during each hour commencing with the hour beginning at 0000 hours on January 1, 2000 through the hour commencing at 2300 hours on December 31, 2000. 1.3 Release From Other Obligations. Other than the purchases and sales ------------------------------- set forth in Article 1 of this Agreement, UGI is not obligated to purchase from PP&L nor is PP&L required to sell to UGI any other quantity of Power at any time. ARTICLE 2 PRICES 2.1 Capacity Credits. For each Capacity Credit purchased pursuant to ---------------- Section 1.1, UGI shall pay PP&L at the rate of $110 per megawatt day prior to June 1, 1999, and $121.00 per megawatt day beginning June 1, 1999 through February 28, 2001. 2.2 Energy. UGI shall pay to PP&L $28.00 per megawatt hour for energy ------ purchased pursuant to Section 1.2. ARTICLE 3 DELIVERY POINTS AND RELIABILITY GUIDELINES 3.1 Delivery Point(s). PP&L shall deliver the Power to the UGI points of ----------------- interconnection with PP&L in the PP&L Zone; however UGI shall be responsible for network transmission under the PJM Open Access Transmission Tariff and related agreements. 3.2 Reliability Guidelines. Each Party agrees to adhere to accepted Good ---------------------- Utility Operating Practice and specifically adhere to the applicable operating policies, -2- criteria and/or guidelines of the North American Electric Reliability Council ("NERC") and any regional or subregional requirement. 3.3 Scheduling. The delivery of Power under this Agreement shall be ---------- Scheduled by UGI in accordance with the guidelines established by the PJM Office of Interconnection. 3.4 Title Transfer. Title to, possession of, and risk of loss of Power -------------- Scheduled and received or delivered hereunder shall transfer from PP&L to UGI at the Delivery Point. PP&L warrants that at the time of delivery PP&L shall have good title to the Power sold and delivered hereunder and the right to sell such Power to UGI. ARTICLE 4 CONDITIONS TO EFFECTIVENESS 4.1 Reliability Assurance Agreement. UGI shall become a party to and sign ------------------------------- the PJM Reliability Assurance Agreement and become a Load Serving Entity under that agreement. 4.2 1999 Interconnection Agreement. The 1999 Interconnection Agreement ------------------------------ shall have been permitted by the FERC to become effective. 4.3 FERC Approval of This Agreement. The FERC shall have permitted this ------------------------------- Agreement to become effective. ARTICLE 5 TERM OF AGREEMENT 5.1 Commencement. This Agreement shall commence on the first date upon ------------ which (1) this Agreement has been fully executed by the Parties, and (2) the conditions to effectiveness set forth in Article 4 have been fulfilled ("the Effective Date"). On the Effective Date of this Agreement, the 1992 Power Sales Agreement shall terminate. 5.2 Termination. This Agreement shall terminate on February 28, 2001. ----------- PP&L shall have no obligation to UGI to continue to provide any service thereunder following that date, nor shall this Agreement be interpreted to create in PP&L any obligation to serve UGI under the FPA or other legal or regulatory authority. Following expiration of this Agreement UGI shall not be obligated to continue purchases from -3- PP&L under this Agreement or to compensate PP&L in any manner other than for amounts owed for sales and service rendered under this Agreement. ARTICLE 6 BILLING AND PAYMENT 6.1 Statements. PP&L shall render to UGI for each calendar month during ---------- the term of this Agreement a statement or statements setting forth the total quantity of Power purchased under this Agreement during the preceding month and the amounts due to PP&L from UGI under this Agreement. The first monthly statement shall contain the total quantity of Power purchased under this Agreement and all amounts due PP&L from UGI from the Effective Date through the end of the preceding month. 6.2 Billing and Payments. Unless otherwise informed by PP&L by written -------------------- notice providing at least three (3) days notice, statements shall be submitted monthly within ten (10) days following the last day of the month in which sales under this Agreement were made and shall be paid by UGI on or before the later of fifteen (15) days after the date the bill is received or the 20th day of the month. Payments shall be made by Automated Clearing House ("ACH") wire transfer to designated bank account or other generally accepted electronic funds transfer method as directed by PP&L in PP&L's discretion. Payment shall be deemed to have been made when PP&L's financial institution either initiates the transfer or receives the funds. If informed by PP&L by written notice of a different statement and payment schedule, UGI agrees to follow such schedule. UGI will pay all amounts set forth in such statements on or before the date that such amounts are due. Except as provided in Section 6.3, if UGI fails to pay all of the amount of any statement when that amount becomes due, UGI shall pay PP&L a late charge on the unpaid balance that shall accrue on each calendar day from the due date at the Interest Rate. Except in the case of a disputed bill, if UGI fails to pay amounts due to PP&L by the date that such amounts are due, PP&L may suspend performance pending receipt of full payment with interest (and shall have no further duty to UGI as a result of such action). Disputed bills shall be handled as stated below. 6.3 Billing Disputes. In the event any portion of any bill is in dispute, ---------------- the undisputed amount shall be paid to PP&L and a detailed written explanation of the basis for the dispute shall be submitted by UGI within the time periods specified for payment in Section 6.2. The Parties shall use their best efforts to attempt to resolve such disputes on a timely basis. Upon determination of the correct billing amount, the adjusted bill shall be paid promptly after such determination with interest at the Interest -4- Rate accrued in accordance with Section 6.2 and computed from the date payment is received to the date the adjustment is made. If the Parties are unable to resolve the dispute, either Party may exercise its available administrative or legal remedies, including those set forth in Section 6.6 below. 6.4 Audit. Each Party or any third party representative of a Party has ----- the right at its sole expense and during normal working hours, to examine the records of the other Party to the extent reasonably necessary to verify the accuracy of any statement, charge or computation made pursuant to the provisions of this Agreement. If any such examination reveals any inaccuracy in any statement, the necessary adjustments in such statement and the payments thereof shall be made prior to the lapse of two years from the rendition of such statement, and provided further that the rights set forth in the first sentence of this Section 6.4 will survive until two years after termination of this Agreement. 6.5 Records. Each Party shall keep such records as may be necessary to ------- afford the other a clear history of all deliveries or receipts of capacity credits and energy under this Agreement. Records shall be maintained for a period necessary to comply with Section 6.4 and shall be made available as necessary to verify the accuracy of statements submitted under this Agreement. 6.6 Dispute Resolution. (a) In the event of a dispute between the ------------------ Parties arising under this Agreement, the Parties will work together in good faith to resolve the dispute. If the Parties are unable to resolve such dispute between themselves within five days after written notification by one Party to the other of the existence of such dispute, they shall immediately refer such matter to their internal upper management for resolution. If the management of the Parties is unable to resolve the dispute within ten days after the matter is brought to their level for review, either Party may bring a claim or suit in accordance with the provisions of Section 13.6 of this Agreement, and agrees that service of process may be made upon it in any legal proceeding relating to this Agreement at the address indicated in Section 13.4. Each Party shall pay its own attorneys' fees and expenses, except that if the prevailing Party is required to initiate proceedings to enforce the award or confirm judgment, the prevailing Party shall be entitled to recover its costs and attorneys' fees associated with such action. EACH PARTY HEREBY WAIVES ITS RIGHT TO A JURY TRIAL. (b) Notwithstanding the dispute procedure provided in this Section 6.6, the Parties have no obligation to use such dispute resolution process where the dispute involves confidentiality or the infringement of intellectual property rights. In the event of a breach of confidentiality or a claim of infringement under this Agreement, the Party -5- seeking redress shall have the right to bring a claim or suit in accordance with Section 13.6 immediately. ARTICLE 7 LIQUIDATED DAMAGES 7.1 Scheduling. Scheduling of Power for delivery under this Agreement ---------- shall be subject to Section 3.3. Unless otherwise agreed to, PP&L and UGI shall be responsible for any transmission and ancillary services relating to the transmission of Power, in the case of PP&L, to the Delivery Point(s), and in the case of UGI, at and from the Delivery Point(s). 7.2 In the event PP&L fails to deliver the Power, where such failure was not excused by Force Majeure or by UGI's failure to perform, PP&L shall pay UGI (on the date payment would otherwise be due under this Agreement) an amount for each Mwhr of such deficiency equal to the positive difference, if any, between: (i) the price at which UGI is able to purchase or otherwise receive such deficiency quantity of Power acting in a commercially reasonable manner (adjusted to reflect differences in transmission costs, if any) and (ii) the Contract Price; provided, however, in no event shall such amounts include any -------- ------- penalties, ratcheted demand or similar charges. 7.3 In the event UGI fails to Schedule and to receive the Power, where such failure was not excused by Force Majeure or by PP&L's failure to perform, UGI shall pay PP&L (on the date payment would otherwise be due under this Agreement) an amount for each Mwhr of such deficiency equal to the positive difference, if any, between: (i) the Contract Price and (ii) the price at which PP&L is able to sell or otherwise dispose of such deficiency quantity of power acting in a commercially reasonable manner (adjusted to reflect differences in transmission costs, if any); provided, however, in no event shall such amounts -------- ------- include any penalties, ratcheted demand or similar charges. 7.4 Both Parties hereby stipulate that the payment obligations set forth above are reasonable in light of the anticipated harm and the difficulty of estimation or calculation of actual damages and each Party hereby waives the right to contest such payments as an unreasonable penalty. In the event either Party fails to pay such amounts in accordance with this Article when due, the aggrieved Party shall have the right to: (i) suspend performance until such amounts plus interest at the Interest Rate have been paid, and/or (ii) exercise any remedy available at law or in equity to enforce payment of such amount plus interest at the Interest Rate. The remedy set forth herein -6- shall be the sole and exclusive remedy of the aggrieved Party for the failure of the other Party to sell or purchase Power hereunder and all other damages and remedies are hereby waived. 7.5 As an alternative to the foregoing damages provisions, if the Parties mutually agree in writing, the nonperforming Party may Schedule deliveries or receipts, as the case may be, pursuant to such terms as the Parties agree in order to discharge some or all of the obligation to pay damages. In the absence of such agreement, the damages provisions of this Article shall apply. ARTICLE 8 INDEMNIFICATION 8.1 PP&L's Indemnification of UGI. PP&L hereby agrees to indemnify, ----------------------------- defend and hold harmless UGI, its agents, servants and Affiliates and the respective officers, directors, employees and representatives (collectively, "UGI's Indemnitees") of each, from and against any and all losses, claims, damages or liabilities (including reasonable attorneys' fees actually incurred including, without limitation, penalties or fines imposed by government authorities) arising out of the fraud, negligence, or willful misconduct of PP&L relating to Power delivered under this Agreement until such Power has been delivered to UGI at the Delivery Points including, without limitation, the loss of/or claims for loss or damage to property, except to the extent caused by the fraud, negligence or the willful misconduct of UGI's Indemnitees and provided that PP&L shall be promptly notified in writing of any such claim or suit brought against any such UGI Indemnitee. The foregoing notwithstanding, PP&L's obligations under this Agreement towards any UGI Indemnitee are conditioned upon such UGI Indemnitee providing such cooperation as PP&L may reasonably request in connection with its defense or settlement of the claim or suit against such UGI Indemnitee. 8.2 UGI's Indemnification of PP&L. UGI hereby agrees to indemnify, defend ----------------------------- and hold harmless PP&L, its agents, servants and Affiliates and the respective officers, directors and employees and representatives (collectively, "PP&L's Indemnitees") of each, from and against any and all losses, claims, damages or liabilities to third parties (including reasonable attorneys' fees actually incurred including, without limitation, penalties or fines imposed by government authorities) arising out of the fraud, negligence, or willful misconduct of UGI relating to Power delivered under this Agreement after such Power has been delivered to UGI at and from the Delivery Points including, without limitation, the loss of/or claims for loss or damage to property, except to the extent caused by the fraud, negligence or the willful misconduct of PP&L's -7- Indemnitees and provided that UGI shall be promptly notified in writing of any such claim or suit brought against any such PP&L Indemnitee. The foregoing notwithstanding, UGI's obligations under this Agreement towards any PP&L Indemnitee are conditioned upon such PP&L Indemnitee providing such cooperation as UGI may reasonably request in connection with its defense or settlement of the claim or suit against such PP&L Indemnitee. ARTICLE 9 ASSIGNMENT AND SUCCESSION 9.1 Assignment and Succession. Neither Party shall assign this ------------------------- Agreement or its rights hereunder without the prior written consent of the other Party, which consent shall not be unreasonably withheld or delayed. Upon any assignment made in compliance with this Section, this Agreement shall inure to and be binding upon the successors and permitted assigns of the assigning Party. Notwithstanding the foregoing, either Party may, without the need for consent from the other Party (and as long as such Party remains fully liable hereunder), (a) transfer, pledge, or assign this Agreement as security for any financing with financial institutions; or (b) transfer or assign this Agreement to an Affiliate of such Party. Nothing in this Section shall preclude any party from transferring or assigning this Agreement to any person or entity succeeding to all or substantially all of the assets of such Party; provided, however, that any such assignee shall agree to be bound by the terms and conditions hereof pursuant to an agreement satisfactory to the nonassigning Party and that all the persons obligated to fulfill the assigning Party's obligations under the Agreement after the assignment shall have substantially equivalent financial capability to that of all other persons obligated to fulfill the assigning Party's obligations under the Agreement before the assignment. References to any Party named herein shall include such Party's successors and permitted assigns. ARTICLE 10 LIMITATION OF LIABILITY AND FORCE MAJEURE 10.1 Force Majeure. In the event either Party is rendered unable, by an ------------- event of Force Majeure, to carry out wholly or in part its obligations under this Agreement and such Party gives notice and full particulars of such event of Force Majeure to the other Party as soon as practicable after the occurrence of the event relied on, then the obligations of the Party affected by such event of Force Majeure pursuant to this Agreement, other than the obligation to make payments then due or becoming due -8- hereunder, shall be suspended from the inception and throughout the period of continuance of any such inability so caused, but for no longer period, and such event of Force Majeure shall, so far as and as soon as practicable, be remedied by application of Good Utility Operating Practice; provided however, that no provision of this Agreement shall be interpreted to require PP&L to deliver, or UGI to receive, Power at points other than the Delivery Point(s) or to require UGI to accept or PP&L to make delivery of any remaining amounts of Power under this Agreement following resolution of the Force Majeure. 10.2 Limitation of Liability. FOR BREACH OF ANY PROVISION FOR WHICH AN ----------------------- EXPRESS REMEDY OR MEASURE OF DAMAGES IS PROVIDED IN THIS AGREEMENT, THE LIABILITY OF THE DEFAULTING PARTY SHALL BE LIMITED AS SET FORTH IN SUCH PROVISION, AND ALL OTHER DAMAGES OR REMEDIES HEREBY ARE WAIVED. IF NO REMEDY OR MEASURE OF DAMAGES IS EXPRESSLY PROVIDED, THE LIABILITY OF THE DEFAULTING PARTY SHALL BE LIMITED TO DIRECT DAMAGES ONLY AND ALL OTHER DAMAGES AND REMEDIES ARE WAIVED. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR CONSEQUENTIAL, INCIDENTAL, PUNITIVE, EXEMPLARY OR INDIRECT DAMAGES IN TORT, FOR CONTRACT OR OTHERWISE. ARTICLE 11 TAXES 11.1 Allocation of and Indemnity for Taxes. The Contract Price paid ------------------------------------- hereunder includes full reimbursement for and PP&L is liable for and shall pay or cause to be paid, or reimburse UGI if UGI shall have paid, all Taxes applicable to the Power sold hereunder prior to the Delivery Point(s) ("PP&L's Taxes"). In the event UGI is required to remit any of PP&L's Taxes, the amount thereof shall be deducted from any sums becoming due to PP&L hereunder. PP&L shall indemnify, defend and hold UGI harmless from any liability for all PP&L's Taxes. The Contract Price does not include reimbursement for and UGI is liable for and shall pay, cause to be paid or reimburse PP&L if PP&L shall have paid, all Taxes applicable for the Power sold hereunder at and after the Delivery Point(s) ("UGI's Taxes"). UGI shall indemnify, defend and hold PP&L harmless from any liability for all UGI's Taxes. 11.2 Automatic Tax Adjustment. Only if agreed to by the Parties, an ------------------------ adjustment for tax changes shall apply, as appropriate, to the Contract Prices as billed under this Agreement. In such case, the Contract Prices will be adjusted, as required, -9- by including an automatic pass-through of increases in federal, state, or local taxes, including new environmental taxes, or tax rates applicable to the Power, based on actual tax expense incurred by PP&L. 11.3 Cooperation. Both Parties shall use reasonable efforts to administer ----------- this Agreement and implement the provisions in accordance with their intent to minimize Taxes. ARTICLE 12 DEFAULT, SECURITY AND RESPONSIBILITY 12.1 Default, Security and Responsibility Events. Except as otherwise ------------------------------------------- provided in Article 7, in the event either Party ("Defaulting Party") (i) makes an assignment or any general arrangement for the benefit of creditors; (ii) defaults in payment or performance of any obligation to the other Party under this Agreement provided that such default in payment or performance shall be deemed a default under this Article if not cured within five (5) Business Days following written notice by the non-defaulting Party of such default in payment or performance; (iii) files a petition or otherwise commences, authorizes, or acquiesces in commencement of a proceeding or cause under any bankruptcy or similar law for the protection of creditors or have such petition filed or proceedings commenced against it; (iv) otherwise becomes bankrupt or insolvent (however evidenced); or (v) fails to give adequate security for or assurance of its ability to perform its further obligation under this Agreement within seventy-two (72) hours of a reasonable request by the other Party, then the non- defaulting Party upon written notice has the right to withhold or suspend deliveries or receipts or terminate this Agreement pursuant to Section 12.2. Subsections (i) - (v) above shall each be considered an "Event of Default." 12.2 Early Termination. ----------------- (a) If an Event of Default occurs with respect to a Party at any time during the term of this Agreement, the other Party (the "Notifying Party") may (i) upon written notice to the other Party, which notice shall be given no later than sixty (60) days after the discovery of the occurrence of the Event of Default, terminate this Agreement as of a date determined by the Notifying Party ("Early Termination Date"); (ii) withhold any payment due under this Agreement; and/or (iii) suspend performance under this Agreement; provided, however, upon the occurrence of any Event of Default listed in clause (i), (iii) or (iv) of Section 12.1, this Agreement shall automatically terminate, without notice, and without any other action by either Party as if an Early Termination -10- Date had been declared immediately prior to such event. If an Early Termination Date has been designated or deemed to occur, the Notifying Party shall in good faith calculate its damages resulting from the termination of this Agreement (the "Termination Payment") as set forth below. (b) When the Notifying Party is PP&L, the Termination Payment will be the positive difference, if any, between (i) the payments (discounted to the Early Termination Date at a rate per annum equal to the average yield to maturity of United States treasury obligations having comparable maturity dates) that PP&L would have received under this Agreement at the agreed to quantity(ies) and price(s) had the Agreement not been terminated; and (ii) the payments (discounted in the same manner as set forth above), for the remaining term, as either quoted by a bona fide third party offer or which are reasonably expected to be available in the market under replacement contract for this Agreement. (c) When the Notifying Party is UGI, the Termination Payment will be the positive difference, if any, between (i) the payments (discounted to the Early Termination Date at a rate per annum equal to the average yield to maturity of United States treasury obligations having comparable maturity dates) that UGI would make under replacement contract (with the same quantities and substantially similar terms and conditions) for the remaining term of this Agreement, as either quoted by a bona fide third party offer or which are reasonably expected to be available in the market; and (ii) the payments (discounted in the same manner as set forth above) that UGI would pay under the Agreement for its remaining term at the agreed to quantity(ies) and price(s) had the Agreement not been terminated. (d) To ascertain the market prices of a replacement contract, the Notifying Party may consider, among other valuations, quotations from leading dealers in electric purchase and sale contracts for Power and other bona fide third party offers, all adjusted for the length of the remaining term and differences in transmission costs, if any. (e) The Notifying Party shall give the Defaulting Party written notice of the amount of the Termination Payment, along with a statement detailing the calculation of such amount. The Defaulting Party shall pay the Termination Payment to the Notifying Party immediately upon receipt of such notice. At the time for payment of any amount due under this Section, each Party shall pay to the other Party all additional amounts payable by it pursuant to this Agreement, but all such amounts shall be netted and aggregated with any Termination Payment payable hereunder. Any Party failing to -11- make payment when due hereunder shall pay interest on the overdue balance from the due date at the Interest Rate. ARTICLE 13 MISCELLANEOUS 13.1 Regulatory. It is understood by the Parties that this Agreement and ---------- performance hereunder is subject to all present and future valid and applicable laws, orders, statutes, and regulations of courts or regulatory bodies (state or federal) having jurisdiction over UGI, PP&L, or this Agreement. 13.2 Authorizations. The Parties hereto represent that they have (or will -------------- have upon the Effective Date of this Agreement) all appropriate authorizations necessary or proper to consummate and carry out their obligations under this Agreement. 13.3 Monitoring and Recording. Each Party acknowledges and consents to the ------------------------ monitoring and recording of all telephone conversations between its representatives and the representatives of the other Party. Any recording of such conversations may be introduced to prove the intent of this Agreement; provided however, that nothing of such conversations herein shall be construed as a waiver of any objection to the introduction of such evidence on the grounds of relevance. 13.4 Notices. Any notice, request, demand, statement, or payment provided ------- for in this Agreement shall be confirmed in writing, unless otherwise noted, and shall be made as specified below; provided, however, that notices of interruption and communications to Transmitting Utility(ies) may be provided verbally, effective immediately and, upon request, confirmed in writing. A notice sent by facsimile transmission shall be deemed received by the close of the Business Day on which such notice was transmitted or such earlier time as confirmed by the receiving Party and notice by overnight mail or courier shall be deemed to have been received two (2) Business Days after it was sent or such earlier time as is confirmed by the receiving Party unless it confirms a prior verbal communication in which case any such notice shall be deemed received on the day sent. Notices shall be addressed to the Parties as follows or to such other address as UGI or PP&L shall from time to time designate by letter properly addressed: -12-
UGI Utilities, Inc.: NOTICES & CORRESPONDENCE INVOICES - ------------------------ -------- UGI Utilities, Inc. - Electric Division UGI Utilities, Inc. - Electric Division 400 Stewart Road 400 Stewart Road P.O. Box 3200 P.O. Box 3200 Wilkes-Barre, PA 18773-3200 Wilkes-Barre, PA 18773-3200 Attn: Vice President and General Manager Attn: Controller - Electric Division FAX: (570) 830-1190 FAX: (570) 830-1192 PP&L, Inc.: NOTICES & CORRESPONDENCE PAYMENTS - ------------------------ -------- PP&L, Inc. PP&L, Inc. Two North Ninth Street Two North Ninth Street Allentown, PA 18101-1179 Allentown, PA 18101-1179 Attn: Energy Marketing Center Attn: Cash Receipts FAX: (610) 774-6523 FAX: (610) 774-4446
13.5 Entirety. This Agreement and any Exhibits hereto constitute the -------- entire agreement between the Parties. In addition, there are no other prior or contemporaneous agreements or representations affecting the same subject matter other than those herein expressed. Except for those matters which, in accordance with this Agreement, may be resolved by the Parties and documented electronically, it is further agreed that no amendment, modification or change herein shall be enforceable, except as specifically provided for in this Agreement, unless produced in writing and executed by both Parties. 13.6 Governing Law and Venue. If any proceeding or action on or ----------------------- respecting this Agreement is brought by one of the Parties against the other Party including any counterclaims and cross claims asserted in any such proceeding or action, this Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without regard to Conflict of Law principles. Venue shall be either at the FERC or the courts of the Commonwealth of Pennsylvania. Any such proceeding shall be brought in the Courts of the Commonwealth of Pennsylvania, except to the extent that the FERC has exclusive jurisdiction over the subject matter of the proceeding. -13- 13.7 Confidentiality. Neither Party shall disclose the terms of this --------------- Agreement to any third party absent the express written permission of the other Party except where (1) necessary to comply with any applicable law, order, regulation or exchange rule; provided, however, that each Party shall notify the other Party promptly upon receipt of any request to it in any proceeding that could result in an order requiring such disclosure and the Party subject to such request shall use reasonable efforts to prevent or limit the disclosure; or (2) necessary to effectuate transmission of electricity subject to this Agreement. However, nothing herein shall prevent either Party from disclosing simple price and volume terms to a third party solely for the purpose of it being used in conjunction with other similar information for establishing electric price indices by a qualified independent entity provided that such information cannot be used to identify the Parties to this Agreement. The Parties shall be entitled to all remedies available at law or in equity to enforce, or seek relief in connection with, this confidentiality obligation; provided, however, that all monetary damages shall be limited to actual direct damages and a breach of this section shall not give rise to the right to suspend or terminate this Agreement. 13.8 Non-Waiver. No waiver by either Party hereto of any one or more ---------- defaults by the other in the performance of any of the provisions of this Agreement shall be construed as a waiver of any other default or defaults whether of a like kind or different nature. 13.9 Severability. Except as otherwise stated herein, any provision, ------------ article or section of this Agreement that is declared or rendered unlawful by a court of law or regulatory agency with jurisdiction over the Parties, or deemed unlawful because of statutory change, will not otherwise affect the lawfulness, enforceability and applicability of the remaining provisions, articles or sections of this Agreement, nor shall it affect the obligations that arise under this Agreement. 13.10 Headings. The headings used for the Articles herein are for -------- convenience and reference purposes only and shall in no way affect the meaning or interpretation of the provisions of this Agreement. -14- IN WITNESS WHEREOF, the Parties hereto have executed this Agreement in duplicate originals to be effective as of the day and year first written above. UGI Utilities, Inc. PP&L, Inc. By: ________________________________ By: ___________________________ Name: Mark R. Dingman Name: ___________________________ -------------------------------- Title: Vice President Title: ___________________________ -------------------------------- and General Manager -15- DEFINITIONAL ANNEX All references to Articles, Sections, Exhibits and Annexes are to those set forth in or appended to this Agreement. Reference to any document means such document as amended from time to time and reference to any Party includes any permitted successor or assignee thereof. The following definitions and any terms defined internally in this Agreement shall apply to this Agreement and all notices and communications made pursuant to this Agreement. In addition to terms defined elsewhere in this Agreement, the following definitions shall apply hereunder: "Accounted-For Obligation" shall have the same meaning as under the ------------------------ Reliability Assurance Agreement. "Affiliate" means with respect to any person, any other person (other than --------- an individual) that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, such person. For purposes of the foregoing definition, "control" means the direct or indirect ownership of more than five percent (5%) of the outstanding capital stock or other equity interests having ordinary voting power. "Capacity Credits" shall have the same meaning as set forth in Section 2.3 ---------------- of Schedule 11 to the Operating Agreement of the PJM Interconnection, L.L.C. "Capacity Resource" shall have the same meaning as under the Reliability ----------------- Assurance Agreement. "Contract Price" means the agreed price for the purchase and sale of Power -------------- under this Agreement. "Control Area" means an electric system or combination of electric systems ------------ to which a common automatic generation control scheme is applied in accordance with Good Utility Operating Practices to: (1) match, at all times, the power output of the generators within the electric system(s) and Power purchased from entities outside the electric system(s), with the load within the electric system(s); (2) maintain scheduled interchange with other Control Areas; (3) maintain the frequency of the electric system(s) within reasonable limits; and -16- (4) provide sufficient generating capacity to maintain spinning and operating reserves. "FERC" means the Federal Energy Regulatory Commission or any successor ---- agency. "Force Majeure" means any cause which the Party claiming Force Majeure (the ------------- "Claiming Party"), was unable, in the exercise of due diligence and Good Utility Operating Practice, to avoid, did not intend, and which is beyond the control, and without the fault or negligence, of the Claiming Party or the Claiming Party's Power Resources, and which renders the Claiming Party or Claiming Party's Power Resources unable to carry out wholly or in part its obligation under this Agreement. Force Majeure includes, but is not restricted to: flood; earthquake; geohydrolic subsidence; tornado; storm; fire; civil disturbance or disobedience; labor dispute; labor or material shortage; sabotage; action or restraint by court order or public or governmental authority (so long as the Claiming Party has not applied for or assisted in the application for, and has opposed where and to the extent reasonable, such government action); and reductions or interruptions in services which, in a Claiming Party's reasonable judgment, or in the reasonable judgment of Claiming Party's Power Resources, are necessary to protect generating or transmission facilities or the reliability of transmission facilities; including the integrity, safety, reliability or operation of any interconnected electric grid or system; and government action that results in the price at which Power may be made available under this Agreement being fixed or established by any government authority at a level that results in a price that may be charged under this Agreement that (i) in the case of PP&L, is lower than the Contract Price and (ii) in the case of UGI, is higher than the Contract Price; provided, however, that such government action does not include the imposition of any Taxes. Nothing contained herein shall be construed to require a Claiming Party to settle any strike or labor dispute. "Good Utility Operating Practice" means the practices, methods and acts ------------------------------- engaged in or approved by a significant portion of the electric power industry during the relevant time period, or the practices, methods and acts which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result consistent with reliability, safety, expedition, the requirements of governmental agencies having jurisdiction and, if appropriate or relevant under the Transaction in question, at the lowest reasonable cost; such term is not intended to be limited to the optimum practice, method or act to the exclusion of all others, but rather to constitute a spectrum of acceptable practices, methods or acts. -17- "Interest Rate" means the prime rate of interest published by Mellon Bank ------------- of Philadelphia or any successor thereto plus two hundred basis points as in effect from time to time; provided, however, that the Interest Rate shall not exceed the maximum rate permitted by applicable law. "Load Serving Entity" shall have the same meaning as under the Reliability ------------------- Assurance Agreement. "Power" means electric capacity credits or energy or any combination ----- thereof. Energy delivered as a component of power shall be of the type commonly known as three-phases sixty-cycle alternating current. Use of either a reservation charge and associated energy charge or an as-delivered energy charge is for economic and operational convenience, and does not change the nature of the Power sold under this Agreement. "Power Resources" means the sources of Power with which PP&L has made --------------- arrangements in order to provide Power under this Agreement. "PJM" means the Pennsylvania-New Jersey-Maryland Interconnection, L.L.C. --- "PP&L Zone" shall mean the Pennsylvania Power and Light Company Group ----------- transmission zone as described in and established by the PJM Open Access Transmission Tariff and related agreements. "Quantity" means the amount of Power to be contracted for under this -------- Agreement. "Regulatory Approvals" means, for any Transaction, all applicable state and -------------------- federal regulatory authorizations, consents, or approvals required under this Agreement. "Reliability Assurance Agreement" means the Reliability Assurance Agreement --------------------------------- Among Load Serving Entities in the PJM Control Area as amended and revised from time-to-time. "Schedule" or "Scheduling" means communicating with and confirming with all -------- ---------- Transmitting Utilities as well as between UGI and PP&L that a particular amount of Power is to be delivered or received and providing all such information and satisfying all such requirements as may be necessary to cause such Parties to recognize and confirm the delivery or receipt of the Power. All scheduling of services with -18- Transmitting Utility(s) and Control Area(s) shall be accomplished in compliance with the scheduling rules of those Transmitting Utility(ies) and Control Area(s). Between PP&L and UGI, scheduling shall be accomplished no later than sixty (60) minutes before the start of the intended power flow or as per other rules as UGI and PP&L may jointly agree from time to time. "Taxes" means all ad valorem, property, occupation, utility, gross ----- receipts, sales use, excise, and other taxes or governmental charges, licenses, permits, and assessments, other than taxes based on net income or net worth. "Transmitting Utility" means the utility or utilities and their respective -------------------- Control Areas transmitting Power from the Power Resources to the Delivery Point(s) as part of this Agreement. "1935 Interconnection Agreement" shall mean the interconnection agreement ------------------------------ as supplemented and amended from time to time which covered the interconnection and the coordinated operations of the electric systems of PP&L and UGI within the PJM. "1992 Power Sales Agreement" shall mean the 15 year partial requirements -------------------------- power sales agreement entered into between PP&L and UGI on December 1, 1992. -19- EX-10.(J).3 10 AMENDMENT NO. 2 SUPP. EXECUTIVE RETIREMENT PLAN EXHIBIT 10(j)-3 AMENDMENT NO. 2 TO PP&L, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN WHEREAS, PP&L, Inc. ("PP&L") adopted the PP&L, Inc. Supplemental Executive Retirement Plan (the "Plan"), effective July 1, 1985, as amended and restated from time to time, for certain of its employees; and WHEREAS, the Plan was amended and restated effective January 1, 1998, and subsequently amended by Amendment No. 1; and WHEREAS, the Company desires to further amend the Plan; NOW, THEREFORE, the Plan is hereby amended as follows: I. Effective July 1, 1999 the definition of "Prior Plan" in Article 2 was deleted. II. Effective July 1, 1999, the following sections of Article 4 are amended to read as follows: 4. Amount of Supplemental Executive Retirement Benefit. (a) A Participant entitled to benefits under Article 3 will be paid a SERB equal to an annual amount payable for the life of Participant calculated pursuant to Sections (b) through (f) below: (b) The amount calculated under Subsection (1) and/or (2), as appropriate: (1) The sum of (A) plus (B): (A) 2.0% of Participant's Supplemental Final Average Earnings times his Years of Service up to 20, plus (B) 1.5% of Participant's Supplemental Final Average Earnings times his Years of Service in excess of 20 but not in excess of 30. (2) With respect only to Participants who were officers in positions in PP&L Salary Groups I through IV on December 31, 1997: -1- (A) the benefit determined under Subsection (4)(b)(1) shall be calculated using Projected Years of Service instead of Years of Service; (B) such Participant's SERB shall not be less than the greater of (I) or (II) below: (I) (i) 2.7% of Participant's Supplemental Final Average Earnings calculated as of the earlier of December 31, 2001 or the date Participant terminates employment times his Years of Service up to 20, plus (ii) 1.0% of Participant's Supplemental Final Average Earnings calculated as of the earlier of December 31, 2001 or the date Participant terminates employment, times his Years of Service in excess of 20 but not more than 30 less (iii) the annual amount payable as the maximum primary Social Security benefit payable to an individual aged 65 in the year of Participant's retirement whether or not received by Participant. (II) (i) 2.7% of Participant's Supplemental Final Average Earnings calculated as of the earlier of December 31, 2001 or the date Participant terminates employment, times his Projected Years of Service up to 20, plus (ii) 1.0% of Participant's Supplemental Final Average Earnings calculated as of the earlier of December 31, 2001 or the date Participant terminates employment, times his Projected Years of Service in excess of 20 but not more than 30, less (iii) the annual amount payable as the maximum primary Social Security benefit payable to an individual aged 65 in the year of Participant's retirement whether or not received by Participant (f) In the event that a Participant's benefits under any plan to which Section (d) or (e) of this Article refers are subject in whole or in part to a domestic relations order, SERB payments shall be calculated and paid without regard to such order. -2- III. Except as provided for in this Amendment No. 2, all other provisions of the Plan shall remain in full force and effect. IN WITNESS WHEREOF, this Amendment No. 2 is executed this ____ day of ___________________1999. PP&L, INC. By:_______________________________ John R. Biggar Senior Vice President and Chief Financial Officer -3- EX-10.(K).2 11 AMENDMENT NO. 1 INCENTIVE & COMPENSATION PLAN EXHIBIT 10(k)-2 AMENDMENT NO. 1 TO PP&L RESOURCES INCENTIVE COMPENSATION PLAN WHEREAS, PP&L Resources, Inc. ("Resources") has adopted the PP&L Resources Incentive Compensation Plan ("Plan") effective January 1, 1987; and WHEREAS, the Plan was amended and restated effective January 1, 1999; and WHEREAS, Resources desires to further amend the Plan; NOW, THEREFORE, the Plan is hereby amended as follows: I. Effective January 1, 1999, the following sections are amended to read: SECTION 3. EFFECTIVE DATE AND DURATION. Upon the approval of the predecessor plan by the holders of a majority of the shares of 4 1/2% Preferred Stock, Series Preferred Stock, Preference Stock and Common Stock of PP&L, Inc. present (either in person or by proxy) at the 1987 Annual Meeting of shareowners, the predecessor plan became effective on January 1, 1987. This Plan as amended and restated shall become effective as of January 1, 1999 upon the approval of the Plan by the holders of a majority of the shares of Resources Common Stock present (either in person or by proxy) at the 1999 Annual Meeting of Shareowners. Awards of Incentive Stock Options may be made under the Plan for a period of ten years after January 1, 1999. This Plan shall continue in effect until all matters relating to the payment of Awards and the administration of the Plan have been settled. SECTION 5. GRANT OF AWARDS AND LIMITATION OF NUMBER OF SHARES AWARDED. The Committee may, from time to time, grant Awards to one or more Eligible Employees, provided that: (i) subject to any adjustment pursuant to Section 10G and any limitation pursuant to Section 10H, the maximum number of shares of Common Stock subject to Awards (including Incentive Stock Options) shall not exceed annually 2% of the outstanding Common Stock of Resources on the first day of each calendar year commencing on and after January 1, 1999; (ii) the maximum number of Options awarded to any single Eligible Employee in any calendar year shall not exceed 1.5 million shares; provided that any portion of such maximum number of shares that has not been granted may be carried over and used in any subsequent year; (iii) to the extent that an Award lapses or is forfeited or the rights of the Participant to whom an Award was granted terminate, any shares of Common Stock subject to such Award shall again be available for the grant of an Award under the Plan; and (iv) shares delivered under the Plan may -1- be authorized and unissued Common Stock, Common Stock held in the treasury of Resources or Common Stock purchased on the open market (including private purchases) in accordance with applicable securities laws. SECTION 10. MISCELLANEOUS PROVISIONS. H. New York Stock Exchange Requirements. In accordance with the requirements of the New York Stock Exchange (the "NYSE") for the listing of newly issued shares of Common Stock subject to Awards, the Committee may not grant Awards under the Plan to the extent that the aggregate number of shares subject to Awards granted after approval of the Plan at the 1999 Annual Meeting of shareowners of Resources would exceed 5% of the outstanding Common Stock of Resources on the date of such Annual Meeting, unless the issuance of the shares of Common Stock subject to any such additional Awards has been approved by the shareowners of Resources to the extent required by the rules of the NYSE. SECTION 11. OTHER STOCK-BASED AWARDS (a) Generally. The Committee, in its sole discretion, may grant awards of --------- Common Stock, awards of restricted shares and awards that are valued in whole or in part by reference to, or are otherwise based on the Fair Market Value of, Common Stock ("Other Stock-Based Awards"). Such Other Stock-Based Awards shall be in such form, and dependent on such conditions, as the Committee shall determine, including, without limitation, the right to receive one or more shares of Common Stock (or the equivalent cash value of such Common Stock) upon the completion of a specified period of service, the occurrence of an event and/or the attainment of performance objectives. Other Stock-Based Awards may be granted alone or in addition to any other Awards granted under the Plan. Subject to the provisions of the Plan, the Committee shall determine to whom and when Other Stock-Based Awards will be made; the amount of Common Stock to be awarded under (or otherwise related to) such Other Stock-Based Awards; whether such Other Stock-Based Awards shall be settled in cash, Common Stock or a combination of cash and Common Stock; and all other terms and conditions of such Awards (including, without limitation, the vesting provisions thereof). (b) Performance-Based Awards. Notwithstanding anything to the contrary ------------------------ herein, certain Other Stock-Based Awards granted under this Section 11 may be granted in a manner which is deductible by Resources under Section 162(m) of the Code (or any successor section thereto)("Performance-Based Awards"). A Participant's Performance-Based Award shall be determined based on the attainment of written performance goals approved by the Committee for a performance period established by the Committee (i) while the outcome for that performance period is substantially uncertain and (ii) no more than 90 days after the commencement of the performance period to which the performance goal relates or, if less, the number of days which is equal to 25 percent of the relevant performance period. The performance goals, which must be objective, shall be based upon one or more of the following criteria: (i) earnings before or after taxes (including earnings before interest, taxes, depreciation and amortization); (ii) net income; (iii) operating income; (iv) earnings per share; (v) book value per share; (vi) return on stockholders' equity; (vii) expense management; (viii) return on investment before or after -2- the cost of capital; (ix) improvements in capital structure; (x) profitability of an identifiable business unit or product; (xi) maintenance or improvement of profit margins; (xii) stock price; (xiii) market share; (xiv) revenues or sales; (xv) costs; (xvi) cash flow; (xvii) working capital; (xviii) changes in net assets (whether or not multiplied by a constant percentage intended to represent the cost of capital); (xix) return on assets; and (xx) independent industry ratings or assessments. The foregoing criteria may relate to Resources, one or more of its subsidiaries or one or more of its divisions, units, minority investments, partnerships, joint ventures, product lines or products or any combination of the foregoing, and may be applied on an absolute basis and/or be relative to one or more peer group companies or indices, or any combination thereof, all as the Committee shall determine. In addition, to the degree consistent with Section 162(m) of the Code (or any successor section thereto), the performance goals may be calculated without regard to extraordinary items or accounting changes. The maximum amount of a Performance-Based Award to any Participant with respect to a fiscal year of Resources shall be 1.5 million shares; provided that any portion of such maximum number of shares that has not been granted may be carried over and used in any subsequent year. The Committee shall determine whether, with respect to a performance period, the applicable performance goals have been met with respect to a given Participant and, if they have, to so certify and ascertain the amount of the applicable Performance-Based Award. No Performance-Based Awards will be paid for such performance period until such certification is made by the Committee. The amount of the Performance-Based Award determined by the Committee for a performance period shall be paid to the Participant at such time as determined by the Committee in its sole discretion after the end of such performance period; provided, however, ----------------- that a Participant may, if and to the extent permitted by the Committee and consistent with the provisions of Section 162(m) of the Code, elect to defer payment of a Performance-Based Award. II. Except as provided for in this Amendment No. 1, all other provisions of the Plan shall remain in full force and effect. IN WITNESS WHEREOF, this Amendment No. 1 is executed this ____ day of _____________, 1999. PP&L RESOURCES, INC. By:_____________________________________ John M. Chappelear Vice President-Investments & Pension -3- EX-12.(A) 12 PPL CORP. COMP. RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12(a) PPL CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Millions of Dollars)
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Fixed charges, as defined: Interest on long-term debt................................. $233 $203 $196 $207 $213 Interest on short-term debt and other interest............. 47 33 26 17 18 Amortization of debt discount, expense and premium - net... 4 2 2 2 2 Interest on capital lease obligations Charged to expense..................................... 8 8 9 13 15 Capitalized............................................ 1 2 2 2 2 Estimated interest component of operating rentals.......... 20 18 15 8 8 Proportionate share of fixed charges of 50-percent-or-less-owned persons...................... 1 1 1 1 1 ---- ---- ---- ---- ---- Total fixed charges................................ $314 $267 $251 $250 $259 ==== ==== ==== ==== ==== Earnings, as defined: Net income (a)............................................. $478 $379 $296 $329 $323 Preferred and Preference Stock Dividend Requirements....... 26 25 24 28 28 Less undistributed income of less than 50-percent-owned persons............................ -- -- -- -- -- ---- ---- ---- ---- ---- 504 404 320 357 351 Add (Deduct): Income taxes............................................... 174 259 238 253 286 Amortization of capitalized interest on capital leases..... 2 2 2 4 5 Total fixed charges as above (excluding capitalized interest on capital lease obligations)............................ 313 265 248 248 257 ---- ---- ---- ---- ---- Total earnings..................................... $993 $930 $808 $862 $899 ==== ==== ==== ==== ==== Ratio of earnings to fixed charges (b)....................... 3.16 3.48 3.22 3.45 3.47 ==== ==== ==== ==== ====
(a) 1999 and 1998 net income excluding extraordinary items. (b) Based on earnings excluding one-time adjustments, the ratio of earnings to fixed charges are: 1999, 2.86; 1998, 3.10; 1997, 3.40; and 1995, 3.08. EX-12.(B) 13 PPL ELECTRIC UTILITIES COMP. RATIO EARNINGS Exhibit 12(b) PPL ELECTRIC UTILITIES CORPORATION AND SUBSIDIARIES, CONSOLIDATED COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Millions of Dollars)
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Fixed charges, as defined: Interest on long-term debt..................................... $205 $188 $195 $207 $213 Interest on short-term debt and other interest................. 10 14 17 11 18 Amortization of debt discount, expense and premium - net....... 5 2 2 2 2 Interest on capital lease obligations Charged to expense......................................... 9 8 9 13 15 Capitalized ............................................... 1 2 2 2 2 Estimated interest component of operating rentals.............. 19 18 15 8 8 Proportionate share of fixed charges of 50-percent-or-less-owned persons ......................... 1 1 1 1 1 ---- ---- ---- ---- ---- Total fixed charges.................................... $250 $233 $241 $244 $259 ==== ==== ==== ==== ==== Earnings, as defined: Net income (a)................................................. $444 $409 $348 $357 $352 Less undistributed income of less than 50-percent-owned persons................................ -- -- -- -- -- ---- ---- ---- ---- ---- 444 409 348 357 352 Add (Deduct): Income taxes .................................................. 151 273 248 251 287 Amortization of capitalized interest on capital leases......... 2 2 2 4 6 Total fixed charges as above (excluding capitalized interest on capital lease obligations)................................ 249 231 239 243 257 ---- ---- ---- ---- ---- Total earnings......................................... $846 $915 $837 $855 $902 ==== ==== ==== ==== ==== Ratio of earnings to fixed charges (b)........................... 3.38 3.93 3.47 3.50 3.48 ==== ==== ==== ==== ====
(a) 1999 and 1998 net income excluding extraordinary items. (b) Based on earnings excluding one-time adjustments, the ratio of earnings to fixed charges are: 1999, 3.09; 1998, 3.52; and 1995, 3.09. EX-23 14 CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-48781, 333-70101, 333-70101-01, 333-87847, 333- 87847-01 and 333-87847-02) of PPL Corporation and in the Registration Statements on Form S-8 (Nos. 33-50031, 333-02003 and 333-95967) of PPL Corporation of our report dated January 31, 2000 relating to the consolidated financial statements and financial statement schedules, which appears in this Form 10_K. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 1, 2000 EX-24 15 POWER OF ATTORNEY PPL CORPORATION PPL ELECTRIC UTILITIES CORPORATION. 1999 ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION ON FORM 10-K POWER OF ATTORNEY ----------------- The undersigned directors of PPL Corporation and PPL Electric Utilities Corporation, both Pennsylvania corporations, which are to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, their 1999 Annual Report on Form 10-K, do hereby appoint William F. Hecht, John R. Biggar and Robert J. Grey their true and lawful attorney, and each of them their true and lawful attorney, with power to act without the other and with full power of substitution and resubstitution, to execute for them and in their names said Form 10-K Report and any and all amendments thereto, whether said amendments add to, delete from or otherwise alter said Form 10-K Report, or add or withdraw any exhibits or schedules to be filed therewith and any and all instruments in connection therewith. The undersigned hereby grant to said attorneys and each of them full power and authority to do and perform in the name of and on behalf of the undersigned, and in any and all capacities, any act and thing whatsoever required or necessary to be done in and about the premises, as fully and to all intents and purposes as the undersigned might do, hereby ratifying and approving the acts of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals this 25th day of February, 2000. By: /s/ Frederick M. Bernthal L.S. By: /s/ Stuart Heydt L.S. ------------------------------- ------------------------------ Frederick M. Bernthal Stuart Heydt By: /s/ E. Allen Deaver L.S. By: /s/ Frank A. Long L.S. ------------------------------- ------------------------------ E. Allen Deaver Frank A. Long By: /s/ William J. Flood L.S. By: /s/ Norman Robertson L.S. ------------------------------- ------------------------------ William J. Flood Norman Robertson By: /s/ Elmer D. Gates L.S. By: /s/ Marilyn Ware L.S. ------------------------------- ------------------------------ Elmer D. Gates Marilyn Ware By: /s/ William F. Hecht L.S. ------------------------------- William F. Hecht EX-27 16 FINANCIAL DATA SCHEDULE - PPL CORPORATION
UT This schedule contains summary information extracted from the statement of operations and changes in member's equity, the statement of cash flows, and the balance sheet for the Form 10-K dated December 31, 1999, and is qualified in its entirety by reference to such financial statements. 0000922224 PPL CORPORATION 1,000,000 YEAR DEC-31-1999 DEC-31-1999 PER-BOOK 5,564 775 1,293 3,542 0 11,174 2 957 654 1,613 47 50 3,939 377 0 480 468 0 67 58 4,075 11,174 4,590 174 3,718 3,892 698 97 795 277 458 26 432 151 142 644 2.84 2.84 Net of $836 million of treasury stock Net income includes an extraordinary item of ($46) million ($78 million net of $32 million of income taxes) reflecting the effects of the early extinguishment of debt and a credit relating to wholesale power activity. It also includes minority interest of $14 million.
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