PP&L RESOURCES INC
10-K405, 1999-03-03
ELECTRIC SERVICES
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<PAGE>
 
                                 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, 1998

                   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          PP&L Resources, Inc.                   23-2758192
                   (Exact name of Registrant as
                   specified in its charter)
                   (Pennsylvania)
                   Two North Ninth Street
                   Allentown, PA  18101
                   (610) 774-5151
 
  1-905            PP&L, Inc.                             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 PP&L Resources, Inc.    New York & Philadelphia
                                        Stock Exchanges


Preferred Stock of PP&L, Inc.
 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 PP&L, Inc.
 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 PP&L, Inc.
(b) Issued by PP&L Capital Trust II and guaranteed by PP&L, Inc.

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.

         PP&L Resources, Inc.                [   ]
         PP&L, Inc.                          [ 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.

 PP&L Resources, Inc.                   Yes  X        No 
                                            -----        -----
 PP&L, Inc.                             Yes  X        No 
                                            -----        -----



The aggregate market value of the voting common stock held by non-affiliates of
PP&L Resources, Inc. at January 31, 1999 was $4,208,205,601.  PP&L Resources,
Inc. held all 157,300,382 outstanding common shares, no par value, of PP&L, Inc.
The aggregate market value of the voting preferred stock held by non-affiliates
of PP&L, Inc. at January 31, 1999 was $92,518,336.

The number of shares of PP&L Resources, Inc. Common Stock, $.01 par value,
outstanding on January 31, 1999 was 157,684,519, excluding 16,996,129 shares
held as treasury stock.

           Documents incorporated by reference:

     Registrants have incorporated herein by reference certain sections of their
1999 Notices of Annual Meetings and Proxy Statements which will be filed with
the Securities and Exchange Commission not later than 120 days after December
31, 1998.  Such Proxy Statements will provide the information required by Part
III of this Report.
<PAGE>
 
                             PP&L RESOURCES, INC.
                                  PP&L, INC.

                          FORM 10-K ANNUAL REPORT TO
                    THE SECURITIES AND EXCHANGE COMMISSION
                     FOR THE YEAR ENDED DECEMBER 31, 1998
                     ------------------------------------

                               TABLE OF CONTENTS
                               -----------------

     This combined Form 10-K is separately filed by PP&L Resources, Inc. and
PP&L, Inc.  Information contained herein relating to PP&L, Inc. is filed by PP&L
Resources, Inc. and separately by PP&L, Inc. on its own behalf.  PP&L, Inc.
makes no representation as to information relating to PP&L Resources, Inc. or
its subsidiaries, except as it may relate to PP&L, Inc.

Item                                                          Page
- ----                                                          ----
                             PART I
                             ------
 1.  Business .............................................

 2.  Properties ...........................................

 3.  Legal Proceedings ....................................

 4.  Submission of Matters to a Vote of Security Holders ..

     Executive Officers of the Registrants ................

                             PART II
                             -------

 5.  Market for the Registrant's Common Equity and Related
     Stockholder Matters ..................................

 6.  Selected Financial Data ..............................

 7.  Review of the Financial Condition and
     Results of Operations  ...............................

 8.  Financial Statements and Supplementary Data

       Report of Independent Accountants ..................

       Management's Report on Responsibility for Financial
         Statements .......................................

     Financial Statements:

       PP&L Resources, Inc.

       Consolidated Statement of Income for each of the 
         Three Years Ended December 31, 1998, 1997 and 
         1996..............................................
       Consolidated Statement of Cash Flows for each of 
         the Three Years Ended December 31, 1998, 1997 
         and 1996..........................................
       Consolidated Balance Sheet at December 31, 1998 and
         1997 .............................................
       Consolidated Statement of Shareowners' Common 
         Equity for each of the Three Years Ended December 
         31, 1998, 1997 and 1996...........................
       Consolidated Statement of Preferred Stock at
         December 31, 1998 and 1997 .......................
       Consolidated Statement of Company-Obligated
         Mandatorily Redeemable Securities at
         December 31, 1998 and 1997 .......................
       Consolidated Statement of Long-Term Debt at
         December 31, 1998 and 1997 .......................
<PAGE>
 
       PP&L, Inc.

       Consolidated Statement of Income for each of the 
         Three Years Ended December 31, 1998, 1997 and 
         1996..............................................
       Consolidated Statement of Cash Flows for each of 
         the Three Years Ended December 31, 1998, 1997 
         and 1996..........................................
       Consolidated Balance Sheet at December 31, 1998 and
         1997 .............................................
       Consolidated Statement of Shareowner's Common 
         Equity for each of the Three Years Ended December 
         31, 1998, 1997 and 1996 ..........................
       Consolidated Statement of Preferred Stock at
         December 31, 1998 and 1997 .......................

       Notes to Financial Statements ......................

       Supplemental Financial Statement Schedule:

       II - Valuation and Qualifying Accounts and
            Reserves for the Three Years Ended
            December 31, 1998 .............................

     Quarterly Financial, Common Stock Price and
       Dividend Data ......................................

 9.  Changes in and Disagreements with Accountants on
       Accounting and Financial Disclosure ................

                             PART III
                             --------

10.  Directors and Executive Officers of the Registrants ..

11.  Executive Compensation ...............................

12.  Security Ownership of Certain Beneficial
     Owners and Management ................................

13.  Certain Relationships and Related Transactions .......

                             PART IV
                             -------

14.  Exhibits, Financial Statement Schedules, and
       Reports on Form 8-K ................................

     Shareowner and Investor Information ..................

     Signatures ...........................................

     Exhibit Index ........................................
 
     Computation of Ratio of Earnings to Fixed Charges ....
<PAGE>
 
                      Glossary of Terms and Abbreviations

AFUDC (Allowance for Funds Used During Construction) - the cost of equity and
debt funds used to finance construction projects that is capitalized as part of
construction cost.

ATLANTIC - Atlantic City Electric Company

BG&E - Baltimore Gas & Electric Company

CERCLA - Comprehensive Environmental Response, Compen-sation and Liability Act

CLEAN AIR ACT (Federal Clean Air Act Amendments of 1990) - legislation enacted
to address environmental issues including acid rain, ozone and toxic air
emissions.

CTC - competitive transition charge

CUSTOMER CHOICE ACT - (Pennsylvania Electricity Generation Customer Choice and
Competition Act) - legislation enacted to restructure the state's electric
utility industry to create retail access to a competitive market for generation
of electricity

DelSur - Distributidora Electricidad del Sur S.A., an electric distribution
company in El Salvador

DEP - Pennsylvania Department of Environmental Protection

DISTRICT COURT - United States District Court for the Eastern District of
Pennsylvania.

DOE - Department of Energy

DRIP (Dividend Reinvestment Plan) - program available to shareowners of PP&L
Resources' common stock and PP&L preferred stock to reinvest dividends in PP&L
Resources' common stock instead of receiving dividend checks.

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) - legislation passed by Congress to
promote competition in the electric energy market for bulk power.

ENERGY MARKETING CENTER - organization within PP&L responsible for marketing and
trading wholesale energy

EPA - Environmental Protection Agency

ESOP - Employee Stock Ownership Plan

FASB (Financial Accounting Standards Board) - a rulemaking organization that
establishes financial accounting and reporting standards.

FGD - flue gas desulfurization equipment installed at coal-fired power plants to
reduce sulfur dioxide emissions.

FERC (Federal Energy Regulatory Commission) - federal agency that regulates
interstate transmission and sale of electricity and related matters.

GRT - Gross Receipts Tax

H.T. LYONS - H.T. Lyons, Inc., a PP&L Resources unregulated subsidiary
specializing in mechanical contracting and engineering.

IBEW - International Brotherhood of Electrical Workers

ISO - Independent System Operator

ITC - intangible transition charge

JCP&L - Jersey Central Power & Light Company

MAJOR UTILITIES - Atlantic, BG&E and JCP&L

McCarl's - McCarl's Inc., a PP&L Resources unregulated subsidiary specializing
in mechanical contracting and engineering.

MCCLURE - McClure Company, a PP&L Resources unregulated subsidiary specializing
in mechanical contracting and engineering.

MSHA - Mine Safety and Health Administration

NOX - 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 as required by PURPA.

OCA - Pennsylvania Office of Consumer Advocate

OSM - United States Office of Surface Mining

PA. CNI - Pennsylvania corporate net income tax

PCB (Polychlorinated Biphenyl) - additive to oil used in certain electrical
equipment up to the late-1970s.  Now classified as a hazardous chemical.

PECO - PECO Energy Company

PENN FUEL GAS - Penn Fuel Gas, Inc., a PP&L Resources regulated subsidiary
specializing in natural gas distribution, transmission and storage services, and
the sale of propane.

PJM (PJM Interconnection, L.L.C.) - operates the electric transmission network
and electric energy market in the mid-Atlantic region of the U.S.

PLAN - PP&L's non-contributory defined benefit pension plan.

PP&L - PP&L, Inc.

PP&L CAPITAL FUNDING - PP&L Capital Funding, Inc., PP&L Resources' financing
subsidiary.

PP&L CAPITAL TRUST - a Delaware statutory business trust created to issue
Preferred Securities, whose common stock is held by PP&L.

PP&L CAPITAL TRUST II -- a Delaware statutory business trust created to issue
Preferred Securities, whose common stock is held by PP&L.

PP&L ENERGYPLUS - Refers to PP&L, Inc. d/b/a PP&L EnergyPlus, and PP&L
EnergyPlus Co., a PP&L, Inc. unregulated subsidiary which is involved in retail
electric generating supply. During 1998, PP&L, Inc. d/b/a PP&L EnergyPlus
provided retail electric generating supply in the Pennsylvania retail pilot
program. As a result of the PUC restructuring settlement, PP&L EnergyPlus became
a separate subsidiary of PP&L, Inc. in September 1998. As of January 1999, PP&L
EnergyPlus Co. is providing retail electric generating supply to customers
throughout Pennsylvania.

PP&L GLOBAL  - PP&L Global, Inc., a PP&L Resources unregulated subsidiary which
invests in and develops world-wide power projects

PP&L RESOURCES - PP&L Resources, Inc., the parent holding company of PP&L, PP&L
Global and other subsidiaries.
<PAGE>
 
PP&L SPECTRUM - PP&L Spectrum, Inc., a PP&L Resources unregulated subsidiary
which offers energy-related products and services.

PP&L'S MORTGAGE - PP&L's Mortgage and Deed of Trust, dated October 1, 1945.

PREFERRED SECURITIES - Company-obligated mandatorily re-deemable preferred
securities of subsidiary trusts holding solely company debentures (issued by two
Delaware statutory business trusts).

PUC (Pennsylvania Public Utility Commission) - state agency that regulates
certain ratemaking, services, accounting, and operations of Pennsylvania
utilities.

PUC DECISION - final order issued by the PUC on September 27, 1995 pertaining to
PP&L's base rate case filed in December 1994.

PUC FINAL ORDER - Final order issued by the PUC on August 27, 1998, approving
the settlement of PP&L Inc.'s 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.

RCRA - 1976 Resource Conservation and Recovery Act

SBRCA - Special Base Rate Credit Adjustment

SEC - Securities and Exchange Commission

SER - Schuylkill Energy Resources, Inc.

SFAS (Statement of Financial Accounting Standards) - accounting and financial
reporting rules issued by the FASB.

SO2 - Sulfur dioxide

STAS (State Tax Adjustment Surcharge) - rate adjustment mechanism to customer
bills for changes in certain state taxes.

SUPERFUND - federal and state legislation that addresses remediation of
contaminated sites.

SWEB - South Western Electricity plc, a British regional electric utility
company.

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.

VERP - Voluntary Early Retirement Program

YEAR 2000 - a set of date-related problems that may be experienced by software
systems or applications.
<PAGE>
 
                                    PART I
                                    ------

                               ITEM 1. BUSINESS
                               ----------------

     Terms and abbreviations appearing in "BUSINESS" are explained in the
glossary.

BACKGROUND

     PP&L Resources is a holding company with headquarters in Allentown, PA.
Its subsidiaries include PP&L, which provides electricity delivery service in
eastern and central Pennsylvania, sells retail electricity throughout
Pennsylvania and markets wholesale electricity in 28 states and Canada; PP&L
EnergyPlus (a subsidiary of PP&L), which sells competitively-priced energy and
energy services to newly deregulated markets; PP&L Global, an international
independent power company which invests in and develops world-wide power
projects; PP&L Spectrum, which markets energy-related services and products;
PP&L Capital Funding, which provides debt funding for PP&L Resources and its
subsidiaries other than PP&L; Penn Fuel Gas, which provides natural gas
distribution, transmission and storage services and sells propane; and H.T.
Lyons and McClure, which are mechanical contractor and engineering firms.  In
February 1999, PP&L Resources acquired McCarl's Inc., another mechanical
contractor and engineering firm.  Other subsidiaries may be formed by PP&L
Resources to take advantage of new business opportunities.

     The financial condition and results of operations of PP&L and PP&L Global
are currently the principal factors affecting PP&L Resources' financial
condition and results of operations.

     The electric utility industry, including PP&L, 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, in December 1996 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 3 to Financial Statements and "Increasing
Competition" in Review of Financial Condition and Results of Operations for a
discussion of competition-related proceedings before the PUC and PP&L's
involvement in those proceedings.

     PP&L 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.  PP&L Resources and PP&L have been exempted by
the SEC from the provisions of PUHCA applicable to them as holding companies.
<PAGE>
 
     PP&L is subject to the jurisdiction of the NRC in connection with the
operation of the two nuclear-fueled generating units at PP&L's Susquehanna
station. PP&L 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.

     PP&L 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.  The operations of PP&L are subject to the
Occupational Safety and Health Act of 1970, and the coal cleaning and loading
operations of a PP&L subsidiary are subject to the Federal Mine Safety and
Health Act of 1977.

     PP&L 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, PP&L is delivering power supplied by licensed
EGS' pursuant to the Customer Choice Act.

     During 1998, about 96% of total operating revenue was derived from electric
energy sales and marketing activities, with 26% coming from residential
customers, 22% from commercial customers, 15% from industrial customers, 34%
from wholesale sales and 3% from others.

     PP&L 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.  PP&L 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.  See
"Increasing Competition" in the Review of Financial Condition and Results of
Operations for further details on this PJM restructuring.
<PAGE>
 
     To take advantage of opportunities in the competitive energy marketplace,
PP&L created an Energy Marketing Center in 1995.  The group operates a 24-hour
trading floor and a marketing effort with responsibility for all PP&L wholesale
power transactions.  The Energy Marketing Center has allowed PP&L to buy and
sell energy at the most competitive prices and to expand these activities beyond
PP&L's  traditional service territory.

     Pursuant to the Joint Settlement Petition in its PUC restructuring
proceeding, PP&L transferred its retail marketing function to a new subsidiary,
PP&L EnergyPlus, in September 1998.  PP&L EnergyPlus has a PUC license to act as
an EGS.  This license permits PP&L EnergyPlus to offer retail electric supply to
customers throughout Pennsylvania.  In 1999, PP&L EnergyPlus will offer such
supply to industrial and commercial customers throughout the state.  At this
time, PP&L EnergyPlus has decided not to pursue residential customers in the
competitive marketplace based on economic considerations.

     Other wholly-owned subsidiary companies of PP&L principally are engaged in
oil and gas pipeline operations, holding cash reserves and passive financial
investing.

     PP&L Global, PP&L Resources' second largest subsidiary after PP&L, is an
international independent power company with current investments of $671
million.  PP&L Global has ownership and operational interests in distribution
companies in the U.K., Chile and El Salvador that deliver electricity to more
than 2 million customers.  PP&L Global also has investment interests in
Argentina, Peru, Spain, Portugal, Bolivia and Brazil.  PP&L Global's major
investments to date are SWEB, Emel and DelSur.

     During 1998, PP&L Global reached an agreement to acquire the generation
facilities of Bangor-Hydro Electric Company in Maine, totaling 95 megawatts, as
well as certain associated transmission rights, for $89 million.

     In addition, during 1998 PP&L Global signed definitive agreements to
purchase 13 Montana power plants, with 2,614 megawatts of generating capacity,
for $1.586 billion.  The acquisition is subject to several conditions, including
the receipt of required state and federal regulatory approvals and third-party
consents.  The agreements also provide for PP&L Global's acquisition of related
transmission assets for $182 million.

     PP&L Global also has announced plans to develop a 520 megawatt gas-fired
power plant in Kingman, Arizona, a 500 - 600 megawatt gas-fired plant in
Wallingford, Connecticut, and a 500 - 600 megawatt gas-fired plant in eastern
Pennsylvania.

     PP&L Resources has established growth in its generation capability, along
with expansion of its energy marketing operations, as a key element of its
business strategy.  In 
<PAGE>
 
addition to the current generating assets of PP&L and the announced acquisitions
and developments of PP&L Global discussed above, PP&L Resources plans to add
another 7,500 mW of generation within the next five years.

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
PP&L's estimated capital expenditure requirements for the years 1999-2003.  See
Note 14 to Financial Statements for information concerning PP&L's estimate of
the cost to comply with the federal clean air legislation enacted in 1990, to
address groundwater degradation and waste water control  at PP&L facilities and
to comply with solid waste disposal regulations adopted by the DEP.

POWER SUPPLY

     PP&L's system capacity (winter rating) at December 31, 1998 was as follows:

                                                   Net
                                                 Kilowatt
       Plant                                     Capacity
       -----                                     --------
  Nuclear-fueled steam station
   Susquehanna                                  1,995,000 (a)
                                                ---------    
  Coal-fired steam stations
   Montour                                      1,525,000
   Brunner Island                               1,469,000
   Sunbury                                        389,000 (b)
   Martins Creek                                  300,000
   Keystone                                       210,000 (c)
   Conemaugh                                      194,000 (d)
   Holtwood                                        73,000 (e)
                                                ---------    
    Total coal-fired                            4,160,000
                                                ---------
  Gas and oil-fired steam station
   Martins Creek                                1,592,000
  Combustion turbines and diesels                 364,000
  Hydroelectric                                   146,000
                                                ---------
    Total generating capacity                   8,257,000
                                                ---------
  Firm purchases
   Hydroelectric                                  139,000 (f)
   Qualifying facilities                          338,000
                                                ---------
    Total firm purchases                          477,000
                                                ---------
  Total system capacity                         8,734,000
                                                =========
____________________________
  (a)  PP&L's 90% undivided interest.
  (b)  PP&L has announced its intention to sell the Sunbury station in
       1999.
  (c)  PP&L's 12.34% undivided interest.
  (d)  PP&L's 11.39% undivided interest.
  (e)  Holtwood is scheduled to be closed on May 1, 1999.
  (f)  From Safe Harbor Water Power Corporation.
<PAGE>
 
       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,
and installed capacity credit sales and purchases with other utilities.  The net
effect of these transactions is to reduce system capacity by 1,039,000 kilowatts
at the end of December 1998 to 7,695,000 kilowatts.

     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.

     During 1998, PP&L produced about 41.7 billion kWh in plants it owned.  PP&L
also purchased 28.8 billion kWh, and had 35.3 billion kWh in non-system energy
sales.

     During 1998, 59% of the energy generated by PP&L's plants came from coal-
fired stations, 35% from nuclear operations at the Susquehanna station, 4% from
the Martins Creek gas and oil-fired station and 2% from hydroelectric stations.

     The maximum one-hour demand recorded on PP&L's system is 6,688,000
kilowatts, which occurred on January 14, 1999.  The maximum recorded one-hour
summer demand is 6,046,000 kilowatts, which occurred on July 15, 1997.  These
peak demands do not include energy sold to Atlantic, BG&E or JCP&L.

     PP&L purchases energy from and sells energy to other utilities and FERC-
certified power marketers.  PP&L enters into these transactions on an hourly,
daily, weekly, monthly or longer-term basis.

     PP&L has a FERC short-term capacity and/or energy sales tariff enabling
PP&L to sell to other utilities and marketers.  As of the end of 1998, ninety
utilities and marketers had signed service agreements under this cost-based
tariff.  Transactions under these agreements allow PP&L to make more efficient
use of its generating resources and are intended to provide benefits to both
PP&L and the other parties.  Under this tariff, PP&L may also sell power
purchased from third parties, which increases PP&L's capabilities for profitable
wholesale transactions.

     PP&L also has FERC authorization to sell electric energy and capacity at
market-based rates to wholesale customers located both inside and outside the
PJM control area.  Seventy parties have signed service and power sales
agreements for transactions under this market-based rates tariff.

     PP&L has an export license to sell capacity and/or energy to electric
utilities in Canada.  This export license allows PP&L to sell either its own
capacity and energy not required to serve domestic obligations or power
purchased from other utilities.
<PAGE>
 
     See Note 5 to Financial Statements for additional information concerning
the sale of capacity and energy to Atlantic, BG&E and JCP&L.

     In addition to the 338,000 kilowatts of qualifying facility generation
included in the total system capacity table above, PP&L is purchasing about
12,000 kilowatts of output from various other non-utility generating companies.

     In an effort to reduce operating costs and position itself for the
competitive marketplace, PP&L in August 1998 announced the closing of its
Holtwood coal-fired generating station, effective May 1, 1999.  The adjacent
hydroelectric plant will continue to operate.  In addition, PP&L announced its
intention to sell its Sunbury coal-fired generating station in 1999.

FUEL SUPPLY

     Coal
     ----

     During 1998, about 55% of the coal delivered to PP&L's generating stations
was purchased under contracts and 45% was obtained through open market
purchases.  Contracts with non-affiliated coal producers provided PP&L with
about 4.2 million tons of coal in 1998 and are expected to provide PP&L with
about 5.0 million tons in 1999.  PP&L's requirements for additional coal are
expected to be obtained by contracts and open market purchases.

     The amount of coal carried in inventory at PP&L's generating stations
varies from time to time depending on market conditions and plant operations.
As of December 31, 1998, PP&L's coal supply was sufficient for at least 34 days
of operations.

     The coal burned in PP&L's 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.  For information concerning PP&L's
plans to achieve compliance with the federal clean air legislation enacted in
1990, see "Environmental Matters" in Note 14 to Financial Statements.

     PP&L 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 to provide 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 
<PAGE>
 
station are being met from several sources through a blend of long-term and
short-term contracts and spot market purchases.

Oil and Natural Gas
- -------------------

     PP&L's Martins Creek generating station Units 3 and 4 burn both oil and
natural gas. During 1998, 100% of the oil requirements for the Martins Creek
units was purchased on the spot market. As of December 31, 1998, PP&L has no
long-term agreements for these requirements.

     During 1998, all of the natural gas consumed at Martins Creek was purchased
and transported under short-term agreements that were one month or less in
duration.  PP&L does not have any long-term agreements to purchase gas or gas
transportation.

     PP&L's 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 trading enhances wholesale and retail marketing
efforts and provides a diversified energy portfolio to offer customers.
Additionally, the new trading activities create opportunities to optimize
electric generation efficiency and minimize fuel costs.

     Nuclear
     -------

     PP&L has entered into uranium supply and conversion agreements that satisfy
100% of the uranium requirements for the Susquehanna units through 1999,
approximately 45% of the requirements for the period 2000-2002 and, including
options, an additional 25% of the requirements for the period 2003-2005.
Deliveries under these agreements are expected to provide sufficient quantities
of uranium to permit Unit 1 to operate into the first quarter of 2002 and Unit 2
to operate into the first quarter of 2001.

     PP&L has entered into an agreement that satisfies 100% of its enrichment
requirements through 2004.  Assuming that other portions of the nuclear fuel
cycle are met, 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.

     PP&L has entered into an agreement that, including options, satisfies 100%
of its fabrication requirements through 2006.  Assuming that other portions of
the nuclear fuel cycle are met, 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.

     PP&L estimates that there is sufficient storage capacity in the spent
nuclear fuel pools at Susquehanna to accommodate the fuel that is expected to be
discharged through the end of 1999.  
<PAGE>
 
Federal law requires the federal government to provide for the permanent
disposal of commercial spent nuclear fuel. Pursuant to the requirements of that
law, the DOE has initiated an analysis of a site in Nevada for a permanent
nuclear waste repository. Progress on characterization of 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 is necessary. To support this expansion, PP&L has contracted for the
design and construction of a spent fuel storage facility employing dry cask fuel
storage technology at the Susquehanna station. The facility will be modular so
that additional storage capacity can be added as needed. PP&L currently expects
that the new facility will be available to start receiving nuclear spent fuel in
1999. See "Financial Condition - Capital Expenditure Requirements" in the Review
of the Financial Condition and Results of Operations.

     Federal law also provides that certain costs of spent nuclear fuel disposal
are the responsibility of the generators of such wastes.  In January 1997, PP&L
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 the spent nuclear fuel and suspension of the
payment of fees 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 (i.e., monetary
damages) if the DOE fails 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".

YEAR 2000

     See "Year 2000" in the Review of the Financial Condition and Results of
Operations for information.

ENVIRONMENTAL MATTERS

     PP&L is 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 1998 and PP&L's
estimate of those expenditures during the years 1999-2003. PP&L believes that it
is presently in substantial compliance with applicable environmental laws and
regulations.

     See "Environmental Matters" in Note 14 to Financial Statements for
information concerning federal clean air legislation enacted in 1990,
groundwater degradation and waste water control at PP&L facilities, the DEP's
solid waste disposal regulations and PP&L's agreement with the DEP concerning
<PAGE>
 
remediation at certain sites of past operations.  Other environmental laws,
regulations and developments that may have a substantial impact on PP&L 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 DEP administers the EPA's air quality
regulations through the Pennsylvania State Implementation Plan and has
concurrent authority to impose penalties for noncompliance.  At this time, PP&L
is meeting all requirements of Phase I of the Clean Air Act.

     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 the period 2008 to 2012.  Compliance under
the Agreement, if implemented, could result in increased capital and operating
expenses for PP&L in amounts which are not now determinable but which could be
material.

     Water
     -----

     To implement the requirements established by 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 including effluent
standards for steam electric stations.  The DEP administers 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 PP&L's existing
facilities, depending on the DEP's interpretation and future amendments to its
regulations.

     The EPA and DEP limitations, standards and guidelines for the discharge of
pollutants from point sources into surface waters are implemented through the
issuance of NPDES permits. PP&L has the NPDES permits necessary for the
operation of its facilities.

     Pursuant to the Surface Mining and Reclamation Act of 1977, the OSM has
adopted effluent guidelines which are applicable to PP&L subsidiaries as a
result of their past coal mining and 
<PAGE>
 
continued 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 DEP to
implement the NPDES program for Pennsylvania sources. Compliance with applicable
water quality standards is assured by DEP review of NPDES permit conditions.
PP&L's subsidiaries have received NPDES permits for their mines and related
facilities.

     Solid and Hazardous Waste
     -------------------------

     The RCRA regulates the generation, transportation, treatment, storage and
disposal of hazardous wastes.  RCRA also imposes joint and several liability on
generators of solid or hazardous waste for clean-up costs.  A revision of RCRA
in late-1984 lowered  the threshold for the amount of on-site hazardous waste
generation requiring regulation and incorporated underground tanks used for the
storage of petroleum and petroleum products as regulated units.  Based upon the
results of a survey of its solid waste practices, PP&L in the past has filed
notices with the EPA indicating that hazardous waste is occasionally generated
at all of its steam electric generating stations and service centers. PP&L has
established specific operating procedures for handling this hazardous waste.
Therefore, at this time, RCRA and related DEP regulations are not expected to
have a significant additional impact on PP&L.

     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.

     The Pennsylvania Superfund law also gives the DEP broad authority to
identify hazardous or contaminated sites in Pennsylvania and to order owners or
responsible parties to clean-up the sites.  If responsible parties cannot or
will not perform the clean-up, the DEP can hire contractors to clean-up the
sites and then require reimbursement from the responsible parties after the
clean-up is completed.  To date, PP&L has principally been involved in federal,
rather than state, Superfund sites.

     PP&L has completed removal of coal tar from one subsurface accumulation at
a former coal gasification plant site in Monroe County, Pennsylvania and
currently expects that significant additional remedial action will not be
required.  PP&L has entered into agreements with the adjacent property owner and
DEP to share the past and future costs of remediating this site.  PP&L's share
of these costs, including future monitoring, is approximately $3 million, all of
which has been spent or accrued.
<PAGE>
 
     PP&L has removed coal tar in two brick pits on the site of a former gas
plant and from river sediment adjacent to the site in Columbia, Pennsylvania.
The cost of investigation and remediation of the areas of the site where such
action has been required is estimated at $3 million, all of which has been spent
or accrued.  There also is coal tar contamination of the soil and groundwater at
the site.  Further remediation of these other areas of the site may be required,
the costs of which are not now determinable but could be material.

     PP&L at one time also owned and operated several other gas plants in its
service area.  None of these sites is presently on the Superfund list.  However,
a few of them may be possible candidates for listing at a future date. PP&L
expects to continue to investigate and, if necessary, remediate these sites.
The cost of this work is not now determinable but could be material.

     PP&L is involved in several other sites where it may be required, along
with other parties, to contribute to investigation and remediation.  Some of
these sites have been listed by the EPA under Superfund, and others may be
candidates for listing at a future date.  Future investigation or remediation
work at sites currently under review, or at sites currently unknown, may result
in material additional operating costs which PP&L cannot estimate at this time.
In addition, certain federal and state statutes, including Superfund and the
Pennsylvania Hazardous Sites Cleanup Act, empower certain governmental agencies,
such as the EPA and the DEP, to seek compensation from the responsible parties
for the lost value of damaged natural resources.  The EPA and the DEP may file
such compensation claims against the parties, including PP&L, to be held
responsible for clean-up of such sites.  Such natural resource damage claims
against PP&L could result in additional material liabilities.

     See Item 3 "LEGAL PROCEEDINGS" for information concerning an EPA order and
a complaint filed by the EPA in federal district court against PP&L and 35
unrelated parties for remediation of a Superfund site in Berks County,
Pennsylvania; a complaint filed by PP&L and 16 unrelated parties in federal
district court against other parties for contribution under Superfund relating
to the Novak landfill Superfund site in Lehigh County, Pennsylvania and a
related action by the EPA against PP&L and 29 unrelated parties to recover the
agency's past and future costs at the Novak landfill site; an action by the EPA
for reimbursement of the EPA's past response costs and remediation at the site
of a former metal salvaging operation in Montour County, Pennsylvania; and
PP&L's challenge to the DEP's right to collect fees for emissions from PP&L's
coal-fired units.
<PAGE>
 
     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.  PP&L 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.  PP&L 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.  PP&L is unable to predict what effect, if any, the
EMF issue might have on PP&L operations and facilities and the associated cost,
or what, if any, liabilities PP&L might incur related to the EMF issue.

     In addition to the matters described above, PP&L and its subsidiaries have
been cited from time to time for temporary violations of the DEP and the EPA
regulations with respect to air and water quality and solid waste disposal in
connection with the operation of their facilities and may be cited for such
violations in the future.  As a result, PP&L and its subsidiaries may be subject
to certain penalties which are not expected to be material in amount.

     PP&L is 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, PP&L may
be required to modify, replace or cease operating certain of its facilities.
PP&L may also incur material capital expenditures and operating expenses in
amounts which are not now determinable.
<PAGE>
 
FRANCHISES AND LICENSES

     PP&L has authority to provide electric public utility service throughout
its entire service area as a result of grants by the Commonwealth of
Pennsylvania in corporate charters to PP&L and companies to which it has
succeeded and as a result of certification thereof by the PUC. PP&L has been
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.  PP&L also has an export
license from the DOE to sell capacity and/or energy to electric utilities in
Canada.

     PP&L operates Susquehanna Unit 1 and Unit 2 pursuant to NRC operating
licenses which expire in 2022 and 2024, respectively. PP&L operates two
hydroelectric projects pursuant to licenses which were 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.

     PP&L also owns one-third of the capital stock of Safe Harbor Water Power
Corporation, which holds a project license which extends until 2030 for the
operation of its hydroelectric plant.  The total capacity of the Safe Harbor
plant is 417,500 kilowatts, and PP&L is entitled by contract to one-third of the
total capacity (139,000 kilowatts).

EMPLOYEE RELATIONS

     As of December 31, 1998, PP&L Resources and its subsidiaries had
approximately 7,600 employees including 6,344 full-time PP&L employees.
Approximately 65 percent of PP&L's full-time employees are represented by the
IBEW.  PP&L reached a new labor agreement with the IBEW in 1998.  This agreement
expires in May 2002.
<PAGE>
 
                              ITEM 2. PROPERTIES
                              ------------------


     Reference is made to the "Utility Plant" section of Note 1 to Financial
Statements as well as to "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 electric utility plant is
subject to the lien of PP&L's Mortgage. For a description of PP&L's service
territory and additional information concerning the properties of PP&L, see Item
1, "BUSINESS - Power Supply" and "BUSINESS - Fuel Supply."

     See Item 1 "BUSINESS-Background" for a discussion of PP&L Global's
investments.


                           ITEM 3. LEGAL PROCEEDINGS
                           -------------------------


     Reference is made to Note 3 to Financial Statements for information
concerning PP&L's restructuring proceeding before the PUC under the Customer
Choice Act.

     Reference is made to "Increasing Competition" in the Review of the
Financial Condition and Results of Operations for information concerning pending
proceedings before the FERC regarding wholesale customers and restructuring of
the PJM.

     Reference is made to Item 1 "BUSINESS - Fuel Supply" for information
concerning a lawsuit against the DOE for failure of that agency to perform
certain contractual obligations.

     In 1998, PP&L settled all outstanding disputes and litigation with SER, a
non-utility generating company from which PP&L purchases power under PURPA. This
litigation related to the power purchase agreement between the parties and SER's
status as a qualifying cogeneration facility. Specifically, in August 1998 PP&L
executed an agreement with SER providing that, effective January 1, 1999, the
PP&L/SER power purchase agreement will be amended to provide that SER will
receive 6.6 cents/kWh for generation up to 79.5 MW, as long as SER operates a
"qualifying facility" under FERC rules. Generation in excess of 79.5 MW will
continue to be sold at rates in the existing power purchase agreement. Subject
to regulatory requirements, SER will be permitted, but not required, to sell
generation above 80.5 MW to third parties.

     In November 1998, PP&L and SER executed a second settlement providing that:
(i) SER will make two cash payments totaling $30 million to PP&L in December
1998; (ii) PP&L will retain approximately $8 million in payments withheld from
SER from March through December 1998 as a result of PP&L's reduction in the rate
<PAGE>
 
paid to SER for purchased power; (iii) SER will pay PP&L an additional $4.5
million in total, plus interest, over the remaining 11 years of the power
purchase agreement; (iv) PP&L and SER will conclude all outstanding litigation
and disputes; and (v) PP&L will grant SER normal and emergency minimum operating
levels and curtailment terms like those in place for most of PP&L's other NUGs.
Both cash payments totaling $30 million were made by SER to PP&L in December
1998.

     In April 1991, the U.S. Department of Labor through its MSHA issued
citations to one of PP&L's coal-mining subsidiaries for alleged coal-dust sample
tampering at one of the subsidiary's mines. Citations were also issued against
the independent operator of another subsidiary mine, who is also contesting the
citations issued with respect to that mine. The MSHA at the same time issued
similar citations to more than 500 other coal-mine operators. After the U.S.
Court of Appeals for the District of Columbia Circuit affirmed the ruling of the
Mine Safety and Health Review Commission in favor of one of the mine operators
in a test case, the Secretary of Labor in September 1998 moved to vacate and
dismiss all of the pending cases against the mine operators, including the PP&L
subsidiary. MSHA has indicated that it intends to withdraw all of its citations,
which would conclude all of these pending cases against the mine operators,
including PP&L's subsidiary.

     In August 1994, PP&L filed a rate complaint with the federal Interstate
Commerce Commission, now the Surface Transportation Board, challenging
Consolidated Rail Corporation's (Conrail's) coal transportation rates from
interchange points with connecting carriers to PP&L's power plants. In September
1995, PP&L amended its complaint to add the connecting carriers, CSX Corporation
and Norfolk Southern Corporation, as additional defendants. In September 1997,
PP&L reached an agreement with the carriers to settle this case. The settlement
was conditioned on the outcome of the joint Norfolk Southern/CSX application to
take control of Conrail. The Surface Transportation Board approved the Conrail
takeover in July 1998. Under the terms of the settlement, PP&L began paying
lower coal transportation rates in October 1998.

     In August 1991, PP&L and 35 other unrelated parties received an EPA order
under CERCLA requiring that certain remedial actions be taken at a former oil
recovery site in Berks County, Pennsylvania, which has been included on the
federal Superfund list. PP&L had been identified by the EPA as a potentially
responsible party, along with over 100 other parties. The EPA order required
remediation by the 36 named parties of four specific areas of the site. Remedial
action under this order has been completed at a cost of approximately $2
million, of which PP&L's interim share was approximately $50,000.

     The EPA at the same time filed a complaint under Section 107 of CERCLA in
the District Court against PP&L and the same 35 unrelated parties. The complaint
asks the District Court to hold
<PAGE>
 
the parties jointly and severally liable for all EPA's past costs at the site
and future costs of remediating some of the remaining areas of the site. The EPA
claims it has spent approximately $21 million to date. PP&L and a group of the
other named parties have sued approximately 460 other parties in District Court,
claiming that these parties contributed waste to the site, and demanding that
these companies contribute to the clean-up costs.

     In July 1993, PP&L and 33 of the 35 unrelated parties received an EPA order
under Section 106 of CERCLA requiring remediation of the remaining areas of the
site identified by the EPA. The current estimate of remediating the remainder of
the site is approximately $18 million. These costs would be shared among the
responsible parties. PP&L and other parties to the lawsuit have reached a
settlement among themselves and the federal government regarding these claims.
PP&L's share of the settlement amount is not material.

     In December 1991, PP&L and 16 unrelated parties filed complaints against 64
other parties in District Court seeking reimbursement under CERCLA for costs the
plaintiffs have incurred and will incur to investigate and remediate the Novak
landfill site in Lehigh County, Pennsylvania. In January 1997, the EPA filed an
action against PP&L and 29 other parties under Section 107 of CERCLA to recover
the EPA's past costs at the site, which it alleges are in excess of $990,000.
The parties have settled these actions. In addition, the EPA has issued an order
under Section 106 of CERCLA against PP&L and several other parties to jointly
remediate the site. The current estimate of implementing this remedy is
approximately $17 million. PP&L's share of the remediation cost at this site is
not expected to be material.

     In April 1993, PP&L received an order under Section 106 of CERCLA requiring
that actions be taken at the site of a former metal salvaging operation in
Montour County, Pennsylvania. The EPA took similar action with two other
potentially responsible parties at the site. The Company has reached a
settlement with the EPA for this site for an amount that is not material.

     PP&L challenged the DEP's right to collect air emission fees for hazardous
air pollutants (HAPs) from PP&L's coal-fired units and air emission fees for
emissions from PP&L's Phase I-affected units from 1995 through 1999. (Phase I-
affected units were those units required by the Clean Air Act, or which
voluntarily opted into the requirement, to make certain reductions in SO2 and
NOx emissions by 1995; all others must make these reductions by 2000.) The HAPs
emissions fees are approximately $200,000 per year. The emission fees for Phase
I-affected units from 1995 through 1999 are estimated at $1.6 million. PP&L and
the DEP have finalized a settlement of this litigation, under which (i) PP&L
will pay reduced fees for the Phase I-affected units from 1995-1999 and will pay
all HAPs fees as assessed; and (ii) no penalties or interest will be imposed by
DEP.
<PAGE>
 
          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
1998.
<PAGE>

                     EXECUTIVE OFFICERS OF THE REGISTRANTS
                     -------------------------------------

     Officers of PP&L Resources and PP&L 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, 1998:
 
PP&L RESOURCES, INC.:
                                                               Effective Date of
                                                                 Election to
       Name            Age        Position                     Present Position
- ------------------  ---------     ---------                    -----------------
 
William F. Hecht       55         Chairman, President
                                  and Chief Executive          February 24, 1995
                                  Officer
 
Frank A. Long          58         Executive Vice
                                  President                    February 24, 1995
 
Robert G. Byram*       53         Senior Vice President-
                                  Generation and Chief
                                  Nuclear Officer - PP&L       April 1, 1997
 
John R. Biggar         54         Senior Vice President
                                  and Chief Financial
                                  Officer                      November 1, 1998
 
Robert D. Fagan*       53         President - PP&L Global,
                                  Inc.                         December 20, 1995
 
Robert J. Grey         48         Senior Vice President,
                                  General Counsel and
                                  Secretary                    March 1, 1996
 
Terry H. Hunt          50         Senior Vice President-
                                  Strategic Planning           October 1, 1998
 
Joseph J. McCabe       48         Vice President and
                                  Controller                   August 1, 1995

*    Mr. Byram and Mr. Fagan have been designated executive officers of PP&L
     Resources by virtue of their respective positions at PP&L Resources
     subsidiaries.

<PAGE>

PP&L, Inc.
                                                               Effective Date of
                                                                 Election to
       Name            Age        Position                     Present Position
- ------------------  ---------     ---------                    -----------------
 
William F. Hecht       55         Chairman, President
                                  and Chief Executive          Janaury 1, 1993  
                                  Officer
 
Frank A. Long          58         Executive Vice
                                  President and Chief          January 1, 1993  
                                  Operating Officer
 
Robert G. Byram        53         Senior Vice President-
                                  Generation and Chief
                                  Nuclear Officer              April 1, 1997
 
John R. Biggar         54         Senior Vice President
                                  and Chief Financial          November 1, 1998
                                  Officer                                      
 
Robert J. Grey         48         Senior Vice President,
                                  General Counsel and          March 1, 1996
                                  Secretary                                 
 
Terry H. Hunt          50         Senior Vice President-
                                  Strategic Planning           October 1, 1998
 
Joseph J. McCabe       48         Vice President and
                                  Controller                   August 1, 1995

     Each of the above officers, with the exception of Messrs. Fagan, Grey, Hunt
and McCabe, has been employed by PP&L for more than five years as of December
31, 1998.  Mr. Fagan joined PP&L Global in November 1994.  Prior to that time,
he was Vice President and General Manager at Mission Energy Company.  Mr. McCabe
joined PP&L in May 1994 and was previously a partner of Deloitte & Touche LLP.
Mr. Grey joined PP&L in March 1995.  He had been General Counsel of Long Island
Lighting Company since 1992.  Mr. Hunt joined PP&L in October 1998.  He also is
the President and CEO of Penn Fuel Gas and its subsidiaries.

     Prior to their election to the positions shown above, the following
executive officers held other positions within PP&L since January 1, 1994:  Mr.
Byram was Senior Vice President - Nuclear; 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, and Mr.
McCabe was Controller.


<PAGE>
 
                                    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.
<PAGE>
 
<TABLE>
<CAPTION>
ITEM 6.  SELECTED FINANCIAL AND OPERATING DATA
 
                                                             1998 (a)      1997 (a)       1996      1995 (a)     1994 (a)
PP&L Resources, Inc.
- ------------------------------------------------------------------------------------------------------------------------------
Income Items -- millions
<S>                                                        <C>             <C>          <C>         <C>          <C>        
  Operating revenues...................................       $  3,786     $  3,077     $  2,926    $  2,752     $  2,725
  Operating income (g).................................            827          800          810         836          719
  Net Income (Loss)....................................           (569)         296          329         323          216   (e)
Balance Sheet Items -- millions (b)
  Property, plant and equipment, net...................          4,480        6,820        6,960       6,970        7,195
  Recoverable transition costs.........................          2,819
  Total assets.........................................          9,607        9,485        9,670       9,492        9,372
  Long-term debt.......................................          2,984        2,735        2,832       2,859        2,941
  Company-obligated mandatorily redeemable
    preferred securities of subsidiary trusts
    holding solely company debentures..................            250          250
  Preferred stock
    With sinking fund requirements.....................             47           47          295         295          295
    Without sinking fund requirements..................             50           50          171         171          171
  Common equity........................................          1,790        2,809        2,745       2,597        2,454
  Short-term debt......................................            636          135          144          89           74
  Total capital provided by investors..................          5,757        6,026        6,187       6,011        5,936
  Capital lease obligations............................            168          171          247         220          225
Financial Ratios
  Return on average common equity -- %  (f)............          13.39        10.60        12.30       12.81         8.73
  Embedded cost rates (b)
    Long-term debt -- %................................           7.40         7.88         7.89        7.95         8.07
    Preferred stock -- %...............................           5.87         5.85         6.09        6.09         6.07
    Preferred securities (pre-tax) -- %................           8.43         8.43
  Times interest earned before income taxes (f)........           3.69         3.39         3.55        3.56         2.73
  Ratio of earnings to fixed charges -- total
    enterprise basis (c)...............................           3.48         3.22         3.45        3.47         2.70
  Ratio of earnings to fixed charges and
     dividends on preferred stock
     --total enterprise basis (c)......................           3.12         2.85         2.90        2.91         2.27
Common Stock Data
  Number of shares outstanding -- thousands
    Year-end...........................................        157,412      166,248      162,665     159,403      155,482
    Average............................................        164,651      164,550      161,060     157,649      153,458
  Number of shareowners (b)............................        100,458      117,293      123,290     128,075      132,632
  Earnings (loss) per share - reported.................         ($3.46)    $   1.80     $   2.05    $   2.05     $   1.41
  Earnings (loss) per share  excluding
    extraordinary items (f)............................       $   2.29     $   1.80     $   2.05    $   2.05     $   1.41
  Dividends declared per share.........................       $  1.335     $   1.67     $   1.67    $   1.67     $   1.67
  Book value per share (b).............................       $  11.37     $  16.90     $  16.87    $  16.29     $  15.79
  Market price per share (b)...........................       $ 27.875     $ 23.938     $     23    $     25     $     19
  Dividend payout rate -- % (f)........................             58           93           82          82          119
  Dividend yield -- % (d)..............................           4.79         6.98         7.26        6.68         8.79
  Price earnings ratio (f).............................          12.17        13.30        11.22       12.20        13.48
 
(a) Earnings for 1998, 1997, 1995 and 1994 were affected by several one-time adjustments.  Results for 1998
    also include the impact of extraordinary items.  These adjustments affected net income and certain items
    under Financial Ratios and Common Stock Data.  See Financial Notes 4, 10 and 11.
(b) At year-end
(c) Computed using earnings and fixed charges of PP&L Resources 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.  (Extraordinary items excluded from 1998 calculations.)
(d) Based on year-end market prices.
(e) Results for 1994 restated to reflect formation of the holding company.
(f) Results for 1998 based on earnings per share excluding extraordinary items.
(g) Operating income of 1997 and earlier years restated to conform to the current presentation.
 
Note:  See Results of Operations - "Financial Indicators" for selected ratios for 1996, 1997 and 1998 based on
       fully-adjusted earnings.
</TABLE>
<PAGE>
 
SELECTED FINANCIAL AND OPERATING DATA

<TABLE>
<CAPTION>
 
                                                             1998 (a)    1997 (a)     1996      1995 (a)    1994 (a)
PP&L, Inc.
- ------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>         <C>         <C>        <C>         <C>   
INCOME ITEMS -- millions
  Operating revenues.....................................    $ 3,643     $ 3,049     $ 2,911    $ 2,752     $ 2,725
  Operating income (f)...................................        801         790         809        836         719
  Earnings (Loss) available to PP&L Resources, Inc.             (587)        308         329        324         215   (d)
BALANCE SHEET ITEMS -- MILLIONS (b)
  Property, plant and equipment, net.....................      4,331       6,820       6,960      6,970       7,195
  Recoverable transition costs...........................      2,819
  Total assets...........................................      8,838       9,472       9,405      9,424       9,321
  Long-term debt.........................................      2,569       2,633       2,832      2,859       2,941
  Company-obligated mandatorily redeemable
    preferred securities of subsidiary trusts holding
    solely company debentures............................        250         250
  Preferred stock
    With sinking fund requirements.......................        295         295         295        295         295
    Without sinking fund requirements....................        171         171         171        171         171
  Common equity..........................................      1,730       2,612       2,617      2,528       2,404
  Short-term debt........................................         80          45          10         89          74
  Total capital provided by investors....................      5,095       6,006       5,925      5,942       5,885
  Capital lease obligations                                      168         171         247        220         225
FINANCIAL RATIOS
  Return on average common equity -- % (e)...............      13.61       11.75       12.95      13.10        8.83
  Embedded cost rates (b)
    Long-term debt -- %..................................       7.56        7.91        7.89       7.95        8.07
    Preferred stock -- %.................................       6.09        6.90        6.09       6.09        6.07
    Preferred securities (pre-tax) -- %..................       8.43        8.43
  Times interest earned before income taxes (e)..........       4.22        3.67        3.62       3.58        2.73
  Ratio of earnings to fixed charges -- total
    enterprise basis (c).................................       3.93        3.47        3.50       3.48        2.70
  Ratio of earnings to fixed charges and
     dividends on preferred stock
     --total enterprise basis (c)........................       3.04        2.77        2.93       2.92        2.26
REVENUE DATA
   Average price per kWh billed for service area
      sales - cents......................................       7.26        7.36        7.38       7.21        7.24
SALES DATA
  Customers (thousands)(b)...............................      1,257       1,247       1,236      1,226       1,213
  Electric energy sales delivered -- millions of kWh
    Residential..........................................     11,156      11,434      11,849     11,300      11,444
    Commercial...........................................     10,597      10,309      10,288      9,948       9,715
    Industrial...........................................     10,220      10,078      10,016      9,845       9,536
    Other................................................        164         143         154        188         236
                                                         -----------    --------    --------   --------    --------
      Service area sales.................................     32,137      31,964      32,307     31,281      30,931
      Wholesale energy sales.............................     36,706      21,454      14,341     11,424      10,848
                                                         -----------    --------    --------   --------    --------
      Total electric energy sales delivered..............     68,843      53,418      46,648     42,705      41,779
                                                         -----------    --------    --------   --------    --------
 
NUMBER OF FULL-TIME EMPLOYEES (b)........................      6,344       6,343       6,428      6,661       7,431
 
(a) Earnings for 1998, 1997, 1995 and 1994 were affected by several one-time adjustments.   Results for 1998 also
    include the impact of extraordinary items.  This affected earnings available to PP&L Resources and certain items in
    Financial Ratios.  See Financial Note 4.
(b) At year-end
(c) Computed using earnings and fixed charges of PP&L 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.
    (Extraordinary items excluded from 1998 calculations.)
(d) Results for 1994 restated to reflect formation of the holding company.
(e) Results for 1998 based on earnings per share excluding extraordinary items.
(f) Operating income of 1997 and earlier years restated to conform to the current presentation.
</TABLE>
<PAGE>
 
ITEM 7. REVIEW OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PP&L
RESOURCES, INC. AND PP&L, INC.

     PP&L Resources is a holding company with headquarters in Allentown, PA.
Its subsidiaries include PP&L, which provides electricity delivery service in
eastern and central Pennsylvania, sells retail electricity throughout
Pennsylvania and markets wholesale electricity in 28 states and Canada; PP&L
EnergyPlus (a subsidiary of PP&L), which sells competitively-priced energy and
energy services to newly deregulated markets; PP&L Global, an international
independent power company which invests in and develops worldwide power
projects; PP&L Spectrum, which markets energy-related services and products;
PP&L Capital Funding, which provides debt funding for PP&L Resources and its
subsidiaries other than PP&L; Penn Fuel Gas, which provides natural gas
distribution, transmission and storage services and sells propane; and H.T.
Lyons and McClure, which are mechanical contractor and engineering firms.  In
February 1999, PP&L Resources acquired McCarl's Inc., another mechanical
contractor and engineering firm.  Other subsidiaries may be formed by PP&L
Resources to take advantage of new business opportunities.

     The financial condition and results of operations of PP&L and PP&L Global
are currently the principal factors affecting the financial condition and
results of operations of PP&L Resources.  All fluctuations, unless specifically
noted, are primarily due to activities of PP&L and PP&L 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 PP&L Resources and PP&L believe that the
expectations reflected in these statements are reasonable, there can be no
assurance that these expectations will prove to have been correct.  These
forward-looking statements involve a number of risks and uncertainties, and
actual results may differ materially from the results discussed in the forward-
looking statements.  The following are among the 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 and capacity;
weather variations affecting customer energy usage; competition in retail and
wholesale power markets; the need for and effect of any business or industry
restructuring; PP&L Resources' and PP&L's profitability and liquidity; new
accounting requirements or new applications of existing requirements; operating
performance of plants and other facilities; environmental conditions and
requirements; system conditions (including actual results in achieving Year 2000
compliance by PP&L Resources, its subsidiaries and others) and 
<PAGE>
 
operating costs; performance of new ventures; political, regulatory or economic
conditions in foreign countries where PP&L Global makes investments; foreign
exchange rates; and PP&L Resources' and PP&L's commitments and liabilities. Any
such forward-looking statements should be considered in light of such important
factors and in conjunction with PP&L Resources' and PP&L's other documents on
file with the SEC.

     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 PP&L Resources or PP&L 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 PP&L Resources nor PP&L undertakes any obligation to update
the information contained in such statement to reflect subsequent developments
or information.


                             Results of Operations
                             ---------------------
Earnings

     Excluding the effects of weather and several one-time and other
adjustments, most of which are related to the transition to a competitive
electricity market in Pennsylvania, earnings per share were $2.07 in 1998, $2.03
in 1997 and $2.00 in 1996.  Abnormal weather in 1998 adversely affected earnings
by 20 cents per share, the largest such effect in more than a decade.

     On an as-reported basis, PP&L Resources lost $3.46 per share of common
stock in 1998, versus per share earnings of $1.80 in 1997 and $2.05 in 1996.
The following table highlights the major items that impacted earnings for each
of these years:
<TABLE>
<CAPTION>
 
                                         1998     1997   1996
                                       -------  -------  -----
<S>                                    <C>      <C>      <C>
Earnings per share - excluding
 weather, one-time adjustments
 and other impacts of restructuring    $ 2.07   $ 2.03   $2.00
 
Weather variances on billed sales       (0.20)   (0.03)   0.05
 
One-time adjustments:
 PUC restructuring charge (See Note 4)  (5.56)
 FERC municipalities settlement
   (See Note 4)                         (0.19)
 Windfall profits tax (See Note 10)              (0.23)
 SER settlement                          0.11
 U.K. tax rate reduction                 0.06     0.06
 Penn Fuel Gas acquisition costs         0.03    (0.03)
 
Other impacts of restructuring           0.22  
                                       ------   ------   -----
 
Earnings per share - reported          $(3.46)  $ 1.80   $2.05
                                       ======   ======   =====
</TABLE>
<PAGE>
 
     Earnings in 1998 were negatively impacted by $948 million of after-tax
charges related to the settlement of PP&L's restructuring case before the PUC
and another competition-related case before FERC.  Several one-time adjustments
helped earnings, including a reduction in U.K. corporate income tax rates, a
change in the accounting treatment of Penn Fuel Gas acquisition costs and $30
million in proceeds from a settlement with SER regarding a contract dispute over
the power purchase costs.

     The PUC restructuring adjustments also provided a favorable impact of about
22 cents per share on third and fourth quarter earnings of 1998. These
adjustments included lower depreciation on impaired generation assets, reduced
accruals for taxes other than income and a regulatory adjustment to the
accounting for unbilled revenues.  These favorable impacts were partially offset
by the direct expensing of costs of computer software identified as impaired as
part of the restructuring accounting adjustments.

     After eliminating the effects of these adjustments, 1998 earnings improved
by four cents per share over 1997.  This earnings improvement reflects higher
weather-normalized sales in all customer classes, particularly in the third and
fourth quarters of 1998.  Weather-adjusted delivery sales to customers in
central and eastern Pennsylvania were 2.9% higher in 1998 than in 1997.
Earnings were also favorably affected by increased wholesale electricity
revenues.

     These earnings improvements were partially offset by higher operating
expenses incurred in 1998 over 1997.  This increase reflects 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.

     Adjusted 1997 earnings were three cents per share higher than in 1996.
This earnings improvement was attributable to higher revenues from bulk power
sales and trading activity of the Energy Marketing Center, which helped offset
the impact of the phase-down of contractual sales to JCP&L.  Earnings also
benefited from refinancing activities and, excluding one-time adjustments, the
on-going operations of PP&L Global.

     The reduction in contractual bulk power sales to JCP&L and other major
utilities will continue to adversely impact earnings over the next few years.
However, the Energy Marketing Center will resell this returning electric energy
and capacity on the open market, along with its other energy trading activities,
in an effort to offset the loss in revenues from declining contractual sales.
<PAGE>
 
ELECTRIC ENERGY SALES

     Electricity sales for 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
                                   1998         1997          1996
                                  ------  -----------------  ------
                                          (Millions of kWh)
<S>                               <C>     <C>                <C>
Electricity delivered to
  retail customers by PP&L (a)    32,137       31,964        32,307
 
Less:  Electricity supplied
  during pilot by others           1,999           65
                                  ------       ------        ------
 
Electricity supplied to retail
  customers by PP&L               30,138       31,899        32,307
 
Electricity supplied to retail
  customers by PP&L EnergyPlus
  during the pilot                 1,507
                                  ------       ------        ------
 
Total electricity supplied
  to retail customers (a)         31,645       31,899        32,307
 
Wholesale Energy Sales            36,706       21,454        14,340
</TABLE>

(a) kWh for customers residing in PP&L's service territory who are receiving
energy from PP&L or PP&L EnergyPlus will be reflected in both of these
categories.

     Under Pennsylvania's competition pilot program, customers were allowed to
choose the supplier of their electricity in 1998.  Pilot customers continued to
have the utility that served their territory deliver electricity from the
supplier of choice.  "Electricity delivered to retail customers by PP&L" is the
amount of electricity delivered by PP&L to customers in its service territory.
"Electricity supplied to retail customers by PP&L" represents the amount of
electricity supplied to PP&L service territory customers who did not participate
in the pilot program.  "Electricity supplied to retail customers by PP&L
EnergyPlus" is electricity supplied to customers within and outside PP&L service
territory who participated in the pilot program and chose PP&L EnergyPlus as
their energy supplier.

     Electricity delivered to retail customers increased by 173 million kWh, or
0.5%, from the comparable period in 1997.  If normal weather had been
experienced in 1998 and 1997, deliveries would have increased by 2.9%.  This
increase is attributable to strong third and fourth quarter deliveries to all
customer classes.  Electricity delivered decreased by 343 million kWh, or 1.1%,
in 1997 from 1996.  However, if normal weather had been experienced, deliveries
in 1997 would have increased by 0.2%.

     Total electricity supplied to retail customers has decreased for the past
two years.  This decrease was due to milder weather in both 1998 and 1997 as
compared to 1996, as well as the impact of the competition pilot program.

     The increase in wholesale energy sales, which includes sales to other
utilities and energy marketers through contracts, spot market transactions or
power pool arrangements, was primarily the result of 
<PAGE>
 
increased activity of the Energy Marketing Center. See "Operating Revenues:
Wholesale Energy Marketing and Trading Activities" for more information.

     PP&L Resources has established growth in its generation capability, along
with expansion of its energy marketing operations, as a key element of its
business strategy. In addition to the current generating assets of PP&L and the
announced acquisitions and developments of PP&L Global discussed in Item 1
"BUSINESS-Background," PP&L Resources plans to add another 7,500 mW of
generation within the next five years.

ENERGY MARKETING AND TRADING ACTIVITIES

     PP&L, through its Energy Marketing Center, purchases and sells electric
capacity and energy at the wholesale level under its FERC market-based tariff.
PP&L has entered into agreements to sell firm capacity or energy under its
market-based tariff to certain entities located inside and outside of the PJM
power pool.  PP&L enters into these agreements to market available energy and
capacity from its generating assets and to profit from market price
fluctuations.  If PP&L was unable to meet its obligations under these agreements
to sell firm capacity and energy, under certain circumstances it would be
required to pay damages equal to the difference between the market price to
acquire replacement capacity or energy and the contract price of the undelivered
capacity or energy.  Depending on price volatility in the wholesale energy
markets, such damages could be material.  Events that could affect PP&L's
ability to meet its firm capacity or energy obligations or cause significant
increases in the market price of replacement capacity and energy include the
occurrence of 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 affecting
the wholesale energy markets.  Although PP&L 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.

     PP&L's efforts to mitigate risks associated with open contract positions
include maintaining generation capacity to deliver electricity to satisfy its
net firm sales contracts and purchasing firm transmission service.  In addition,
the Energy Marketing Center adheres to the Company's risk management policy and
programs, including  established credit policies in evaluating counterparty
credit risk.  PP&L has not experienced any material losses due to non-
performance by counterparties to date.

     During 1998, the Energy Marketing Center entered into commodity forward and
option contracts for the physical purchase and sale of energy; these
transactions were reflected in the financial statements under the accrual method
of accounting.  As of January 1, 1999, PP&L adopted mark-to-market accounting
for energy contracts entered into for trading purposes, in accordance with EITF
98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities" and, as a result, recognized a $6.0 million after-tax credit to
energy 
<PAGE>
 
purchases. Under mark-to-market accounting, gains and losses that result from
changes in the market prices on contracts entered into for trading purposes will
be reflected in current earnings. For purposes of EITF 98-10, energy trading
activities refer to energy contracts entered into with the objective of
generating profits on or from exposure to shifts or changes in market prices,
and 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). PP&L will continue to
use accrual accounting for energy contracts that are hedges of non-trading
activities until it adopts SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," which it expects will occur effective January 1, 2000. SFAS
133, which expands the definition of a derivative to include most of PP&L's
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.

MARKET RISK SENSITIVE INSTRUMENTS

     Quantitative and Qualitative Disclosures About Market Risk
     ----------------------------------------------------------

     PP&L Resources actively manages the market risk inherent in its commodity,
debt, foreign currency and equity positions. The Board of Directors of PP&L
Resources 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 provides only 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.

     Commodity Price Risk - Energy Marketing Center
     ----------------------------------------------

     PP&L's 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, risk limits management with measurement and controls for
real time risk monitoring.  In 1998, PP&L entered into fixed-price forward and
option contracts that required physical delivery of the commodity.  In 1999,
PP&L expects to continue to use such contracts as well as other contracts, such
as futures and options that could be settled either in cash or by physical
delivery of the underlying commodity; exchange-for-physical transactions; and
over-the-counter contracts, such
<PAGE>
 
as swap agreements where settlement is generally based on the difference between
a fixed and index-based price for the underlying commodity, and tolling, reverse
tolling, or other contractual arrangements.

     PP&L 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, PP&L enters into these contracts for trading
purposes to take advantage of market opportunities.  PP&L may at times create a
net open position in its portfolio that could result in material losses if
prices do not move in the manner or direction anticipated.

     PP&L 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.  As of December 31, 1998, PP&L estimated
that a 10% decline in market prices across all geographic areas and time periods
could have adversely changed the value of PP&L's trading portfolio by
approximately $16 million.  For PP&L's non-trading portfolio, a 10% decline in
market prices across all geographic areas and time periods could have positively
changed the value of PP&L's non-trading portfolio by $17 million; however, this
would be offset by the decline in the value of the underlying commodity, the
electricity generated.  In addition to commodity price risk, PP&L's commodity
positions are also subject to operational and event risks including, among
others, increases in load demand and forced outages at generating plants.

     Beginning in October 1998, the PJM ISO established capacity auctions to
increase price transparency and liquidity.  PP&L expects to participate fully in
this capacity market and will apply its existing risk management policies and
procedures to its capacity transactions.  In the future, capacity is expected to
evolve into an actively traded commodity, similar to electricity.

     Commodity Price Risk - PP&L EnergyPlus
     --------------------------------------

     PP&L EnergyPlus was created in September 1998 as a retail marketing
subsidiary of PP&L.  During 1998, PP&L EnergyPlus entered into various
arrangements, effective in 1999, with retail customers who elect to shop for an
energy provider.  These contracts commit PP&L EnergyPlus to the sale of
electricity or natural gas without a specified firm volume.  The longest sales
contract extends for three years.  To hedge the price risk of these
transactions, PP&L EnergyPlus has entered into forward purchase contracts and
has the ability to supply the electricity through an option contract with the
Energy Marketing Center.  Therefore, the potential for near-term losses
associated with PP&L EnergyPlus' commodity position is immaterial.

     Interest Rate Risk
     ------------------


     As a result of deregulation and the new competitive environment, PP&L is
exposed to increased interest rate risk.  In addition, PP&L 
<PAGE>
 
Resources has issued debt to finance unregulated energy investments, which also
increases interest rate risk. PP&L Resources plans to manage its interest
expense risk by using financial derivative products to adjust the mix of fixed
and floating rate interest rates in its debt portfolio, adjust the duration of
its debt portfolio and lock in U.S. treasury rates in anticipation of future
financing, when appropriate. Risk limits were developed using value at risk
methodology and are designed to balance risk exposure to volatility in interest
expense and losses in the fair value of PP&L Resources' long-term fixed rate
debt due to changes in the absolute level of interest rates. As of December 31,
1998, PP&L Resources had no financial derivative instruments outstanding.

     PP&L Resources is also exposed to changes in earnings and cash flows as a
result of changes in interest rates for commercial paper and other short-term
debt. At December 31, 1998, PP&L Resources' potential annual maximum exposure to
increased interest expense due to an increase in interest rates over a 30-day
period, based on a confidence level of 97.5%, was estimated at $4.5 million.
This amount has been determined by considering the impact of a hypothetical
increase in interest rates on the company's commercial paper and other short-
term debt balances as of December 31, 1998. Historically, there is a 97.5%
probability that interest rates for commercial paper and other short-term debt
will not increase more than 50 basis points over a 30-day period.

     PP&L Resources is also exposed to changes in the fair value of its long-
term, fixed rate debt.  At December 31, 1998, PP&L Resources estimated its
potential maximum exposure to a change in the fair value of its long-term fixed
rate debt through an adverse movement in interest rates over a one-day period,
based on a confidence level of 97.5%, at $22 million.  Historically, there is a
97.5% probability that fixed interest rates will not increase more than 13 basis
points over a one-day period.

     Market events that are inconsistent with historical trends could cause
actual results to exceed estimated levels.

     Foreign Operations Risk
     -----------------------

     PP&L Global has investments in several international operations, most of
which are joint ventures.  At December 31, 1998, PP&L Global had investments of
$671 million.  These investments are primarily energy-related distribution
facilities.  PP&L Global is exposed to foreign currency risk primarily through
investments in affiliates in Latin America and Europe.

     PP&L Resources has adopted a foreign currency risk management program that
is 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, 1998, PP&L
Resources did not incur any significant foreign currency-based financing.
<PAGE>
 
     As of December 31, 1998, PP&L Resources was party to two forward contracts
to hedge the foreign currency exchange risk associated with dividends declared
but not yet received.  PP&L will exchange 16 million British pounds sterling
(BPS) for approximately $27 million on March 31, 1999, based on a contractual
exchange rate of $1.654/BPS.  On January 22, 1999, PP&L Resources exchanged 359
million Chilean pesos (ChP) for $0.7 million, based on a contractual exchange
rate of $.00195/ChP.  The fair value of these contracts at December 31, 1998,
was immaterial.

     Nuclear Decommissioning Fund - Securities Price Risk
     ----------------------------------------------------

     PP&L maintains trust funds, as required by the NRC, to fund certain costs
of decommissioning Susquehanna.  As of December 31, 1998, 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.  PP&L actively
monitors the investment performance and periodically reviews asset allocation in
accordance with PP&L's nuclear decommissioning trust policy statement.  A
hypothetical 10% increase in interest rates and 10% decrease in equity prices
would result in a $13.7 million reduction in the fair value of the trust assets.

     PP&L's restructuring settlement agreement provides for the collection of
authorized nuclear decommissioning costs through the CTC.  Additionally, PP&L is
permitted to seek recovery from customers of up to 96% of any increases in these
costs.  Therefore, PP&L securities price risk is expected to remain immaterial.
<PAGE>
 
OPERATING REVENUES:  ELECTRIC OPERATIONS

     The increase (decrease) in revenues from electric operations was
attributable to the following:
<TABLE>
<CAPTION>
 
 
                                             1998 vs 1997   1997 VS 1996
                                             -------------  -------------
<S>                                          <C>            <C>
                                                 (Millions of Dollars)
 
Retail Electric Revenues
 Weather effect                                  $(63)          $(30)
 Sales volume and sales mix effect                 67             (1)
 Unbilled revenues                                 10             16
 Pilot shopping credit above market price         (14)
 Other, net                                         7              9
Energy revenues                                                  (29)
Other Electric Revenues                             6              4
                                                 ----           ----
                                                 $ 13           $(31)
                                                 ====           ====
</TABLE>

     Operating revenues for electric operations increased by $13 million in 1998
over 1997.  During the third quarter of 1998, PP&L recognized increased revenues
of $23 million due to the impact on unbilled revenue resulting from a change in
the regulatory treatment of energy costs.  Excluding this benefit and the
effects of milder than normal weather experienced in 1998, revenues from
electric operations would have increased by $53 million.

     This revenue increase can be attributed to strong retail electric sales in
the third and fourth quarters of 1998.  Excluding the effects of weather,
electricity delivered to retail customers increased for all customer classes,
2.9% in total, in 1998 over 1997.

     Operating revenues decreased by $31 million in 1997 from 1996.  Revenues
from service area sales in 1997 were slightly lower than 1996.  The decrease was
attributable to mild weather in 1997 and a change in the regulatory treatment of
energy costs by the PUC.  For 1997 and 1998 underrecovered energy costs (up to a
cap of $31.5 million annually) were not recorded as energy revenues, but as
regulatory credits, which offset "Other Operating Expenses."

Operating Revenues:  Wholesale Energy Marketing and Trading Activities

     The increase (decrease) in revenues from wholesale energy marketing and
trading activities was attributable to the following:
<TABLE>
<CAPTION>
 
                             1998 VS 1997   1997 vs 1996
                             -------------  -------------
                                (Millions of Dollars)
<S>                          <C>            <C>
 
     Bilateral sales             $496           $183
     PJM                           63             17
     Cost-based contracts         (45)           (27)
     Oil & gas sales               62
     Other                         (3)            (4)
                                 ----           ----
                                 $573           $169
                                 ====           ====
</TABLE>
<PAGE>
 
     Revenues from wholesale energy marketing and trading activities increased
by $573 million in 1998 and $169 million in 1997 when compared to the prior
years.  Revenues have continued to increase despite the phase-down of the
capacity and energy agreement with JCP&L and the end of the capacity and energy
agreement with Atlantic in March of 1998.  This increase in revenues reflects
PP&L's continued emphasis on competing in wholesale markets.  Energy purchases
have also increased to meet these increased sales.  Refer to "Energy Purchases"
for more information.

     During 1998, the national energy trading market experienced high prices and
increased volatility.  PP&L is actively managing its portfolio to attempt to
capture the opportunities and limit its exposure to these volatile prices.
Refer to "Energy Marketing and Trading Activities" for more information.

PUC RESTRUCTURING PROCEEDING

     Refer to Financial Note 3 to Financial Statements for information regarding
the PUC restructuring proceeding.

COST OF ELECTRIC FUEL

     Electric fuel expense increased by $14 million in 1998 when compared to
1997.  This reflects increased 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 activities of the Energy
Marketing Center.  This increase was partially offset by lower fuel prices for
all units, especially oil/gas-fired stations.

     Fuel expense for 1997 increased by $18 million from 1996.  This increase
was primarily due to PP&L's coal-fired units operating at higher output to
support increased wholesale electric market activity.  The increase was slightly
offset by a decrease in the unit fuel prices for coal-fired and gas-fired
generation.

ENERGY 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 activities of the Energy
Marketing Center, which includes increased purchases of natural gas and capacity
for resale.  The related sales are included in wholesale energy sales.  The
overall market price of purchased power has also been higher during 1998
compared to 1997 due to market volatility.

     Energy purchases in 1997 increased by $152 million over 1996.  This
increase was primarily due to increased marketing and trading activities of the
Energy Marketing Center.  Higher overall market prices of power during 1997
compared to 1996 contributed to the increase in purchased power costs.
<PAGE>
 
POWER PLANT OPERATIONS

     In an effort to reduce operating costs and position itself for the
competitive marketplace, PP&L in August 1998, announced the closing of its
Holtwood coal-fired generating station, effective May 1, 1999.  The adjacent
hydroelectric plant will continue to operate.  PP&L also announced its intention
to sell its Sunbury coal-fired generating station in 1999.

DEPRECIATION AND AMORTIZATION

     Depreciation and amortization expenses in 1998 decreased by $47 million
from 1997.  This decrease reflects the write-down of impaired generation-related
assets in connection with the restructuring adjustments recorded in June 1998.
See Note 4 to Financial Statements for additional information.

     Depreciation and amortization expenses in 1997 increased by $10 million
from 1996.  This increase was primarily due to depreciation on plant additions
and amortization of newly implemented computer software.

OTHER OPERATION AND MAINTENANCE EXPENSES

     Other operation and maintenance expenses increased by $90 million from 1997
to 1998.  This increase reflects higher costs associated with computer
information systems, and additional payroll, consultant services and other
expenses to meet the requirements of retail competition.  This increase also
reflects additional software expenses, increased firm transmission costs related
to the Energy Marketing Center activities and higher provisions for
uncollectible customer accounts.  Operation and maintenance costs of Penn Fuel
Gas, which was acquired in 1998, also added to the increase.

     These increases were partially offset by credits recorded in connection
with the competition pilot program.  The PUC has authorized PP&L to seek future
recovery of the revenue lost in the pilot program.  PP&L has established a
regulatory asset for the excess of the shopping credits provided to pilot
customers over the market price of this energy.  These credits totaled $14
million in 1998, and were recorded as offsets to "Other Operating Expense."

     Other operation and maintenance expenses in 1997 decreased by $25 million
from 1996.  Excluding the effect of underrecovered energy costs, operation and
maintenance expenses increased by $7 million in 1997.  These increases were
primarily due to costs associated with the pilot program, the PUC restructuring
filing and the FERC transmission access filing.

     Prior to 1997, underrecovered energy costs were accrued as energy revenues.
In 1997 and 1998, these underrecovered costs were recorded as regulatory credits
(up to a PUC-mandated cap of $31.5 million), which are reflected in the income
statement as a reduction of "Other Operating Expense."  This reflects a change
in the regulatory 
<PAGE>
 
treatment of undercollected energy costs by the PUC. See Note 1 to Financial
Statements.

OTHER INCOME AND (DEDUCTIONS)

     Other income of PP&L Resources increased by $94 million from 1997 to 1998.
This increase was primarily attributed to two one-time adjustments in 1998 and
1997.  PP&L's earnings for 1998 reflect a $30 million, or 11 cents per share,
recovery from SER as a result of a settlement agreement.  This settlement
agreement resolved disputes concerning the prices PP&L paid for power purchased
from SER since 1990.  Conversely, 1997 earnings included a one-time $37 million,
or 23 cents per share, charge for the U.K. windfall profits tax on privatized
utilities which affected PP&L Global's SWEB investment.  The tax has been paid
in full.

     The accounting treatment of Penn Fuel Gas acquisition costs also
contributed to the change in other income from 1997 to 1998.  The acquisition
was originally contemplated as a pooling of interests, and estimated transaction
costs of about $6 million were charged against earnings in the third quarter of
1997.  The transaction was ultimately recorded under purchase accounting, and
the transaction costs were capitalized as part of the investment.  Third quarter
1998 earnings were credited by $6 million due to this change.

     Other income and deductions for 1997 decreased by $49 million from 1996.
This decrease was primarily due to the windfall profits tax, as well as the
initial expensing of Penn Fuel Gas acquisition costs.

FINANCING COSTS

     PP&L Resources reduced its long-term financing costs during the past few
years by retiring long-term debt with the proceeds from the sale of securities
at a lower cost and by repurchasing PP&L preferred stock.  Interest on long-term
debt and dividends on preferred stock decreased from $241 million in 1995 to
$228 million in 1998, for a total decrease of $13 million.  Interest on short-
term debt, net of capitalized interest and AFUDC borrowed funds, increased from
$12 million in 1995 to $27 million in 1998.  This increase reflects PP&L Capital
Funding's commercial paper program initiated in 1998.

INCOME TAXES

     Income tax expense for 1998 increased by $22 million, or 9.3%, from 1997.
This was primarily due to an increase in pre-tax book income of $106 million.

     Income tax expense for 1997 decreased by $17 million, or 6.7%, from 1996.
This was primarily due to a decrease in pre-tax book income of $54 million.
<PAGE>
 
                              FINANCIAL CONDITION
                              -------------------
                                        
CAPITAL EXPENDITURE REQUIREMENTS

     The schedule below shows PP&L's current capital expenditure projections for
the years 1999-2003 and actual spending for the year 1998.

PP&L'S CAPITAL EXPENDITURE REQUIREMENTS
<TABLE> 
<CAPTION> 
                                      ACTUAL -------------PROJECTED-------------
                                      1998   1999    2000    2001    2002   2003
                                                   (Millions of Dollars)
<S>                                 <C>    <C>    <C>     <C>     <C>     <C> 
Construction expenditures
Generating facilities                 $ 91   $ 97    $117    $125    $104   $ 93
Transmission and
 distribution facilities               102    110     123     125     125    135
Environmental                            6     13       2       2      42     71
Other                                   44     26      19      19      18     17
                                      ----   ----    ----    ----    ----   ----
 Total Construction
  Expenditures                         243    246     261     271     289    316
Nuclear fuel owned and
 leased                                 55     47      63      65      67     68
Other leased property                   26     21      21      21      21     21
                                      ----   ----    ----    ----    ----   ----
 Total Capital Expen-
  ditures                             $324   $314    $345    $357    $377   $405
                                      ====   ====    ====    ====    ====   ====
</TABLE> 

     Construction expenditures include AFUDC and Capitalized Interest which are
     expected to be less than $9.5 million in each of the years 1999-2003.

     PP&L's capital expenditure projections for the years 1999-2003 total about
$1.8 billion.  Capital expenditure plans are revised from time to time to
reflect changes in conditions.

PP&L GLOBAL UNREGULATED INVESTMENTS

     PP&L Global continues to pursue opportunities to develop and acquire
electric generation, transmission and distribution facilities in the United
States and abroad.

     As of December 31, 1998, PP&L Global had investments of $671 million in
distribution, transmission and generation facilities in the U.K., Bolivia, Peru,
Argentina, Brazil, Spain, Portugal, Chile and El Salvador.  PP&L Global's major
investments to date are SWEB, Emel and DelSur.

     In 1998, PP&L Global acquired an additional 1,813,000 shares of Emel at a
cost of approximately $32 million, increasing its ownership interest to 37.5%.
In February 1998, PP&L Global and Emel acquired a 75% interest in DelSur, an
electric distribution company serving 193,000 customers in El Salvador, for
approximately $180 million.  Under the purchase agreement, PP&L Global directly
acquired 37.5% of DelSur and Emel acquired the other 37.5%.  Subsequently, PP&L
Global and Emel acquired an additional 925,000 shares at a cost of 
<PAGE>
 
approximately $10.3 million, increasing their ownership interest to 80.45%.
DelSur is one of five electricity distribution companies in El Salvador that
were privatized by the government. In June 1998, PP&L Global acquired an
additional 26% interest in SWEB for $170 million, increasing its equity interest
to 51% and its voting interest to 49%.

     In September 1998, PP&L Global announced an agreement to acquire most of
Bangor Hydro-Electric Company's generating assets and certain transmission
rights. PP&L Global will purchase 100 percent of Bangor Hydro's hydroelectric
assets and certain transmission rights, as well as its interest in an oil-fired
generation facility, for $89 million. The acquisition has been approved by the
Maine Public Utilities Commission, and remains subject to the approval of the
FERC as well as certain third-party consents, which are expected in 1999.

     PP&L Global has signed definitive agreements with Montana Power Company,
Portland General Electric Company and Puget Sound Energy, Inc. to acquire 13
Montana power plants, with 2,614 MW of generating capacity, for a purchase price
of $1.586 billion.  The acquisition is subject to several conditions, including
the receipt of required state and federal regulatory approvals and third-party
consents.  In this regard, PacifiCorp, a co-owner of Colstrip Units 3 and 4, has
a right of first refusal to purchase a portion of the assets of these Units.
PP&L Global expects to complete the acquisition by the end of 1999.  About 65%
of the acquisition cost is expected to be financed on a project credit basis,
non-recourse to PP&L Global and PP&L Resources.  The balance of the acquisition
cost is expected to be financed through a combination of debt and equity issued
by PP&L Resources, or with funds that PP&L Resources derives from PP&L's
securitization of transition costs.  The agreements also provide for PP&L
Global's acquisition of related transmission assets for $182 million, subject to
certain conditions, including federal regulatory approval.

ACQUISITIONS

     In 1998, PP&L Resources acquired Penn Fuel Gas which, together with its
subsidiaries, specializes in natural gas distribution, transmission and storage
services and the sale of propane. The transaction was treated as a purchase for
accounting and financial reporting purposes. PP&L Resources issued approximately
5.6 million shares of common stock, with a value of approximately $135 million,
to acquire all Penn Fuel Gas common and preferred stock. Under the terms of the
merger agreement, shareowners of Penn Fuel Gas received 6.968 common shares of
PP&L Resources for each common share of Penn Fuel Gas that they owned and 0.682
common shares of PP&L Resources for each preferred share of Penn Fuel Gas that
they owned.
<PAGE>
 
     In 1998, PP&L Resources also acquired H.T. Lyons and McClure, mechanical
contractor and engineering firms, in cash transactions for amounts that were not
material.  In February 1999, PP&L acquired McCarl's, another mechanical
contractor and engineering firm, in a cash transaction for an amount that was
not material.

FINANCING AND LIQUIDITY

     PP&L Resources' net cash provided by operating activities decreased by $140
million in 1998 compared with 1997.  This decrease was primarily due to the
decline in net income when adjusted for the impact of certain non-cash items.
Earnings in 1998 benefited from lower depreciation, higher equity earnings of
unconsolidated affiliates, regulatory credits and other non-cash transactions.
Net cash provided by operating activities decreased by $16 million from 1996 to
1997.

     Net cash used in PP&L Resources' investing activities was $194 million
higher in 1998 than 1997.  This increase was primarily due to PP&L Global's
increased investment in electric energy projects, including its additional
investment in SWEB.  Net cash used in investing activities was $141 million
lower in 1997 compared with 1996.  This decrease was primarily due to lower
construction expenditures by PP&L, liquidation of subsidiaries' long-term
investments to make funds available for other investing and financing
activities, and a reduction in the amount of equity funds invested by PP&L
Global.

     Net cash used in PP&L Resources' financing activities was $530 million
lower in 1998 than 1997.  This reflects a $487 million increase in short-term
debt in 1998.  This short-term financing helped to fund PP&L Resources' $419
million stock repurchase, and PP&L Global's additional investments.  Net cash
used in financing activities in 1997 was $257 million higher than in 1996.  This
was primarily due to PP&L Resources' purchase of PP&L preferred stock at a cost
of $380 million, and the retirement of $210 million of long-term debt.  These
outflows were partially offset by PP&L's issuance of $250 million of preferred
securities through PP&L Capital Trust and PP&L Capital Trust II.

     From 1996 through 1998, PP&L Resources issued $722 million of long-term
debt.  For the same period, PP&L Resources issued $215 million of common stock.
Proceeds from these security sales were used, in part, to retire $650 million of
long-term debt to lower financing costs.  During the years 1996-1998, PP&L also
incurred $234 million of obligations under capital leases (primarily nuclear
fuel).

     PP&L Capital Funding provides debt funding for PP&L Resources and its
subsidiaries other than PP&L.  In order to ensure liquidity, PP&L and PP&L
Capital Funding share a joint facility with a group of banks.  This joint
facility is comprised of a 364-day revolving credit agreement and a five-year
revolving credit agreement.  In March 1998, the existing 364-day revolving
credit agreement was increased from $150 million to $350 million.  This
increase, when added to the $300 million five-year revolving credit agreement,
brought to $650 million 
<PAGE>
 
the total amount of revolving credit available to PP&L and PP&L Capital Funding
under the joint agreement. In November 1998, PP&L, PP&L Capital Funding, and
PP&L Resources replaced the existing 364 day facility with an amended and
restated 364-day revolving credit arrangement terminating in November 1999. The
five-year revolving credit agreement expires in 2002. Separately, in July 1998,
PP&L Capital Funding entered into five separate $80 million, 364-day credit
facilities with five banks. PP&L Resources guarantees all obligations of PP&L
Capital Funding under the foregoing facilities. As of December 31, 1998, no
borrowings were outstanding under any revolving credit arrangements.

     Under the PUC restructuring order of August 27, 1998, PP&L is permitted to
issue transition bonds to securitize up to $2.85 billion of its stranded costs.
PP&L is planning to pursue such securitization later in 1999.  The proceeds will
be used by PP&L to retire outstanding debt and to repurchase common stock from
PP&L Resources.

     See Note 9 to Financial Statements for additional financing activities in
1998.

FINANCIAL STRATEGY

     PP&L Resources has developed a financial strategy that is intended to
position PP&L Resources for the anticipated future competitive environment after
giving effect to the PUC's Final Order, the related restructuring charge on
PP&L's books and the collection of CTC revenues during the transition period.
In addition to the securitization referenced above, PP&L Resources' financial
strategy and goals include:

     (a) a common stock dividend level based on a targeted payout ratio of 45%-
55% designed to maintain PP&L Resources' future financing flexibility;

     (b) maintenance of investment grade ratings on the senior debt securities
of PP&L Resources and PP&L; and

     (c) the temporary use of a higher degree of leverage in PP&L Resources'
capital structure during the transition period.

     As the electric utility industry transitions to a competitive environment,
PP&L Resources anticipates the potential to achieve long-term returns on
shareowner capital that exceed the returns that have been historically permitted
in a fully regulated business environment.  At the same time, PP&L Resources'
business risks are expected to increase, resulting in an increase in the
potential volatility in revenue and income streams.  As such, PP&L Resources
believes that a dividend payout ratio that is significantly lower than the 80%-
90% payout ratio previously experienced by PP&L Resources and the electric
utility industry in general is required to better position PP&L Resources to
more effectively compete in the energy markets by increasing PP&L Resources'
future financing flexibility.  Accordingly, effective October 1, 1998, PP&L
Resources' quarterly common stock dividend was reduced to $0.25 per share ($1.00
annualized rate) from 
<PAGE>
 
the previous level of $0.4175 per share ($1.67 annualized rate). In addition to
providing an increase in PP&L Resources' future financing flexibility, this
dividend action positions PP&L Resources' common stock for potential increased
growth in market value by retaining a proportionately higher level of earnings
in the business for reinvestment.

     A reduction in PP&L Resources' permanent capitalization, as well as the
temporary increase in leverage, was effected through a tender offer for 17
million shares of its common stock at $24.50 per share, which was financed by
PP&L Resources through the use of short-term debt.  During the transition period
PP&L Resources anticipates using internal cash flows to retire debt, with a
corresponding decrease in financial leverage.  The short-term debt used by PP&L
Resources was made available through the issuance of commercial paper by PP&L
Capital Funding.

     Dividends on common stock are declared at the discretion of the Boards of
Directors of PP&L Resources and PP&L.  PP&L Resources and PP&L will continue to
consider the appropriateness of these dividend levels, taking into account the
respective financial positions, results of operations, conditions in the
industry and other factors which the respective Boards deem relevant.

FINANCIAL INDICATORS

     The results of 1998, 1997 and 1996 were impacted by extraordinary items,
other one-time adjustments and weather.  (See "Earnings" for more information.)
The following financial indicators for PP&L Resources reflect the elimination of
these impacts from earnings, and provide a better measure of the underlying
earnings performance of PP&L Resources and its subsidiaries.
<TABLE>
<CAPTION>
 
                                    1998     1997     1996
                                   -------  -------  -------
<S>                                <C>      <C>      <C>
 
Earnings per share, as adjusted    $ 2.07   $ 2.03   $ 2.00
 
Return on average common equity     12.23%   11.82%   12.03%
 
Ratio of pre-tax income to
  interest charges                   3.55     3.55     3.52
 
Dividends declared per share       $1.335   $ 1.67   $ 1.67
 
Book value per share               $17.80   $16.88   $16.37
 
Ratio of market price per share
  to book value per share             157%     142%     141%
</TABLE>

ENVIRONMENTAL MATTERS

     Air
     ---

     The Clean Air Act deals, in part, with acid rain, attainment of federal
ambient ozone standards and toxic air emissions.  PP&L has complied with the
1995 Phase I acid rain provisions by installing continuous emission monitors on
all units, burning lower sulfur coal and installing low NOx burners on most
units.  To comply with the year 
<PAGE>
 
2000 Phase II acid rain provisions, PP&L plans to purchase lower sulfur coal and
use banked or purchased emission allowances instead of installing FGD on its
wholly owned units.

     PP&L has met the 1995 ambient ozone requirements of the Clean Air Act by
reducing NOx emissions by nearly 50% through the use of low NOx burners.
Further seasonal (i.e., 5 month) NOx reductions to 55% and 75% of 1990 levels
for 1999 and 2003, respectively, are specified under the Northeast Ozone
Transport Region's Memorandum of Understanding.  The DEP has finalized
regulations which require PP&L to reduce its ozone seasonal NOx by 57% beginning
in 1999.  PP&L plans to comply with this reduction with operational initiatives
that rely, to a large extent, on the existing low NOx burners.

     The EPA has finalized new national standards for ambient levels of ground-
level ozone and fine particulates.  Based in part on the new ozone standard, the
EPA has finalized NOx emission limits for 22 states, including Pennsylvania,
which in effect require approximately an 80% reduction from the 1990 level in
Pennsylvania by May 2003; the state is required by September 1999 to develop
plans for implementing this reduction.  Pursuant to Section 126 of the Clean Air
Act, several Northeast states have petitioned the EPA to find that major sources
of NOx emissions, including PP&L's power plants, are significantly contributing
to non-attainment in those states.  The EPA has proposed to find such
contribution and require emissions reductions at those sources if the states in
which those sources are located fail to develop plans by September 1999 to
implement the proposed 2003 limits.  PP&L estimates that compliance with these
emissions reduction requirements could require installation of NOx emissions
removal systems on PP&L's three largest coal-fired units, at a capital cost of
approximately $35 million per unit.  The new particulates standard may require
further reductions in SO2 and may expand the planned seasonal NOx reductions to
year round in the 2010-2012 timeframe.

     Under the Clean Air Act, the EPA has been studying the health effects of
hazardous air emissions from power plants and other sources, in order to
determine whether those emissions should be regulated.  Recently, the EPA
released a technical report of its findings to date.  The EPA concluded that
mercury is the power plant air toxin of greatest concern, but that more
evaluation is needed before it can determine whether regulation of air toxins
from fossil fuel plants is necessary.  The EPA is now seeking mercury and
chlorine sampling and other data from electric generating units, including
PP&L's.  In addition, the EPA has announced a new enforcement initiative against
older coal-fired plants.  Several of PP&L's coal-fired plants could fall into
this category.  These EPA initiatives could result in compliance costs for PP&L
in amounts which are not now determinable but which could be material.

     Expenditures to meet the 2000 acid rain and 1999 NOx reduction requirements
are included in the table of projected construction expenditures in the section
entitled "Financial Condition - Capital Expenditure Requirements."  PP&L
currently estimates that additional capital expenditures and operating costs for
environmental compliance 
<PAGE>
 
under the Clean Air Act will be incurred beyond 2002 in amounts which are not
now determinable but which could be material.

     Water and Residual Waste
     ------------------------

     PP&L has installed dry fly ash handling systems at most of its power
stations, which reduces waste water discharge.  In other cases, PP&L has
modified the existing facilities to allow continued operation of the ash basins
under a DEP permit.  Any groundwater contamination caused by the basins must
also be addressed.

     Groundwater degradation related to fuel oil leakage from underground
facilities and seepage from coal refuse disposal areas and coal storage piles
has been identified at several PP&L generating stations.  Remedial work related
to oil leakage is substantially completed at two generating stations.  At this
time, the only other remedial work being planned is to abate a localized
groundwater degradation problem associated with a waste disposal impoundment at
the Montour plant.

     The final NPDES permit for the Montour plant contains stringent limits for
iron and chlorine discharges.  Depending on the results of a toxic reduction
study, additional water treatment facilities or operational changes may be
needed at this plant.

     Capital expenditures through the year 2003 to correct groundwater
degradation at fossil-fueled generating stations, and to address waste water
control at PP&L facilities are included in the table of construction
expenditures in the section entitled "Financial Condition - Capital Expenditure
Requirements."  In this regard, PP&L currently estimates that $5.5 million of
additional capital expenditures may be required in the next four years to close
some of the ash basins and address other ash basin issues at various generating
plants.  Additional capital expenditures could be required beyond the year 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, PP&L entered into a consent order with the DEP to address a number
of sites where PP&L may be liable for remediation of contamination.  This may
include potential PCB contamination at certain PP&L substations and pole sites;
potential contamination at a number of coal gas manufacturing facilities
formerly owned and operated by PP&L; and oil or other contamination which may
exist at some of PP&L's former generating facilities.  As of December 31, 1998,
PP&L has completed work on slightly more than half of the sites included in the
consent order.

     In 1996, Penn Fuel Gas entered into a similar consent order with the DEP to
address a number of its sites where Penn Fuel Gas may be liable for remediation
of contamination.  The sites primarily include 
<PAGE>
 
former coal gas manufacturing facilities. Prior to PP&L Resources acquiring Penn
Fuel Gas on August 21, 1998, Penn Fuel Gas had obtained a "no further action"
determination from the DEP for two of the 20 sites covered by the order.

     At December 31, 1998, PP&L had accrued approximately $6 million and Penn
Fuel Gas had accrued $15 million, representing the respective amounts PP&L and
Penn Fuel Gas can reasonably estimate they will have to spend to remediate sites
involving the removal of hazardous or toxic substances, including those covered
by each company's consent orders mentioned above.  Future cleanup or remediation
work at sites currently under review, or at sites not currently identified, may
result in material additional operating costs for PP&L or Penn Fuel Gas, which
neither company can estimate at this time.  In addition, certain federal and
state statutes, including Superfund and the Pennsylvania Hazardous Sites Cleanup
Act, empower certain governmental agencies, such as the EPA and the DEP, to seek
compensation from the responsible parties for the lost value of damaged natural
resources.  The EPA and the DEP may file such compensation claims against the
parties, including PP&L or Penn Fuel Gas, held responsible for cleanup of such
sites.  Such natural resource damage claims against PP&L or Penn Fuel Gas could
result in material additional liabilities.

     General
     -------

     Due to the environmental issues discussed above or other environmental
matters, PP&L may be required to modify, replace or cease operating certain
facilities to comply with statutes, regulations and actions by regulatory bodies
or courts.  In this regard, PP&L also may incur capital expenditures, operating
expenses and other costs in amounts which are not now determinable but which
could be material.

INCREASING COMPETITION

     Background
     ----------

     The electric utility industry has experienced and will continue to
experience a significant increase in the level of competition in the energy
supply market.  PP&L has publicly expressed its support for full customer choice
of electricity suppliers for all customer classes.  PP&L is actively involved in
efforts at both the state and federal levels to encourage a smooth transition to
full competition.

     Pennsylvania Activities
     -----------------------

     Reference is made to Note 3 to Financial Statements for a discussion of the
disposition of PP&L's restructuring plan under the Customer Choice Act.

     In August 1997, the PUC issued an order modifying and approving PP&L's
pilot program under the applicable provisions of the Customer Choice Act and PUC
guidelines.  Retail customers participating in the PP&L and other Pennsylvania
utilities' pilot programs began to receive power from their supplier of choice
in November 1997.  Under its pilot 
<PAGE>
 
program, approximately 60,000 PP&L residential, commercial and industrial
customers chose their electric supplier. PP&L continued to provide all
transmission and distribution, customer service and back-up energy supply
services to participating customers in its service area.

     Only those alternative suppliers licensed by the PUC and in compliance with
the state tax obligations set forth in the Customer Choice Act could participate
in the pilot programs. Approximately 87 suppliers obtained such licenses to
participate in the pilot programs.

     Reference is also made to "PUC Restructuring Proceeding" for a discussion
of the settlement approved by the PUC which requires, among other things, that
PP&L transfer its retail electric marketing function to a separate, affiliated
corporation.  In August 1998, PP&L formed a new subsidiary, PP&L EnergyPlus, for
this purpose.  In September 1998, the PUC approved PP&L EnergyPlus' application
to act as a Pennsylvania EGS.  This license permits PP&L EnergyPlus to offer
retail electric supply to participating customers in PP&L's service territory
and in the service territories of other Pennsylvania utilities.  In 1999, PP&L
EnergyPlus will offer such supply to industrial and commercial customers
throughout the state.  At this time, PP&L EnergyPlus has determined not to
pursue residential customers in the competitive marketplace based on economic
considerations.

     In September 1998, the PUC issued an Order which, in part, directed
Pennsylvania utilities which are members of PJM, including PP&L, to offer their
installed capacity at a price of $19.72 per kilowatt-year (Capacity Order).
PP&L brought an action in the District Court seeking an injunction against the
Capacity Order on the basis, among other things, that it attempted to regulate
matters within exclusive federal jurisdiction.  In October 1998, PP&L entered
into a settlement agreement with the PUC under which (i) PP&L will offer to sell
capacity credits to EGS's licensed by the PUC at the equivalent of $19.72 per
kilowatt-year prior to June 1, 1999 (increasing to $22.41 per kilowatt-year from
June 1, 1999 through December 31, 1999) for service to PP&L residential
customers; (ii) all PP&L residential customers will be permitted to select an
EGS in January 1999; (iii) the PUC will withdraw the Capacity Order as to PP&L;
and (iv) PP&L will withdraw its federal court action against the Capacity Order.

     Federal Activities
     ------------------

     Reference is made to Note 4 to Financial Statements "Accounting for the
Effects of Certain Types of Regulation," for a discussion of PP&L's settlement
with 15 small utilities.

     In June 1997, all of the PJM companies except PECO (the PJM Supporting
Companies) filed proposals with the FERC to amend the PJM tariff and restructure
the PJM pool.  PECO filed a separate request with the FERC to amend the PJM
tariff.  Furthermore, PECO and certain 
<PAGE>
 
electric marketers submitted significantly different proposals to restructure
the PJM pool.

     In November 1997, the FERC approved, with certain modifications, the PJM
Supporting Companies' proposals for transforming the PJM into an ISO.  In
summary, the FERC order:  (i) approved the PJM's open access transmission rates
based on geographic zones, but required PJM to file a single PJM system-wide
rate proposal by 2002; (ii) accepted the PJM Supporting Companies' methodology
to price transmission when the system is congested and to charge these
congestion costs to system users in addition to the open access transmission
rates, but ordered PJM to file an additional proposal to address concerns raised
over price certainty for buyers and sellers during periods of congestion; (iii)
determined that the ISO is to operate both the transmission system and the power
exchange which provides for the purchase and sale of spot energy within the PJM
market; and (iv) accepted the PJM Supporting Companies' proposal regarding
mandatory installed capacity obligations for all entities serving firm retail
and wholesale load within PJM, but rejected their proposal for allocating the
capacity benefits which result from PJM's ability to import power from other
regional power pools.

     The PJM Supporting Companies and numerous other parties have filed requests
for amendment and/or rehearing of virtually every portion of the FERC's PJM ISO
order.  PP&L also has filed its own request for amendment and/or rehearing.  The
FERC has not yet taken action on these filings.  PP&L's primary issue with the
FERC's order relates to a requirement that existing wholesale contracts for
sales service and transmission service be modified to have the new PJM
transmission tariff applied to service under these existing contracts and the
requirement that PP&L modify these contracts to ensure that customers are not
assessed multiple transmission charges.  In an order issued in May 1998, the
FERC allowed PP&L to request an increase in the revenue requirement applicable
to transmission service over PP&L's transmission facilities to the extent that
PP&L has otherwise unrecovered transmission costs as a result of the contract
modifications.  PP&L filed the proposed increase to its transmission revenue
requirement in July 1998.  In October 1998, PP&L filed a settlement agreement
among the active parties in that proceeding, which was approved by FERC in
December 1998.

     In July 1997, the FERC accepted a new wholesale power tariff that permits
PP&L to sell capacity and energy at market-based rates, both inside and outside
the PJM area, subject to certain conditions.  This tariff allows PP&L to become
more active in the wholesale market with utilities and other entities, and
removes pricing restrictions which in the past had limited PP&L to charging at
or below cost-based rates.

     In July 1998, the FERC accepted amendments to PP&L's market-based rate
tariff that permit PP&L to sell, assign or transfer transmission rights and
associated ancillary services.  In October 1998, the FERC accepted a proposed
amendment to PP&L's market-based rate tariff to permit PP&L to sell electric
energy and/or capacity to its affiliates under specified conditions.
<PAGE>
 
     In September 1998, PP&L filed its EGS Coordination Tariff with the FERC.
The EGS Coordination Tariff applies to entities licensed to serve retail
electricity customers under the Commonwealth of Pennsylvania's retail access
program.  The purpose of the EGS Coordination Tariff is to permit PP&L to
provide EGS's with certain FERC-jurisdictional services which will facilitate
the ability of EGS's to meet their obligations under the PJM Open Access
Transmission Tariff and related agreements of the PJM.  The FERC accepted the
EGS Coordination Tariff for filing in October 1998 but in a later order stated
that it would issue a decision holding that the EGS Coordination Tariff did not
need to be filed with the FERC.  That decision has not yet been issued.

     In September 1997, PP&L filed a request with the FERC to lower the
applicable PP&L revenue requirement currently set forth in the PJM open access
transmission tariff.  The new revenue requirement results from PP&L's use of the
same test year and cost support data used in the PUC restructuring proceeding.
PP&L requested that the new revenue requirement take effect on November 1, 1997.
In February 1998, the FERC accepted the proposed rates, subject to refund, and
set the amount of the decrease in the revenue requirement for hearing.  In
October 1998, PP&L filed a settlement agreement among the active parties in that
proceeding, which was accepted by the FERC in December 1998.

     Reference is made to "Pennsylvania Activities" above for a discussion of
PP&L's new retail electric marketing subsidiary, PP&L EnergyPlus.  PP&L
EnergyPlus filed an application with the FERC in September 1998 for authority to
sell electric energy and capacity at market-based rates, and for authority to
sell, assign or transfer transmission rights and associated ancillary services.
The FERC accepted PP&L EnergyPlus' application in December 1998.  Also, in
September 1998, PP&L filed a notification of change in status with the FERC to
report PP&L's affiliation with PP&L EnergyPlus.  Pursuant to FERC requirements,
PP&L has a filed code of conduct governing its relationship with affiliates that
engage in the sale and/or transmission of electric energy.

YEAR 2000

     PP&L Resources and its subsidiaries utilize computer-based systems
throughout their businesses.  In the year 2000, these systems will face a
potentially serious problem with recognizing calendar dates.  Without corrective
action, the most reasonable worst case scenario regarding Year 2000 issues could
result in computer shutdown or erroneous calculations causing operational
problems at the generating stations; diminished ability to monitor, control and
coordinate generation with the transmission and distribution systems; and
adverse impacts on the operation of various monitoring and metering equipment
utilized throughout PP&L.  A Company-wide Year 2000 coordination committee was
formed to raise the awareness of the Year 2000 issue, share information and
review the progress towards compliance.  A seven-step approach was developed to
achieve Year 2000 compliance by assessing and remediating the problem in
application software, hardware, plant control systems and devices containing
<PAGE>
 
embedded microprocessors.  The seven steps in the plan include awareness,
inventory, assessment, remediation, testing, implementation, and contingency
planning.  PP&L Resources has identified and communicated with critical
suppliers, such as fuel suppliers, in order to obtain assurances that they are
in compliance with Year 2000 issues.  The majority of the responses from these
parties are favorable, with some responses still being evaluated and followed-up
as appropriate.

     Delivery of electricity is dependent on the overall reliability of the
electric grid.  PP&L is cooperating and coordinating with the North American
Electric Reliability Council and the PJM Interconnection regarding Year 2000
remediation efforts.

     As of December 31, 1998, PP&L Resources estimates that approximately 75% of
mainframe applications that will remain in production have been determined as
being Year 2000 compliant.  It is anticipated that all mission-critical systems
(i.e. mainframe, embedded technologies, and client server applications) will be
Year 2000 ready by July 1, 1999 and all systems ready by November 30, 1999.  
Year 2000 compliant means computer systems or equipment with date-sensitive
chips will accurately process date and time data. Year 2000 ready means that the
computer systems or equipment with date-sensitive chips can be used on January
1, 2000, and beyond, but are not fully year 2000 compliant.

     PP&L has basic contingency plans in place to address issues such as
blackouts on the electrical grid, cold starts of generating facilities and
disaster recovery procedures for the computing environment.  PP&L recognizes
that additional contingency plans may be necessary and, as part of the seven-
step remediation process, continues to work on identifying and developing
additional contingency plans that may be needed.

     In May 1998, the NRC issued a notification requirement under which nuclear
utilities are required to inform the NRC, in writing, that they are working to
solve the Year 2000 computer problem.  In addition, nuclear utilities have until
July 1, 1999 to inform the NRC that their computers are Year 2000
compliant/ready or to submit a status report summarizing the on-going work.
PP&L filed its written response, detailing its Year 2000 compliance activities,
with the NRC in August 1998.

     In July 1998, the PUC initiated a non-adversarial investigation to be
conducted by the Office of Administrative Law Judge "to accurately assess any
and all steps taken and proposed to be taken to resolve the Year 2000 compliance
issue by all jurisdictional fixed utilities and mission-critical service
providers such as the PJM."  The PUC required all jurisdictional utilities to
file a written response to a list of questions concerning Year 2000 compliance;
and that, if mission-critical systems cannot be made Year 2000 compliant on or
before March 31, 1999, to file a detailed contingency plan by that date.  PP&L
filed its written response to these questions in August 1998 and in November
1998 submitted testimony to the PUC that 
<PAGE>
 
the Company would have its mission-critical systems Year 2000 ready by July 1,
1999 and all systems ready by November 30, 1999.

     At this time, PP&L has achieved the following completion percentages on the
seven steps referenced above for Year 2000 compliance:  awareness, 87%;
inventory, 97%; assessment, 87%; remediation, 70%; testing, 72%; implementation,
56%; and additional contingency plans (beyond the basic plans referenced above),
16%.

     Based upon present assessments, PP&L Resources estimates that it will incur
approximately $15 million in Year 2000 remediation costs.  Through December 31,
1998, PP&L Resources spent approximately $8 million in remediation costs, which
included assistance from outside consultants. These costs are being funded
through internally generated funds and are being expensed as incurred.
<PAGE>
 
(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
 PP&L Resources, Inc. and to the Shareowner and
 Board of Directors of PP&L, Inc.

In our opinion, the accompanying consolidated financial statements listed in the
index appearing under Item 14(a)(1) and (2) on page 101, present fairly, in all
material respects, the consolidated financial position of PP&L Resources, Inc.
and its subsidiaries ("PP&L Resources") at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 and the consolidated financial
position of PP&L, Inc. and its subsidiaries ("PP&L") at December 31, 1998 and
1997 and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.  These financial statements are
the responsibility of management of PP&L Resources and PP&L; 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 generally accepted
auditing standards 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
February 1, 1999
<PAGE>
 
                             PP&L Resources, Inc.
                             --------------------
        Management's Report on Responsibility for Financial Statements
        --------------------------------------------------------------


     The management of PP&L Resources, Inc. 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 PP&L Resources.

     PP&L Resources' 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 PP&L Resources' 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.

     PP&L Resources 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, PP&L
Resources maintains an internal auditing program to evaluate PP&L Resources'
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 PP&L Resources' system of
internal control is adequate to accomplish the objectives discussed in this
report.

     The Board of Directors, acting through its Audit and Corporate
Responsibility Committee, oversees management's responsibilities in the
preparation of the financial statements.  In performing this function, the Audit
and Corporate Responsibility 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 and Corporate Responsibility 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 PP&L Resources' 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 PP&L
Resources' operating subsidiaries.  These policies and guidelines address:  the
necessity of ensuring open communication within PP&L Resources; 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
<PAGE>
 
                                  PP&L, Inc.
                                  ----------
        Management's Report on Responsibility for Financial Statements
        --------------------------------------------------------------


     The management of PP&L, Inc. 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 PP&L.

     PP&L'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 of PP&L Resources.  Management has made available to
PricewaterhouseCoopers all PP&L'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.

     PP&L 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, PP&L
maintains an internal auditing program to evaluate PP&L'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 PP&L's system of internal control is
adequate to accomplish the objectives discussed in this report.

     The Board of Directors, acting through PP&L Resources' Audit and Corporate
Responsibility Committee, oversees management's responsibilities in the
preparation of the financial statements.  In performing this function, the Audit
and Corporate Responsibility 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 PP&L Resources' Audit and Corporate Responsibility 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 PP&L's affairs are conducted according to the highest standards
of personal and corporate conduct.  This responsibility is characterized and
reflected in PP&L's business policies and guidelines.  These policies and
guidelines address:  the necessity of ensuring open communication within PP&L;
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
<PAGE>
 
<TABLE>
<CAPTION>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 
CONSOLIDATED STATEMENT OF INCOME
PP&L Resources, Inc. and Subsidiaries
(Millions of Dollars, except per share data)
                                                                              1998                  1997                 1996
OPERATING REVENUES                                               
<S>                                                                  <C>                   <C>                   <C>
  Electric operations............................................           $  2,410              $  2,397              $  2,428
  Gas operations.................................................                 35
  Wholesale energy marketing and trading activities..............              1,223                   650                   481
  Energy related businesses (Note 1).............................                118                    30                    17
                                                                   -----------------     -----------------     -----------------
  Total Operating Revenues.......................................              3,786                 3,077                 2,926
                                                                   -----------------     -----------------     -----------------
                                                                 
OPERATING EXPENSES                                               
  Operation                                                      
    Cost of electric fuel........................................                480                   466                   448
    Cost of natural gas and propane..............................                 13
    Energy purchases.............................................              1,060                   504                   352
    Other operating..............................................                605                   513                   531
  Maintenance....................................................                182                   184                   191
  Depreciation and amortization (Note 1).........................                338                   385                   375
  Taxes, other than income (Note 6)..............................                188                   204                   203
  Energy related businesses (Note 1).............................                 93                    21                    16
                                                                   -----------------     -----------------     -----------------
  Total Operating Expenses.......................................              2,959                 2,277                 2,116
                                                                   -----------------     -----------------     -----------------
                                                                 
OPERATING INCOME.................................................                827                   800                   810
                                                                   -----------------     -----------------     -----------------
                                                                 
Other Income and (Deductions)....................................                 66                   (28)                   21
                                                                   -----------------     -----------------     -----------------
                                                                 
INCOME BEFORE INTEREST AND INCOME TAXES..........................                893                   772                   831
                                                                 
Interest Expense.................................................                230                   215                   220
                                                                   -----------------     -----------------     -----------------
                                                                 
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS...............                663                   557                   611
                                                                 
Income Taxes (Note 6)............................................                259                   237                   254
                                                                   -----------------     -----------------     -----------------
                                                                 
INCOME BEFORE EXTRAORDINARY ITEMS................................                404                   320                   357
                                                                 
Extraordinary Items (net of $666 income taxes)  (Note 4).........               (948)
                                                                   -----------------     -----------------     -----------------
                                                                 
INCOME (LOSS) BEFORE DIVIDENDS ON PREFERRED STOCK................               (544)                  320                   357
                                                                 
Preferred Stock Dividend Requirements............................                 25                    24                    28
                                                                   -----------------     -----------------     -----------------
                                                                 
NET INCOME (LOSS)................................................              ($569)             $    296              $    329
                                                                   =================     =================     =================
                                                                 
EARNINGS PER SHARE OF COMMON STOCK                               
  BASIC AND DILUTED (A):                                         
    Income Before Extraordinary Items............................              $2.29                 $1.80                 $2.05
    Extraordinary Items (net of tax).............................              (5.75)
                                                                   -----------------     -----------------     -----------------
NET INCOME (LOSS)................................................             ($3.46)                $1.80                 $2.05
                                                                   =================     =================     =================
                                                                 
Dividends Declared per Share of Common Stock.....................             $1.335                 $1.67                 $1.67
                                                                 
(a) Based on average number of shares outstanding (thousands)....            164,651               164,550               161,060
 
See accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
 
CONSOLIDATED STATEMENT OF CASH FLOWS
PP&L Resources, Inc. and Subsidiaries
(Millions of Dollars)

<TABLE>
<CAPTION>
 
                                                                              1998                   1997                   1996
                                                                
CASH FLOWS FROM OPERATING ACTIVITIES                            
<S>                                                                <C>                    <C>                    <C>
 Net income (loss) from continuing operations...................              ($569)                 $ 296                  $ 329
 Extraordinary items (net of income taxes of $666)..............               (948)
                                                                 ------------------     ------------------     ------------------
 Net income before extraordinary items..........................                379                    296                    329
 Adjustments to reconcile net income to net                     
  cash provided by operating activities                         
   Depreciation and amortization................................                338                    385                    375
   Amortization of property under capital leases................                 58                     68                     86
   Equity in (earnings)/loss of unconsolidated affiliates.......                (49)                     2                    (13)
   Regulatory debits and credits................................                (61)                   (36)                   (10)
   Deferred income taxes and investment tax credits.............                 12                     18
   Change in current assets and current liabilities             
     Fuel inventories...........................................                 (9)                    11                    (14)
     Other......................................................                (33)                   (13)                   (35)
   Other operating activities -- net............................                  2                     46                     75
                                                                 ------------------     ------------------     ------------------
       Net cash provided by operating activities................                637                    777                    793
                                                                 ------------------     ------------------     ------------------
                                                                
CASH FLOWS FROM INVESTING ACTIVITIES                            
 Property, plant and equipment expenditures.....................               (304)                  (310)                  (360)
 Proceeds from sale of nuclear fuel to trust....................                 54                     60                     93
 Purchases of available-for-sale securities.....................                (15)                   (72)                  (600)
 Sales and maturities of available-for-sale securities..........                 70                    111                    631
 Investments in unconsolidated affiliates.......................               (306)                  (152)                  (201)
 Purchases and sales of other financial investments - net.......                  4                     76
 Other investing activities - net...............................                 12                     (4)                     5
                                                                 ------------------     ------------------     ------------------
       Net cash used in investing activities....................               (485)                  (291)                  (432)
                                                                 ------------------     ------------------     ------------------
                                                                
CASH FLOWS FROM FINANCING ACTIVITIES                            
 Issuance of long-term debt.....................................                495                    111                    116
 Issuance of common stock.......................................                 62                     76                     77
 Purchase of treasury stock.....................................               (419)
 Issuance of Company-obligated mandatorily redeemable           
   preferred securities of subsidiary trusts holding            
   solely parent debentures.....................................                                       250
 Retirement of long-term debt...................................               (295)                  (210)                  (145)
 Purchase of subsidiary's preferred stock (net of premium       
   and associated costs)........................................                                      (369)
 Payments on capital lease obligations..........................                (58)                   (68)                   (86)
 Common and preferred dividends paid............................               (278)                  (298)                  (296)
 Net increase(decrease) in short-term debt......................                487                     (9)                    55
 Other financing activities - net...............................                 (1)                   (20)                    (1)
                                                                 ------------------     ------------------     ------------------
       Net cash used in financing activities....................                 (7)                  (537)                  (280)
                                                                 ------------------     ------------------     ------------------
                                                                
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS.............                145                    (51)                    81
Cash and Cash Equivalents at Beginning of Period................                 50                    101                     20
                                                                 ------------------     ------------------     ------------------
Cash and Cash Equivalents at End of Period......................             $  195                  $  50                  $ 101
                                                                 ==================     ==================     ==================
                                                                
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION               
 Cash paid during the period for:                               
  Interest (net of amount capitalized)..........................             $  237                  $ 208                  $ 213
  Income taxes..................................................             $  248                  $ 244                  $ 286
 
See accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
 
CONSOLIDATED BALANCE SHEET AT DECEMBER 31,
PP&L Resources, Inc. and Subsidiaries
(Millions of Dollars)

<TABLE>
<CAPTION>
 
ASSETS                                                                                             1998              1997
<S>                                                                                            <C>               <C> 
PROPERTY, PLANT AND EQUIPMENT
  Electric utility plant in service - net (Note 1)
     Transmission and distribution.......................................................            $2,179            $2,160
     Generation..........................................................................             1,601             4,022
     General and intangible..............................................................               223               232
                                                                                             --------------    --------------
                                                                                                      4,003             6,414
 
   Construction work in progress - at cost...............................................               117               185
   Nuclear fuel owned and leased - net...................................................               162               167
                                                                                             --------------    --------------
     Electric utility plant - net........................................................             4,282             6,766
   Gas and oil utility plant - net.......................................................               175                30
   Other property - net..................................................................                23                24
                                                                                             --------------    --------------
                                                                                                      4,480             6,820
                                                                                             --------------    --------------
 
INVESTMENTS
   Investment in unconsolidated affiliates at equity (Note 1)............................               688               377
   Nuclear plant decommissioning trust fund (Notes 1 and 7)..............................               206               163
   Financial investments (Notes 1 and 8).................................................                 1                52
   Other (Note 8)........................................................................                11                13
                                                                                             --------------    --------------
                                                                                                        906               605
                                                                                             --------------    --------------
CURRENT ASSETS
   Cash and cash equivalents (Note 1)....................................................               195                50
   Accounts receivable (less reserve:  1998, $16; 1997, $16)
     Utility customers...................................................................               173               190
     Other...............................................................................               125                48
   Unbilled revenues
     Utility customers...................................................................               106                90
     Other...............................................................................                66                37
   Fuel, materials and supplies - at average cost........................................               207               200
   Prepayments...........................................................................                15                28
   Other.................................................................................                61                52
                                                                                             --------------    --------------
                                                                                                        948               695
                                                                                             --------------    --------------
 
REGULATORY ASSETS AND OTHER NONCURRENT ASSETS (NOTE 4)
   Recoverable transition costs..........................................................             2,819
   Other.................................................................................               454             1,365
                                                                                             --------------    --------------
                                                                                                      3,273             1,365
                                                                                             --------------    --------------
 
                                                                                                     $9,607            $9,485
                                                                                             ==============    ==============
</TABLE> 
See accompanying Notes to Financial Statements.
<PAGE>
 
LIABILITIES

<TABLE>
<CAPTION>
                                                                                                   1998               1997
<S>                                                                                            <C>                <C>
Capitalization
  Common equity
    Common stock.........................................................................            $    2             $    2
    Capital in excess of par value.......................................................             1,866              1,669
    Treasury stock.......................................................................              (419)
    Earnings reinvested (Note 4).........................................................               372              1,164
    Capital stock expense and other......................................................               (31)               (26)
                                                                                             --------------     --------------
                                                                                                      1,790              2,809
                                                                                             --------------     --------------
  Preferred stock
    With sinking fund requirements.......................................................                47                 47
    Without sinking fund requirements....................................................                50                 50
  Company-obligated mandatorily redeemable preferred
    securities of subsidiary trusts holding solely
    company debentures...................................................................               250                250
  Long-term debt.........................................................................             2,983              2,585
                                                                                             --------------     --------------
                                                                                                      5,120              5,741
                                                                                             --------------     --------------
 
CURRENT LIABILITIES
  Short-term debt (Note 9)...............................................................               636                135
  Long-term debt due within one year.....................................................                 1                150
  Capital lease obligations due within one year..........................................                59                 58
  Above market NUG purchases due within one year (Note 4)................................               105
  Accounts payable.......................................................................               197                140
  Taxes and interest accrued.............................................................                95                102
  Dividends payable......................................................................                46                 76
  Other..................................................................................               128                108
                                                                                             --------------     --------------
                                                                                                      1,267                769
                                                                                             --------------     --------------
 
 
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
  Deferred income taxes and investment tax credits (Note 6)..............................             1,574              2,221
  Above market NUG purchases (Note 4)....................................................               775
  Capital lease obligations..............................................................               109                113
  Other  (Notes 1 and 7).................................................................               762                641
                                                                                             --------------     --------------
                                                                                                      3,220              2,975
                                                                                             --------------     --------------
 
COMMITMENTS AND CONTINGENT LIABILITIES  (Note 14)........................................
                                                                                             --------------     --------------
 
 
                                                                                                     $9,607             $9,485
                                                                                             ==============     ==============
</TABLE> 
See accompanying Notes to Financial Statements.
<PAGE>
 
CONSOLIDATED STATEMENT OF SHAREOWNERS' COMMON EQUITY
PP&L Resources, Inc. and Subsidiaries
(Millions of Dollars)

<TABLE>
<CAPTION>  
 
                                                                                               FOR THE YEARS ENDED DECEMBER 31,
                                                                                     -----------------------------------------------

                                                                                             1998             1997             1996
                                                                                     ------------     ------------     -------------

<S>                                                                              <C>                  <C>              <C>
Common stock at beginning of year............................................        $          2     $          2     $          2
  Sale of common stock.......................................................
                                                                                     ------------     ------------     -------------

Common stock at end of year..................................................                   2                2                2
                                                                                     ------------     ------------     -------------


Capital in excess of par value at beginning of year..........................               1,669            1,596            1,513
  Common stock issued (b)....................................................                  62               76               77
  Common stock issued for purchase of Penn Fuel Gas (see Note 11).                            135
  Other......................................................................                                   (3)               6
                                                                                     ------------     ------------     -------------

Capital in excess of par value at end of year................................               1,866            1,669            1,596
                                                                                     ------------     ------------     -------------

Treasury stock at beginning of year..........................................
  Purchase of treasury stock.................................................                (419)
                                                                                     ------------     ------------     -------------

Treasury stock at end of year................................................                (419)
                                                                                     ------------     ------------     -------------

Earnings reinvested at beginning of year.....................................               1,164            1,143            1,083
  Net income (loss)..........................................................                (569)             296              329
  Cash dividends declared on common stock....................................                (223)            (275)            (269)

                                                                                     ------------     ------------     -------------

Earnings reinvested at end of year...........................................                 372            1,164            1,143
                                                                                     ------------     ------------     -------------

Capital stock expense and other at beginning of year.........................                 (26)               4               (1)

  Other......................................................................                  (5)             (30)               5
                                                                                     ------------     ------------     -------------

Capital stock expense and other at end of year...............................                 (31)             (26)               4
                                                                                     ------------     ------------     -------------

Total Shareowners' Common Equity.............................................        $      1,790     $      2,809     $      2,745
                                                                                     ============     ============     =============

Common stock shares at beginning of year (a).................................         166,248,284      162,665,416      159,403,266
  Common stock issued (b)....................................................           2,604,369        3,582,868        3,262,150
  Common stock issued for purchase of Penn Fuel Gas..........................           5,555,522
  Common stock purchased.....................................................         (16,996,129)
                                                                                     ------------     ------------     -------------

Common stock shares at end of year...........................................         157,412,046      166,248,284      162,665,416
                                                                                     ------------     ------------     -------------

</TABLE>
(a)  $.01 par value, 390,000,000 share authorized. Each share entitles the
     holder to one vote on any question presented to any shareowners' meeting.
(b)  Common stock issued through the ESOP and the DRIP.



See accompanying Notes to Financial Statements.
<PAGE>
 
CONSOLIDATED STATEMENT OF PREFERRED STOCK AT DECEMBER 31,
PP&L Resources, Inc. and Subsidiaries (a)
(Millions of Dollars)
<TABLE>
<CAPTION> 
 
                                                                               SHARES
                                                       OUTSTANDING          OUTSTANDING        SHARES
                                                   1998        1997(b)        1998 (b)        AUTHORIZED
<S>                                             <C>        <C>            <C>             <C>     
PP&L
  PREFERRED STOCK - $100 par, cumulative
    4-1/2%........................                 $  25      $    25          530,189          629,936
    Series........................                    72           72        4,133,556       10,000,000
                                                 -------      -------   
                                                   $  97      $    97   
                                                 =======      =======   
 
</TABLE> 
 
DETAILS OF PREFERRED STOCK (c)
<TABLE> 
<CAPTION>  
                                                                                                      SINKING FUND
                                                                               OPTIONAL               PROVISIONS
                                                                  SHARES      REDEMPTION      SHARES TO BE
                                             OUTSTANDING       OUTSTANDING     PRICE PER        REDEEMED       REDEMPTION
                                         1998 (b)   1997 (b)     1998 (b)        SHARE        ANNUALLY (f)       PERIOD
<S>                                     <C>        <C>        <C>            <C>            <C>               <C> 
With Sinking Fund Requirements                                               
  Series Preferred                                                           
    5.95%.........................           $ 1       $   1       300,000         (d)            10,000       April 2001
    6.05%.........................                                 250,000         (d)                     
    6.125%........................            31          31     1,150,000         (d)            (e)           2003-2008
    6.15%.........................            10          10       250,000         (d)           100,000       April 2003
    6.33%.........................             5           5     1,000,000         (d)            50,000        July 2003
                                         -------------------                     
                                             $47       $  47                      
                                         ===================                      
                                                                                  
Without Sinking Fund Requirements                                                 
  4-1/2% Preferred................           $25       $  25       530,189    $   110.00
  Series Preferred                                                
    3.35%.........................             2           2        41,783        103.50
    4.40%.........................            11          11       228,773        102.00
    4.60%.........................             3           3        63,000        103.00
    6.75%.........................             9           9       850,000         (d)
                                          ------------------      
                                             $50       $  50      
                                          ==================
</TABLE> 

INCREASES(DECREASES) IN PREFERRED STOCK
 
There were no issuances or redemptions of preferred stock in 1998, 1997 or 1996.
 
(a)   Each share of PP&L's preferred stock entitles the holder to one vote on
      any question presented to PP&L's shareowners' meetings. There were
      10,000,000 shares of PP&L Resources' preferred stock and 5,000,000 shares
      of PP&L's preference stock authorized; none were outstanding at December
      31, 1998 and 1997.
(b)   In 1997, and continuing in 1998, PP&L Resources acquired 79.11% ($369
      million par value) of the outstanding preferred stock of PP&L in a tender
      offer. At December 31, 1998, these shares have not been retired or
      redeemed. The par value of PP&L preferred stock acquired by PP&L Resources
      has been eliminated for purposes of providing consolidated financial
      statements.
(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; 6.05%, 2002; 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, 22,500.
(f)   After giving effect to the preferred stock tender offer.
 
 
 
 
See accompanying Notes to Financial Statements.
<PAGE>
 
CONSOLIDATED STATEMENT OF COMPANY-OBLIGATED
MANDATORILY REDEEMABLE SECURITIES AT DECEMBER 31,
PP&L Resources, Inc. and Subsidiaries (a)
PP&L, Inc. and Subsidiaries (a)
(Millions of Dollars)

<TABLE> 
<CAPTION> 
 
                                                          Outstanding                   Outstanding
                                                    1998                      1997          1998      Authorized     Maturity (b)
<S>                                               <C>                        <C>        <C>           <C>            <C> 
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 2002
     8.20%.............                              100                       100         4,000,000   4,000,000     April 2002
                                           -------------             -------------
                                                   $ 250                     $ 250
                                           =============             =============
</TABLE> 

 
(a)   In 1997 PP&L 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 PP&L to the trusts.
      PP&L 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. PP&L has guaranteed all of the trusts' obligations under the
      Preferred Securities. The proceeds of the sale of these preferred
      securities were loaned by PP&L to PP&L Resources for the tender offer for
      PP&L 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 PP&L, the Subordinated
      Debentures are redeemable on and after the dates shown above 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.

See accompanying Notes to Financial Statements.
<PAGE>
 
CONSOLIDATED STATEMENT OF LONG-TERM DEBT AT DECEMBER 31,
PP&L Resources, Inc. and Subsidiaries
PP&L, Inc. and Subsidiaries
(Millions of Dollars)

<TABLE>
<CAPTION> 
                                                                                     Outstanding
                                                                         1998                           1997     Maturity(b)
<S>                                                                  <C>                            <C>       <C>      
  First Mortgage Bonds (a)                                                                                    
    5-1/2%.................................................                                           $  150      April 1, 1998
    6%.....................................................            $  125                            125       June 1, 2000
    7-3/4%.................................................               150                            150        May 1, 2002
    6-7/8%.................................................               100                            100   February 1, 2003
    6-1/8% to 6-7/8%.......................................               625   (c)                      425          2004-2008
    7.70%..................................................               200                            200          2009-2013  (d)

    7-3/8%.................................................               100                            100          2014-2018
    6-3/4% to 9-3/8%.......................................               815                            815          2019-2023
    7.30%..................................................               150                            150          2024-2028
                                                                                                              
  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
                                                           ------------------              -----------------  
                                                                        2,579                          2,529  
  Unsecured promissory notes...............................                                              116  
  Pollution Control Revenue Bonds..........................                 9                              9  
                                                           ------------------              -----------------  
                                                                        2,588                          2,654  
  Unamortized (discount) and premium -- net................               (19)                           (21) 
                                                           ------------------              -----------------  
                                                                        2,569                          2,633  
  Less amount due within one year..........................                                              150  
                                                           ------------------              -----------------  
                                                                                                              
Total PP&L long-term debt..................................             2,569                          2,483  
                                                           ------------------              -----------------  
                                                                                                              
Additional PP&L Resources, Inc.                                                                               
  Medium Term Notes                                                                                           
    5.75% to 6.84%.........................................               397   (e)                      102          2000-2007
  Unsecured Promissory Notes...............................                18
                                                           ------------------              -----------------
                                                                          415                            102
  Less amount due within one year..........................                 1
                                                           ------------------              -----------------
 
  Total PP&L Resources long-term debt......................            $2,983                         $2,585
                                                           ==================              =================
                                            __________________________________________
 
(a)  Substantially all owned electric utility plant is subject to the lien of PP&L's Mortgage.
(b)  Aggregate long-term debt maturities through 2003 are (millions of dollars):  2000, $235; 2001, $70; 2002, $150; 2003, $185.
     There are no bonds outstanding that have sinking fund requirements.
(c)  In May 1998, PP&L issued $200 million First Mortgage Bonds, 6-1/8% Reset Put Securities Series  due 2006.  In connection
     with this issuance, PP&L assigned to a third party the option to call the bonds from the holders on May 1, 2001.  These bonds
     will mature on May 1, 2006, but will be required to be surrendered by the existing holders on May 1, 2001 either through
     the exercise of the call option by the callholder or, if such option is not exercised, through the automatic exercise of a
     mandatory put by the trustee on behalf of the bondholders.  If the call option is exercised, the bonds will be remarketed
     and the interest rate will be reset for the remainder of their term to the maturity date.  If the call option is not exercised,
     the mandatory put will be exercised and PP&L will be required to repurchase the bonds at 100% of their principal amount
     on May 1, 2001.  Proceeds from the sale of the bonds were used by PP&L to retire $116 million of its unsecured term loans
     and to reduce its outstanding commercial paper balances.
(d)  Any registered owner of these bonds has the right to require PP&L to redeem such owner's bonds on October 1, 1999
     at a price of 100% of the principal amount.
(e)  In 1998, PP&L Capital Funding issued $295 million of medium-term notes with maturities varying from two to seven years.
</TABLE> 
See accompanying Notes to Financial Statements.
<PAGE>
 
CONSOLIDATED STATEMENT OF INCOME
PP&L, Inc. and Subsidiaries
(Millions of Dollars)

<TABLE>
<CAPTION>

                                                                          1998                    1997                   1996
<S>                                                                 <C>                     <C>                    <C> 
OPERATING REVENUES                                           
  Electric operations........................................                 $2,410                  $2,397                 $2,428
  Wholesale energy marketing and trading activities..........                  1,223                     650                    481
  Energy related businesses (Note 1).........................                     10                       2                      2
                                                                  ------------------      ------------------     ------------------
  Total Operating Revenues...................................                  3,643                   3,049                  2,911
                                                                  ------------------      ------------------     ------------------
                                                             
OPERATING EXPENSES                                           
  Operation                                                  
    Cost of electric fuel....................................                    480                     466                    448
    Energy purchases.........................................                  1,060                     504                    352
    Other operating..........................................                    594                     513                    531
  Maintenance................................................                    180                     184                    191
  Depreciation and amortization (Note 1).....................                    335                     385                    375
  Taxes, other than income (Note 6)..........................                    185                     204                    203
  Energy related businesses (Note 1).........................                      8                       3                      2
                                                                  ------------------      ------------------     ------------------
  Total Operating Expenses...................................                  2,842                   2,259                  2,102
                                                                  ------------------      ------------------     ------------------
                                                             
OPERATING INCOME.............................................                    801                     790                    809
                                                             
Other Income.................................................                     77                      12                     17
                                                                  ------------------      ------------------     ------------------
                                                             
INCOME BEFORE INTEREST AND INCOME TAXES......................                    878                     802                    826
                                                             
Interest Expense.............................................                    196                     207                    214
                                                                  ------------------      ------------------     ------------------
                                                             
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS...........                    682                     595                    612
                                                             
Income Taxes (Note 6)........................................                    273                     247                    255
                                                                  ------------------      ------------------     ------------------
                                                             
INCOME BEFORE EXTRAORDINARY ITEMS............................                    409                     348                    357
                                                             
Extraordinary Items (net of $666 income taxes)  (Note 4).....                   (948)
                                                                  ------------------      ------------------     ------------------
                                                             
NET INCOME(LOSS) BEFORE DIVIDENDS ON                         
  PREFERRED STOCK............................................                   (539)                    348                    357
                                                             
Dividends on Preferred Stock.................................                     48                      40                     28
                                                                  ------------------      ------------------     ------------------
                                                             
EARNINGS AVAILABLE TO PP&L RESOURCES, INC....................                  ($587)                 $  308                 $  329
                                                                  ==================      ==================     ==================
 
See accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
 
CONSOLIDATED STATEMENT OF CASH FLOWS
PP&L, Inc. and Subsidiaries
(Millions of Dollars)

<TABLE>  
<CAPTION>  
                                                                            1998                 1997                 1996
<S>                                                                    <C>                  <C>                <C> 
Cash Flows From Operating Activities                              
 Net income (loss) from continuing operations.....................              ($539)               $ 348                $ 357
 Extraordinary items (net of income taxes of $666)................               (948)
                                                                     ----------------     -----------------    ----------------
 Net income before extraordinary items............................                409                  348                  357
 Adjustments to reconcile net income to net                       
  cash provided by operating activities                           
   Depreciation and amortization..................................                335                  385                  375
   Amortization of property under capital leases..................                 58                   68                   86
   Regulatory debits and credits..................................                (61)                 (36)                 (10)
   Deferred income taxes and investment tax credits...............                 12                   20                   (1)
   Change in current assets and current liabilities               
     Fuel inventories.............................................                 (8)                  11                  (14)
     Other........................................................                 16                  (25)                 (38)
   Other operating activities -- net..............................                (66)                  15                   44
                                                                     ----------------     ----------------     ----------------
   Net cash provided by operating activities......................                695                  786                  799
                                                                     ----------------     ----------------     ----------------
                                                                  
CASH FLOWS FROM INVESTING ACTIVITIES                              
  Property, plant and equipment expenditures......................               (297)                (310)                (360)
  Proceeds from sales of nuclear fuel to trust....................                 54                   60                   93
  Purchases of available-for-sale securities......................                (15)                 (72)                 (90)
  Sales and maturities of available-for-sale securities...........                 69                   88                   93
  Purchases and sales of other financial investments - net........                                      76
  Loan to parent..................................................                                    (375)
  Other investing activities - net................................                  6                   (4)                   5
                                                                     ----------------     ----------------     ----------------
        Net cash used in investing activities.....................               (183)                (537)                (259)
                                                                     ----------------     ----------------     ----------------
                                                                  
CASH FLOWS FROM FINANCING ACTIVITIES                              
  Issuance of long-term debt......................................                200                    9                  116
  Issuance of Company-obligated mandatorily redeemable            
    preferred securities of subsidiary trusts holding             
    solely company debentures.....................................                                     250
  Capital contribution from parent................................                  6                    7                   32
  Retirement of long-term debt....................................               (266)                (210)                (145)
  Payments on capital lease obligations...........................                (58)                 (67)                 (86)
  Common and preferred dividends paid.............................               (412)                (344)                (296)
  Net increase (decrease) in short-term debt......................                 35                   35                  (79)
  Other financing activities - net................................                 (1)                  (9)                  (2)
                                                                     ----------------     ----------------     ----------------
        Net cash used in financing activities.....................               (496)                (329)                (460)
                                                                     ----------------     ----------------     ----------------
                                                                  
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..............                 16                  (80)                  80
  Cash and Cash Equivalents at Beginning of Period................                 15                   95                   15
                                                                     ----------------     ----------------     ----------------
  Cash and Cash Equivalents at End of Period......................             $   31                $  15                $  95
                                                                     ================     ================     ================
                                                                  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                 
  Cash paid during the period for:                                
    Interest (net of amount capitalized)..........................             $  208                $ 201                $ 208
    Income taxes..................................................             $  261                $ 253                $ 289
 
See accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
 
CONSOLIDATED BALANCE SHEET AT DECEMBER 31,
PP&L, Inc. and Subsidiaries
(Millions of Dollars)

<TABLE>
<CAPTION>
 
ASSETS                                                                                      1998                   1997
<S>                                                                                   <C>                    <C>
Property, Plant and Equipment
 Electric utility plant in service - net (Note 1)
    Transmission and distribution..............................................                $2,179                 $2,160
    Generation.................................................................                 1,601                  4,022
    General and intangible.....................................................                   223                    232
                                                                                    -----------------      -----------------
                                                                                                4,003                  6,414
 
  Construction work in progress - at cost......................................                   117                    185
  Nuclear fuel owned and leased - net..........................................                   162                    167
                                                                                    -----------------      -----------------
   Electric utility plant - net................................................                 4,282                  6,766
  Gas and oil utility plant - net..............................................                    28                     30
  Other property - net.........................................................                    21                     24
                                                                                    -----------------      -----------------
                                                                                                4,331                  6,820
                                                                                    -----------------      -----------------
 
INVESTMENTS
  Loan to parent...............................................................                   429                    375
  Nuclear plant decommissioning trust fund (Notes 1 and 7).....................                   206                    163
  Financial investments (Notes 1 and 8)........................................                     1                     52
  Investment in unconsolidated affiliate at equity (Note 1)....................                    17                     17
  Other (Note 8)...............................................................                    12                     13
                                                                                    -----------------      -----------------
                                                                                                  665                    620
                                                                                    -----------------      -----------------
 
CURRENT ASSETS
  Cash and cash equivalents (Note 1)...........................................                    31                     15
  Accounts receivable (less reserve:  1998, $16; 1997, $16)
    Utility customers..........................................................                   163                    188
    Other......................................................................                    67                     64
  Unbilled revenues
    Utility customers..........................................................                   104                     90
    Other......................................................................                    61                     36
  Fuel, materials and supplies - at average cost...............................                   196                    200
  Prepayments..................................................................                    14                     26
  Other........................................................................                    58                     51
                                                                                    -----------------      -----------------
                                                                                                  694                    670
                                                                                    -----------------      -----------------
 
REGULATORY ASSETS AND OTHER NONCURRENT ASSETS (NOTE 4)
  Recoverable transition costs.................................................                 2,819
  Other........................................................................                   329                  1,362
                                                                                    -----------------      -----------------
                                                                                                3,148                  1,362
                                                                                    -----------------      -----------------
 
                                                                                               $8,838                 $9,472
                                                                                    =================      =================
</TABLE> 
See accompanying Notes to Financial Statements.
 
<PAGE>
 
<TABLE> 
<CAPTION> 
 
LIABILITIES                                                                                      1998                   1997
<S>                                                                                             <C>                   <C>    
CAPITALIZATION
  Common equity
    Common stock...............................................................                $1,476                 $1,476
    Additional paid-in capital.................................................                    70                     64
    Earnings reinvested (Note 4)...............................................                   210                  1,092
    Capital stock expense and other............................................                   (26)                   (20)
                                                                                    -----------------      -----------------
                                                                                                1,730                  2,612
                                                                                    -----------------      -----------------
  Preferred stock
    With sinking fund requirements.............................................                   295                    295
    Without sinking fund requirements..........................................                   171                    171
  Company-obligated mandatorily redeemable preferred
    securities of subsidiary trusts holding solely
    company debentures.........................................................                   250                    250
  Long-term debt...............................................................                 2,569                  2,483
                                                                                    -----------------      -----------------
                                                                                                5,015                  5,811
                                                                                    -----------------      -----------------
 
CURRENT LIABILITIES
  Short-term debt (Note 9).....................................................                    80                     45
  Long-term debt due within one year...........................................                                          150
  Capital lease obligations due within one year................................                    59                     58
  Above market NUG purchases due within one year (Note 4)......................                   105
  Accounts payable.............................................................                   189                    148
  Taxes and interest accrued...................................................                    86                     99
  Dividends payable............................................................                    12                     81
  Other........................................................................                   114                    107
                                                                                    -----------------      -----------------
                                                                                                  645                    688
                                                                                    -----------------      -----------------
 
DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
  Deferred income taxes and investment tax credits (Note 6)....................                 1,561                  2,221
  Above market NUG purchases (Note 4)..........................................                   775
  Capital lease obligations....................................................                   109                    113
  Other (Notes 1 and 7)........................................................                   733                    639
                                                                                    -----------------      -----------------
                                                                                                3,178                  2,973
                                                                                    -----------------      -----------------
 
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 14) ..............................
                                                                                    -----------------      -----------------
 
                                                                                               $8,838                 $9,472
                                                                                    =================      =================
 
 
See accompanying Notes to Financial Statements.
</TABLE>
<PAGE>

CONSOLIDATED STATEMENT OF SHAREOWNER'S COMMON EQUITY
PP&L, Inc. and Subsidiaries
(Millions of Dollars)

<TABLE> 
<CAPTION> 
 
                                                                      For the Years Ended December 31,
                                                                ------------------------------------------
                                                                  1998             1997             1996
                                                                ---------       ---------         -------- 
<S>                                                             <C>             <C>               <C> 
Common stock at beginning of year.....................          $  1,476        $  1,476          $  1,476
  Sale of common stock................................                                        
                                                                ---------       ---------         -------- 
Common stock at end of year...........................             1,476           1,476             1,476
                                                                ---------       ---------         -------- 
Additional paid-in capital at beginning of year.......                64              57                25
  Capital contribution from PP&L Resources............                 6               7                32
                                                                ---------       ---------         -------- 
Additional paid-in capital at end of year.............                70              64                57
                                                                ---------       ---------         -------- 
Earnings reinvested at beginning of year..............             1,092           1,094             1,034
  Net income (loss)...................................              (539)            348               357
  Cash dividends declared:                                                                    
    Common stock......................................              (295)           (310)             (269)
    Preferred stock...................................               (48)            (40)              (28)
                                                                ---------       ---------         -------- 
Earnings reinvested at end of year....................               210           1,092             1,094
                                                                ---------       ---------         -------- 
Capital stock expense and other at beginning of year..               (20)            (10)               (7)
  Other...............................................                (6)            (10)               (3)
                                                                ---------       ---------         -------- 
Capital stock expense and other at end of year........               (26)            (20)              (10)
                                                                ---------       ---------         -------- 
Total Shareowner's Common Equity......................      $      1,730    $      2,612      $      2,617
                                                                =========       =========         ======== 
                                                                                              
Common stock shares at beginning of year (a)..........       157,300,382     157,300,382       157,300,382
  Common stock issued.................................                                        
  Common stock purchased..............................                                        
                                                             ------------    ------------      ----------- 
Common stock shares at end of year....................       157,300,382     157,300,382       157,300,382
                                                             ------------    ------------      ----------- 
 
(a)  No par value.  170,000,000 shares authorized.  All common shares of PP&L stock are owned by PP&L Resources.
</TABLE>

See accompanying Notes to Financial Statements.  

<PAGE>
 
CONSOLIDATED STATEMENT OF PREFERRED STOCK AT DECEMBER 31,
PP&L, Inc. and Subsidiaries(a)
(Millions of Dollars)
<TABLE>
<CAPTION>                                                                                         SHARES
                                                                      OUTSTANDING              OUTSTANDING       SHARES
                                                                1998                1997           1998        AUTHORIZED
<S>                                                    <C>              <C>                 <C>             <C>             
   PREFERRED STOCK -- $100 par, cumulative
     4-1/2%.......................                               $53                 $53        530,189          629,936
     Series.......................                               413                 413      4,133,556       10,000,000
                                                       -------------       -------------
                                                                $466                $466
                                                       =============       =============
</TABLE> 
 
 
 
DETAILS OF PREFERRED STOCK (b)
<TABLE>
<CAPTION>                                                                                         
                                                                                                            SINKING FUND
                                                                                        OPTIONAL             PROVISIONS
                                                                          SHARES       REDEMPTION    SHARES TO BE
                                                    OUTSTANDING        OUTSTANDING     PRICE PER      REDEEMED       REDEMPTION
                                               1998             1997       1998          SHARE        ANNUALLY         PERIOD
                                                                                                  
<S>                                    <C>              <C>            <C>             <C>           <C>            <C>   
With Sinking Fund Requirements                                                                    
  Series Preferred                                                                                
    5.95%.........................              $30              $30       300,000        (c)          300,000       April 2001
    6.05%.........................               25               25       250,000        (c)          250,000       April 2002
    6.125%........................              115              115     1,150,000        (c)            (d)         2003-2008
    6.15%.........................               25               25       250,000        (c)          250,000       April 2003
    6.33%.........................              100              100     1,000,000        (c)            (e)         2003-2008
                                      -------------    -------------
                                               $295             $295                              
                                      =============    =============                              
                                                                     
Without Sinking Fund Requirements                                    
  4-1/2% Preferred................              $53              $53       530,189        $110.00
  Series Preferred                                                   
    3.35%.........................                4                4        41,783         103.50
    4.40%.........................               23               23       228,773         102.00
    4.60%.........................                6                6        63,000         103.00
    6.75%.........................               85               85       850,000        (c)
                                      -------------    -------------
                                               $171             $171 
                                      =============    =============                              
</TABLE> 
 
INCREASES (DECREASES) IN PREFERRED STOCK

There were no issuances or redemptions of preferred stock in 1998, 1997 or 1996.
 
 
(a)  Each share of PP&L's preferred stock entitles the holder to one vote on any
     question presented to PP&L's shareowners' meetings. There were 5,000,000
     shares of PP&L's preference stock authorized; none were outstanding at
     December 31, 1998 and 1997, 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; 6.05%, 2002; 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, 862,500.
(e)  Shares to be redeemed annually on July 1 as follows: 2003-2007, 50,000;
     2008, 750,000. 

<PAGE>
 
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

     As of December 31, 1998, PP&L Resources was the parent holding company of
PP&L, PP&L Global, PP&L Spectrum, PP&L Capital Funding, Penn Fuel Gas, H.T.
Lyons and McClure.

     The financial condition and results of operations of PP&L and PP&L Global
are currently the principal factors affecting PP&L Resources' financial
condition and results of operations.  PP&L provides electricity delivery service
in eastern and central Pennsylvania, sells retail electricity throughout
Pennsylvania, and markets wholesale electricity in 28 states and Canada.  PP&L
Global is an international independent power company.

     The consolidated financial statements include the accounts of PP&L
Resources and its direct and indirect subsidiaries.  All significant
intercompany transactions have been eliminated.

     Less than 50% owned affiliates are accounted for using the equity method.
These affiliates consist principally of PP&L's investment in Safe Harbor Water
Power Corporation and investments held by PP&L Global.

     All direct and indirect affiliates of PP&L Resources report their results
on a current basis, except for PP&L Global.  Effective in 1998, PP&L Global
records the results of its majority owned affiliates on a one-month lag.  PP&L
Global records the results of affiliates in which it holds a minority interest
on a one-quarter lag.  Recording these results on a lag basis allows PP&L Global
to close its books in a timely manner to coincide with the closing of PP&L
Resources' books.

RECLASSIFICATION

     Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the current presentation.

     The most significant reclassifications have been made in the Consolidated
Statement of Income.  This Statement has been modified to better reflect the
changing nature of the business from a regulated electric utility to a full-
service provider of retail and wholesale energy and related products and
services.  The operating revenues and expenses of PP&L Global, PP&L Spectrum,
McClure, and H.T. Lyons are reflected as "Energy Related Businesses," as
components of  "Operating Income."  Previously, the results of non-regulated
affiliates were included in "Other Income and (Deductions)" in PP&L Resources'
Statement of Income.  In addition, the revenues generated by PP&L's wholesale
energy and trading activities are now separately disclosed.  Also, income taxes
are no longer reflected as "Operating Expense," which was the traditional
disclosure used by utilities.  Lastly, nuclear decommissioning expense had
historically been classified as 
<PAGE>
 
"Other operating" expense. These expenses have been reclassified as depreciation
expense.

     On the Consolidated Balance Sheet, "Electric utility plant in service -
net" at December 31, 1997 has been reclassified to separately disclose
generation plant, which is no longer subject to the regulatory accounting
provisions of SFAS 71, "Accounting for the Effects of Certain Types of
Regulation."  See Note 4 for further information.

MANAGEMENT'S ESTIMATES

     These financial statements have been prepared using information which
represents management's best estimates of existing conditions.  Actual results
could differ from these estimates.

     Significant estimates were required in recording the effect of the PUC
restructuring outcome.  The impairment write-down of certain generation plant
was dependent on projections of future cash flows and capacity factors.  Cash
flow projections and the resulting impact on the fair value determination of
these generating facilities are subject to future re-evaluation.  In addition,
the liabilities recorded for above-market purchases from NUGs were based on
estimated generation by the NUG facilities and estimated future market prices
for this generation.  Again, these recorded amounts are subject to revision if
the underlying estimates change.

ACCOUNTING RECORDS

     The accounting records for PP&L are maintained in accordance with the
Uniform System of Accounts prescribed by the FERC and adopted by the PUC.

REGULATION

     Historically, PP&L accounted for its operations in accordance with the
provisions of SFAS 71, which requires rate-regulated entities to reflect the
effects of regulatory decisions in their financial statements.  PP&L
discontinued application of SFAS 71 for the generation portion of its business
effective June 30, 1998.

UTILITY PLANT

     Additions to utility plant and replacement of units of property are
capitalized at cost.  AFUDC is capitalized as part of the construction costs for
regulated projects.  Effective June 30, 1998, the recording of AFUDC was
discontinued on generation-related construction projects, since these assets are
no longer subject to the provisions of SFAS 71.  Instead, capitalized interest
is recorded on generation-related projects in accordance with SFAS 34,
"Capitalizing Interest Costs."

     The cost of units of depreciable property retired or replaced is charged to
accumulated depreciation.  Expenditures for maintenance and repairs of property
and the cost of replacing items determined to be less than a unit of property
are charged to operating expense.  The cost to retire depreciable units of
generation-related property is 
<PAGE>
 
charged to operating expense while the cost to retire depreciable units of
regulated property is charged to accumulated depreciation.

     Following are the classes of Electric Utility Plant in Service, with
associated accumulated depreciation reserves, at December 31, 1998 and December
31, 1997 (millions of dollars):
<TABLE>
<CAPTION>
 
                                                                     Electric
                             Transmission                General     Utility
                                   &                         &       Plant In
                             Distribution  Generation  Intangible     Service
                            -------------  ----------  ----------    -------- 
<S>                         <C>               <C>        <C>         <C>
December 31, 1998:
Original Cost                     $ 3,395     $ 6,351       $ 383     $10,129
Accumulated Depreciation
  Reserve                          (1,216)     (4,750)       (160)     (6,126)
                                  -------     -------       -----     -------
                                  $ 2,179     $ 1,601       $ 223     $ 4,003
                                  =======     =======       =====     =======
 
December 31, 1997:
Original Cost                     $ 3,309     $ 6,306       $ 369     $ 9,984
Accumulated Depreciation
  Reserve                          (1,149)     (2,284)       (137)     (3,570)
                                  -------     -------       -----     -------
                                  $ 2,160     $ 4,022       $ 232     $ 6,414
                                  =======     =======       =====     =======
</TABLE>

     Generation plant is reflected at the lower of cost or market value at
December 31, 1998.  As noted in the "Regulation" section of this note, PP&L
discontinued application of SFAS 71 for the generation portion of its business
effective June 30, 1998.  In accordance with SFAS 101, "Regulated Enterprises-
Accounting for the Discontinuation of Application of FASB Statement No. 71,"
impairment tests were performed on the individual generating facilities.  These
impairment tests used the provisions of SFAS 121, "Accounting For the Impairment
of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of."  As a result,
generation plant assets were written down by $2.357 billion in June 1998.

     The other classes of Electric Utility Plant in Service continue to be
subject to SFAS 71 and are carried at historical cost.

     For financial statement purposes, depreciation is being provided over the
estimated useful lives of property using a straight-line method.  Certain
property at the Susquehanna Station was depreciated at an annual rate of $173
million from October 1995 through December 1998, at which point this certain
property was fully depreciated.  Provisions for depreciation, as a percent of
average depreciable property, approximated 3.7% in 1998, and 3.8% in 1997 and
1996.

NUCLEAR DECOMMISSIONING AND FUEL DISPOSAL

     An annual provision for PP&L's 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 7.

     The DOE is responsible for the permanent storage and disposal of spent
nuclear fuel removed from nuclear reactors.  PP&L pays the DOE a fee for future
disposal services and recovers such costs in customer 
<PAGE>
 
rates. PP&L has joined other utilities in a federal lawsuit to suspend payments
to the DOE and to place the fees in escrow unless that department begins
accepting nuclear fuel as agreed to in its contract with the utilities.

FINANCIAL INVESTMENTS

     Securities subject to the requirements of SFAS 115 "Accounting for Certain
Investments in Debt and Equity Securities" are carried at fair value, determined
at the balance sheet date.  Net unrealized gains on available-for-sale
securities are included in common equity.  Net unrealized gains and losses on
trading securities are included in income.  Net unrealized gains and losses on
securities that are not available for unrestricted use due to regulatory or
legal reasons are reflected in the related asset and liability accounts.
Realized gains and losses on the sale of securities are recognized utilizing the
specific cost identification method.

PREMIUM ON REACQUIRED LONG-TERM DEBT

     In accordance with SFAS 71, PP&L deferred the premiums and expenses to
redeem long-term debt and amortized these costs over the life of the new debt.
If no new debt was issued to refinance the retired debt, these costs were
amortized over the remaining life of the retired debt.  Effective June 30, 1998,
losses on reacquired debt attributable to the generation portion of PP&L's
business are being expensed as incurred in accordance with SFAS 4, "Reporting
Gains and Losses from Extinguishment of Debt."

ACCOUNTING FOR PRICE RISK MANAGEMENT

     PP&L 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."  During 1998, the
commodity instruments used were forward and option contracts that require
physical delivery of the commodity.  These instruments were reflected in the
financial statements using the accrual method of accounting.  As of January 1,
1999, PP&L adopted mark-to-market accounting for energy trading contracts, in
accordance with EITF 98-10, and gains and losses from changes in market prices
will be reflected in Energy Purchases on the Consolidated Statement of Income.

     PP&L will continue to use accrual accounting for physical commodity
instruments that qualify as hedges of non-trading activities until it adopts
SFAS 133 "Accounting for Derivative Instruments and Hedging Activities" on
January 1, 2000.  Commodity instruments that qualify as hedges manage exposure
to market fluctuations in the price of electricity and fuels needed to produce
electricity.  In order to qualify as a hedge, the price movements in the
commodity derivatives must be highly correlated with the price movements of the
underlying hedged commodity.  When a hedge relationship is terminated, the gains
accrued to date will be included in Energy Purchases when the underlying hedged
physical transaction closes; losses accrued will be recognized immediately in
Energy Purchases.
<PAGE>
 
     In 1999, PP&L expects to expand its use of commodity instruments to include
futures, swaps and financial options.  These instruments, which will permit cash
settlement, will be recorded at fair value on the Consolidated Balance Sheet.
Gains and losses on instruments that qualify as hedges will be recognized in
income when the underlying hedged physical transaction closes and will be
included in Energy Purchases.  Gains and losses related to these transactions,
to the extent they are not yet settled in cash, will be reported as Current
Assets or Liabilities, in the Consolidated Balance Sheet until recognized in
income, until PP&L adopts SFAS 133 on January 1, 2000.  Gains and losses on
instruments considered trading activities will be recognized currently in Energy
Purchases.

     PP&L Resources has utilized a written call option to manage the interest
rate on a portion of its outstanding debt.  The premium received is being
amortized against interest expense over the expected life of the debt.

     PP&L Resources 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 PP&L Resources adopts SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" on January 1,
2000, market gains and losses are recognized and accounted for in accordance
with SFAS 52, "Foreign Currency Translation."

CAPITAL LEASES

     Leased property of PP&L 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.  The
maximum amount of nuclear fuel available for lease under current arrangements is
$200 million.

REVENUES - ELECTRIC AND GAS OPERATIONS

     Electric and gas revenues are recorded based on the amounts of electricity
and gas delivered to retail customers through the end of each calendar month.
This includes amounts customers will be billed for electricity and gas delivered
from the time meters were last read to the end of the month.

     During 1998, PP&L's STAS was zero.  This mechanism can be used in the
future if needed.  The SBRCA expired effective July 1, 1997.  The ECR was
terminated effective January 1, 1997, and was rolled into base rates.  In 1997
and 1998, the PUC authorized PP&L to record undercollected energy costs as a
regulatory asset.  This regulatory asset was recovered during the restructuring
proceeding.  See Notes 3 and 4.

INCOME TAXES

     PP&L Resources and its subsidiaries file a consolidated federal income tax
return.
<PAGE>
 
     The provision for PP&L's 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 6.

     Investment tax credits were deferred when utilized and are amortized over
the average lives of the related assets.

PENSION PLAN AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS

     PP&L and Penn Fuel Gas have noncontributory pension plans covering
substantially all employees.  Subsidiary companies of PP&L formerly engaged in
coal mining have a noncontributory pension plan for substantially all non-
bargaining, full-time employees.  Funding is based upon actuarially determined
computations that take into account the amount deductible for income tax
purposes and the minimum contribution required under the Employee Retirement
Income Security Act of 1974.

     PP&L Global has a non-qualified retirement plan for its corporate officers.

     For information on other postretirement and postemployment benefits, see
Note 12.

CASH EQUIVALENTS

     All highly liquid debt instruments purchased with original maturities of
three months or less are considered to be cash equivalents.

COMPREHENSIVE INCOME

     In 1997 the FASB issued SFAS 130, "Reporting Comprehensive Income."  This
statement required disclosure of "comprehensive income," defined as changes in
equity other than from transactions with shareowners.  Comprehensive income
consists of net income, as well as holding gains and losses of certain assets
(such as available-for-sale securities), foreign currency translation
adjustments and pensions liability adjustments.  The comprehensive income of
PP&L Resources and PP&L was not materially different from net income for the
years ended December 31, 1998, 1997 and 1996.

STOCK REPURCHASE PROGRAM

     In September 1998, PP&L Resources purchased approximately 17 million shares
of its common stock in a self-tender offer. (Refer to Note 9.)  These treasury
shares are reflected on the December 31, 1998 Consolidated Balance Sheet of PP&L
Resources as an offset to common equity under the cost method of accounting.
The cost of the treasury shares was $419 million ($24.50 per share plus
transaction costs).  Management has no definitive plans for the future use of
these shares.  These treasury shares are not considered outstanding in
calculating 
<PAGE>
 
earnings per share on the Consolidated Statement of Income of PP&L Resources for
the year ended December 31, 1998.

2.   SEGMENT AND RELATED INFORMATION

     Effective December 31, 1998, PP&L Resources adopted SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information."  PP&L Resources'
principal business segment is PP&L, which provides electricity delivery service
in eastern and central Pennsylvania, sells retail electricity throughout
Pennsylvania, and markets wholesale electricity in 28 states and Canada.  PP&L
Resources' other reported business segment, PP&L Global, invests in and develops
worldwide power projects with the majority of its investments and related
revenues as of year-end 1998 located in the U.K., Chile, and El Salvador.  PP&L
Global's revenue represents equity earnings in investments.  Other revenues in
the years 1996 and 1997 represent unregulated energy services.  In 1998 other
revenues represent gas distribution and mechanical contracting and engineering,
in addition to unregulated energy services. Financial data for the business
segments are as follows (millions of dollars):


<TABLE>
<CAPTION>
 
 
1998
- ----
                                                               OTHER
                                                   PP&L     AND ELIMIN-      PP&L
                                        PP&L      GLOBAL       ATIONS     RESOURCES
                                       -------  --------    ------------  ----------
<S>                                    <C>      <C>         <C>           <C>
INCOME STATEMENT DATA:
  Operating revenues                   $3,643      $ 47 (b)         $ 96      $3,786
  Extraordinary items, net of taxes      (948)(a)                               (948)
  Interest expense                        196        22               12         230
  Depreciation and amortization           335                          3         338
  Income taxes                            273        (4)             (10)        259
  Net income (loss)                      (587)       15                3        (569)
BALANCE SHEET DATA:
  Cumulative net investment in
     unconsolidated affiliates             17       671 (b)                      688
  Total assets                          8,838       757               12       9,607
CASH FLOW DATA:
  Property, plant and equipment
     expenditures                         297                          7         304
  Investments in unconsolidated
     affiliates                                     306                          306
</TABLE>

(a)  See Note 4 for a detailed explanation of Extraordinary Items.
(b)  Operating revenues were 9.0% of average net investment.
<PAGE>
 
<TABLE>
<CAPTION>
 
 
1997
- ----
                                                       OTHER
                                            PP&L    AND ELIMIN-     PP&L
                                    PP&L   GLOBAL      ATIONS      RESOURCES
                                   ------  -------  -------------  ---------
<S>                                <C>     <C>      <C>            <C>
INCOME STATEMENT DATA:
  Operating revenues               $3,049    $ 32 (a)   $ (4)         $3,077
  Interest expense                    207       8                        215
  Depreciation and amortization       385                                385
  Windfall profits tax                        (37)(b)                    (37)
  Income taxes                        247      (3)        (7)            237
  Net income (loss)                   308     (17)         5             296
BALANCE SHEET DATA:
  Cumulative net investment in
     unconsolidated affiliates         17     360 (a)                    377
  Total assets                      9,472     397       (384)(c)       9,485
CASH FLOW DATA:
  Property, plant and equipment
     expenditures                     310                                310
  Investments in unconsolidated
     affiliates                               152                        152
 
</TABLE>

(a)  Operating revenues were 10.7% of average net investment.
(b)  See Note 10 for a detailed explanation regarding the windfall profits tax
     assessed on PP&L Global.
(c)  Primarily represents a consolidating elimination entry for a loan from CEP,
     a PP&L subsidiary, to PP&L Resources.



<TABLE>
<CAPTION>
 
 
1996
- ----
                                                            OTHER
                                            PP&L         AND ELIMIN-     PP&L
                                    PP&L   GLOBAL          ATIONS      RESOURCES
                                   ------  ------        -----------   ---------
<S>                                <C>     <C>           <C>           <C>
INCOME STATEMENT DATA:
  Operating revenues               $2,911    $ 11 (a)        $  4         $2,926
  Interest expense                    214       6                            220
  Depreciation and amortization       375                     375
  Income taxes                        255      (1)                           254
  Net income (loss)                   329       1              (1)           329
CASH FLOW DATA:
  Property, plant and equipment
     expenditures                     360                                    360
  Investments in unconsolidated
     affiliates                               201                            201
</TABLE>

(a)  Operating revenues were 8.6% of average net investment.
<PAGE>
 
3.   PUC RESTRUCTURING PROCEEDING

     In August 1998, the PUC entered a Final Order approving a "Joint Petition
for Full Settlement of PP&L's Restructuring Plan and Related Court Proceedings"
(Joint Settlement Petition).  The following are the major elements of this
settlement:

     1.  PP&L is permitted to recover $2.97 billion (on a net present value
basis) in transition costs over 11 years - i.e., from January 1, 1999 through
December 31, 2009.  PP&L is permitted a return of 10.86% on the unamortized
balance of these transition costs.

     2.  PP&L will reduce rates to all retail customers by 4% effective January
1, 1999 through December 31, 1999.

     3.  One-third of PP&L customers will be able to choose their electric
supplier on January 1, 1999, one-third on January 2, 1999, and the remainder on
January 2, 2000.

     4.  Beginning on January 1, 1999, PP&L will unbundle its retail electric
rates to reflect separate prices for the transmission and distribution charges,
the CTC (and, if applicable, the ITC), and a "shopping credit" for customers
choosing an alternate electric supplier.  These shopping credits vary among
customer classes and will increase over the transition period to reflect
decreases in the CTC.  The settlement provided for the following unbundled rates
over the transition period:

                       SCHEDULE OF SYSTEM AVERAGE RATES
                                   CENTS/KWH
<TABLE>
<CAPTION>

EFFECTIVE      TRANSMISSION            SHOPPING   GENERATION     TOTAL
 DATE         & DISTRIBUTION   CTC(a)   CREDIT    RATE CAP(b)   RATE(c)
- ---------     --------------   ------   -------   -----------   -------   
<S>           <C>             <C>      <C>       <C>           <C> 
Jan. 1, 1999      1.74           1.57     3.81       5.38         7.12
Jan. 1, 2000      1.74           1.55     4.13       5.68         7.42
Jan. 1, 2001      1.74           1.52     4.16       5.68         7.42
Jan. 1, 2002      1.74           1.45     4.23       5.68         7.42
Jan. 1, 2003      1.74           1.41     4.27       5.68         7.42
Jan. 1, 2004      1.74           1.35     4.33       5.68         7.42
Jan. 1, 2005       (d)           1.27     4.41       5.68          (d)
Jan. 1, 2006       (d)           1.27     4.78       6.05          (d)
Jan. 1, 2007       (d)           1.21     4.84       6.05          (d)
Jan. 1, 2008       (d)           1.14     4.91       6.05          (d)
Jan. 1, 2009(e)    (d)           1.03     5.02       6.05          (d)
</TABLE> 

(a) Average CTC rates are fixed, subject to reconciliation for actual CTC
collection.  Reconciliation of the CTC will be reflected in a rider, which will
be a separate credit or a separate charge to the CTC (up to the Generation Rate
Cap which is the sum of the CTC and the Shopping Credit contained in the
tariff).

(b)  The Generation Rate Cap equals the sum of the CTC and Shopping Credit.  The
generation portion of bills for customers who continue to be supplied by PP&L as
the supplier of last resort will not, on average, exceed the figures in this
column.

(c)  The bundled rate equals the sum of Transmission & Distribution plus
Generation Rate Cap.  Customers who continue to be supplied by PP&L as the
provider of last resort will, on average, pay the total rate shown in the last
column.  The 1999 rate represents a 4% reduction from the existing rate cap of
7.42 cents/kWh.
<PAGE>
 
(d)  The cap on PP&L's transmission and distribution rates under the Customer
Choice Act is extended from June 30, 2001 through 2004.

(e)  Effective until December 31, 2009.

     In addition, the settlement resulted in the following schedule for
amortization of the transition costs over the transition period:

                              ANNUAL STRANDED COST
                          AMORTIZATION AND RETURN (a)
<TABLE> 
<CAPTION> 
                                REVENUE EXCLUDING GROSS RECEIPTS TAX
                                --------------------------------------
         ANNUAL       CTC                                      AMORTI-
         SALES       CENTS/      TOTAL         RETURN          ZATION
Year      MWH         KWH        ($000)        ($000)          ($000)
- ----    ----------   -----      --------      --------        --------
<S>     <C>          <C>        <C>           <C>             <C> 
1999    33,108,701    1.57      $497,938      $310,396        $187,542
2000    33,605,332    1.55       498,027       290,796         207,231
2001    34,109,412    1.52       496,671       269,138         227,532
2002    34,621,053    1.45       481,095       245,359         235,736
2003    35,140,369    1.41       473,995       220,722         253,273
2004    35,667,474    1.35       461,682       194,252         267,430
2005    36,202,486    1.27       438,637       166,303         272,334
2006    36,745,524    1.27       447,326       137,841         309,485
2007    37,296,707    1.21       433,106       105,497         327,610
2008    37,856,157    1.14       411,419        71,258         340,161
2009(b) 38,424,000    1.03       377,373        35,708         341,665
</TABLE> 

(a)  Subject to reconciliation for actual CTC collections.
(b)  Through December 31, 2009.

     5.  The cap on the generation component of rates is extended from December
31, 2005 until December 31, 2009.  The cap on the transmission and distribution
component of rates is extended from June 30, 2001 until December 31, 2004.

     6.  PP&L will recover its nuclear plant decommissioning costs through the
CTC.  PP&L may seek an exception to the rate cap from customers for increases in
these decommissioning costs, but agrees not to recover more than 96% of such
increased amount.

     7.  PP&L is authorized to securitize up to $2.85 billion in transition and
related costs, and a PUC Qualified Rate Order authorizing this securitization is
included in the settlement.  The settlement requires 75% of the savings from
securitization to be passed back to customers, while 25% would be retained by
PP&L.  The costs of issuing the transition bonds and refinancing outstanding
debt and equity will be reflected in the ITC charged to all customers.  As with
the CTC, the ITC must terminate by the end of the transition period; also, the
ITC will offset the CTC on customer bills.

     8.  On January 1, 2002, 20% of all PP&L's residential customers will be
assigned to a provider of last resort other than PP&L or an affiliate of PP&L.
These customers will be selected at random, and 
<PAGE>
 
the supplier will be selected on the basis of a PUC-approved bidding process.

     9.  Subject to a review by the PUC Bureau of Audits, effective on January
1, 1999, alternate electric generation suppliers can provide advanced metering
and billing service to PP&L's commercial and industrial customers.  Effective on
January 1, 1999, such alternate suppliers can provide certain advanced metering
service to PP&L's residential customers.  Effective on January 1, 2000, PP&L's
residential customers can choose their billing service as well from such
alternate suppliers.

     10.  PP&L will transfer its retail marketing function to a separate,
affiliated corporation by September 15, 1998.

     11.  PP&L is permitted, but not required, to transfer ownership and
operation of its generating facilities to a separate corporate entity at book
value.

     12.  PP&L will spend approximately $16 million annually on assistance and
energy conservation for low-income customers.

     Pursuant to the Joint Settlement Petition, PP&L transferred its retail
marketing function to a new subsidiary, PP&L EnergyPlus, on September 14, 1998.
In September 1998, the PUC approved PP&L EnergyPlus's application to act as a
Pennsylvania electric generation supplier (EGS).  This license permits PP&L
EnergyPlus to offer retail electric supply to participating customers in PP&L's
service territory and in the service territories of other Pennsylvania
utilities.  In 1999, PP&L EnergyPlus will offer such supply to industrial and
commercial customers throughout the state.  At this time, PP&L EnergyPlus has
determined not to pursue residential customers in the competitive marketplace
based on economic considerations.

     In September 1998, the PUC issued an Order which, in part, directed
Pennsylvania utilities which are members of PJM, including PP&L, to offer their
installed capacity at a price of $19.72 per kilowatt-year (Capacity Order).
PP&L brought an action in the District Court seeking an injunction against the
Capacity Order on the basis, among other things, that it attempted to regulate
matters within exclusive federal jurisdiction.  In October 1998, PP&L entered
into a settlement agreement with the PUC under which (i) PP&L will offer to sell
capacity credits to EGS's licensed by the PUC at the equivalent of $19.72 per
kilowatt-year prior to June 1, 1999 (increasing to $22.41 per kilowatt-year from
June 1, 1999 through December 31, 1999) for service to PP&L residential
customers; (ii) all PP&L residential customers will be permitted to select an
EGS in January 1999; (iii) the PUC will withdraw the Capacity Order as to PP&L;
and (iv) PP&L will withdraw its federal court action against the Capacity Order.

4.  ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION

     PP&L prepares its financial statements for its regulated operations in
accordance with SFAS 71, which requires rate-regulated companies to reflect the
effects of regulatory decisions in their financial statements.  PP&L has
deferred certain costs pursuant to rate actions of the PUC and the FERC and is
recovering, or expects to recover, such costs in electric rates charged to
customers.
<PAGE>
 
     The EITF has addressed the appropriateness of the continued application of
SFAS 71 by entities in states that have enacted restructuring legislation
similar to Pennsylvania's Customer Choice Act.  The EITF 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 PP&L, with respect to the generation portion of its business,
this occurred effective June 30, 1998 based upon the outcome of the PUC
restructuring proceeding.  PP&L has adopted SFAS 101 for the generation side of
its business.  SFAS 101 requires a determination of impairment of plant assets
performed in accordance with SFAS 121, and the elimination of all effects of
rate regulation that have been recognized as assets and liabilities under SFAS
71.

     PP&L performed impairment tests of its electric generation assets on a
plant specific basis and determined that $2.388 billion of its generation plant
was impaired as of June 30, 1998.  Impaired plant is the excess of the 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, PP&L 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 to these assets 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.  PP&L recorded an extraordinary charge for
this under-recovery in June 1998.

     Under FERC Order 888, 16 small utilities which had power supply agreements
with PP&L signed before July 11, 1994, requested and were provided with PP&L's
current estimate of its stranded costs applicable to these customers if they
were to terminate their agreements in 1999.  Subject to certain conditions,
FERC-approved settlement agreements executed with 15 of these customers provide
for continued power supply by PP&L through January 2004.  As a result of these
settlements, PP&L, in the second quarter of 1998, recorded an extraordinary
charge in the amount of $56 million.

     The extraordinary items related to the PUC restructuring proceeding and the
FERC settlement are reflected on the Statement of Income, net of income taxes.
<PAGE>
 
     Details of amounts written-off in June 1998 are as follows (millions of
dollars):

 Impaired generation-related assets                          $2,388
 Above-market NUG contracts                                     854
 Generation-related regulatory assets and other               1,135
                                                             ------
 Total                                                        4,377
 Recoverable transition costs (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.

     PP&L believes that the electric transmission and distribution operations
continue to meet the requirements of SFAS 71 and that regulatory assets
associated with these operations will continue to be recovered through rates
from customers.    At December 31, 1998, $311 million of regulatory assets,
other than the recoverable transition costs, remain on PP&L's books.  These
regulatory assets will continue to be recovered through regulated transmission
and distribution rates over periods ranging from one to 31 years.

5.  SALES TO OTHER ELECTRIC UTILITIES

     PP&L provided Atlantic with 125,000 kilowatts of capacity (summer rating)
and related energy from its wholly owned coal-fired stations.  Sales to Atlantic
under that agreement expired in March 1998.  PP&L provided JCP&L with 378,000
kilowatts of capacity and related energy from all of its generating units during
1998.  This amount will decline to 189,000 kilowatts in 1999.  The agreement
with JCP&L will terminate on December 31, 1999.  PP&L expects to be able to
resell the returning capacity and energy through its Energy Marketing Center.

     Under a separate agreement, PP&L is providing additional capacity and
energy to JCP&L.  This capacity and energy increased from 150,000 kilowatts to
200,000 kilowatts in June 1998, and will increase to 300,000 kilowatts in June
1999 through the end of the agreement in May 2004.  Prices for this capacity and
energy are market-based.

     PP&L 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.

6.  INCOME AND OTHER TAXES

     For 1998, 1997 and 1996, the corporate federal income tax rate was 35%, and
the Pa. CNI rate was 9.99%.
<PAGE>
 
     The tax effects of significant temporary differences comprising PP&L
Resources' net deferred income tax liability were as follows (millions of
dollars):
<TABLE>
<CAPTION>
                                          1998          1997
                                         -------      -------
<S>                                      <C>          <C>
Deferred tax assets
  Deferred investment tax credits        $   59       $   82
  Non-utility generation contracts
    over market price & buybacks            389
  Accrued pension costs                      99           77
  Contribution in aid of construction        22           19
  Other                                     163           47
  Valuation allowance                        (6)          (6)
                                         ------       ------
                                            726          219
                                         ------       ------
Deferred tax liabilities
  Electric utility plant - net              719        1,755
  Restructuring - CTC                     1,169
  Taxes recoverable through
    Future rates                            100          377
  Reacquired debt costs                      13           43
  Other                                      80           44
                                         ------       ------
                                          2,081        2,219
                                         ------       ------
Net deferred tax liability               $1,355       $2,000
                                         ------       ------
</TABLE>

     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):
<TABLE>
<CAPTION>
 
INCOME TAX EXPENSE                       1998    1997    1996
                                        ------  ------  ------
<S>                                     <C>     <C>     <C>
 
 Provision - Federal                    $ 183   $ 162   $ 189
   State                                   64      57      65
                                        -----   -----   -----
                                          247     219     254
                                        -----   -----   -----
 Deferred - Federal                        19      19       5
  State                                     3       9       5
                                        -----   -----   -----
                                           22      28      10
                                        -----   -----   -----
Investment tax credit, net - Federal      (10)    (10)    (10)
                                        -----   -----   -----
                                          259     237     254
                                        -----   -----   -----
Total income tax Expense - Federal        192     171     184
    State                                  67      66      70
                                        -----   -----   -----
                                        $ 259   $ 237   $ 254
                                        -----   -----   -----
</TABLE>
<PAGE>
 
<TABLE>
<CAPTION>
<S>                                        <C>     <C>     <C>
Reconciliation of Income Tax Expense
Indicated federal income tax on
    pre-tax income before extraordinary
    item at statutory tax rate - 35%       $ 232   $ 195   $ 213
Increase (decrease) due to:
    State income taxes                        43      40      44
    Flow through of depreciation
      differences not previously
      normalized                               9      22      20
    Amortization of investment
      tax credit                             (10)    (10)    (10)
    Research & experimentation
      income tax credits                      (1)     (1)     (5)
    Other                                    (14)     (9)     (8)
                                           -----   -----   -----
                                              27      42      41
                                           -----   -----   -----
  Total income tax expense                 $ 259   $ 237   $ 254
                                           -----   -----   -----
  Effective income tax rate                 39.1%   42.5%   41.6%
Taxes, Other Than Income
      State gross receipts                 $ 105   $ 104   $ 105
      State utility realty                    41      46      44
      State capital stock                     18      34      34
      Social security and other               24      20      20
                                           -----   -----   -----
                                           $ 188   $ 204   $ 203
                                           -----   -----   -----
</TABLE>

7.  NUCLEAR DECOMMISSIONING COSTS

     PP&L's 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 indicates that PP&L's 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.  Decommissioning charges were $12 million in each of the last three
years.  Beginning in January 1999, in accordance with the PUC's Restructuring
Decision, 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.

     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, 1998 and 1997 aggregated
approximately $206 million and $163 million, respectively.  The trust funds
experienced, on a fair market value basis, a $31 million net gain in 1998, which
includes net unrealized appreciation of $26 million, and a net gain in 1997 of
$24 million, which includes net unrealized appreciation of $18 million.  
<PAGE>
 
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 $209 million and $166 million at
December 31, 1998 and 1997, respectively.

     The FASB issued an 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.  Due to the FASB's recognition that these issues intertwine with
other unresolved accounting issues, the FASB has not yet determined when it will
issue another exposure draft or a final statement.

8.  FINANCIAL INSTRUMENTS

     As of December 31, 1998, PP&L Resources was party to two foreign exchange
contracts:  to purchase approximately $27 million with 16 million British pounds
sterling (BPS) on March 31, 1999 and to purchase $0.7 million with 359 million
Chilean pesos (ChP) on January 22, 1999.

     The carrying amount shown on the Consolidated Balance Sheet and the
estimated fair value of PP&L Resources' financial instruments are as follows
(millions of dollars):

<TABLE>
<CAPTION>
                                           December 31, 1998  December 31, 1997
                                           -----------------  -----------------
                                           Carrying    Fair   Carrying    Fair
                                            Amount    Value    Amount    Value
                                           ---------  ------  ---------  ------
<S>                                        <C>        <C>     <C>        <C>
   ASSETS
          Nuclear plant decommis-
          sioning trust fund (a)              $  206  $  206     $  163  $  163
          Financial investments (a)                1       1         58      62
          Other investments                       11      11         13      13
          Cash and cash equivalents              195     195         50      50
          Other financial instru-
            ments included in
            other current assets                   5       5          3       3
   LIABILITIES
          Preferred stock with sinking
            fund requirements (b)                 47      50         47      49
          Company-obligated mandatorily
            redeemable preferred secur-
            ities of subsidiary trusts
            holding solely company
            debentures (b)                       250     259        250     256
          Long-term debt (b)                   2,984   3,176      2,735   2,895
          Commercial paper and
            bank loans                           636     636        135     135
</TABLE>

  (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 
<PAGE>
 
offered to PP&L Resources where quoted market prices are not available.

9.  CREDIT ARRANGEMENTS & FINANCING ACTIVITIES

     PP&L issues commercial paper and, from time to time, borrows from banks to
provide short-term funds for PP&L's general corporate purposes.  Bank borrowings
generally bear interest at rates negotiated at the time of the borrowing. At
December 31, 1998, PP&L had $80 million of commercial paper outstanding.

     PP&L Capital Funding, whose purpose is to provide debt funding for PP&L
Resources and its subsidiaries other than PP&L, established a commercial paper
program in March 1998.  As with all PP&L Capital Funding debt, this commercial
paper is guaranteed by PP&L Resources.  As of December 31, 1998, PP&L Capital
Funding had $553 million of commercial paper outstanding.  Proceeds from the
commercial paper program were primarily used to fund PP&L Resources' common
stock tender offer and provide interim financing for PP&L Global's investment
activities.

    The weighted average interest rate on short-term borrowings was 6.1% and
6.6% at December 31, 1998 and 1997, respectively, for both PP&L Resources and
PP&L.

     In order to ensure liquidity, PP&L and PP&L Capital Funding share a joint
facility with a group of banks.  This joint facility is comprised of a 364-day
revolving credit agreement and a five-year revolving credit agreement.  In March
1998, the existing 364-day revolving credit agreement was increased from $150
million to $350 million.  This increase, when added to the $300 million five-
year revolving credit agreement, brought to $650 million the total amount of
revolving credit available to PP&L and PP&L Capital Funding under the joint
agreement.  In November 1998, PP&L, PP&L Capital Funding and PP&L Resources
replaced the existing 364-day facility with an amended and restated 364-day
revolving credit agreement terminating in November 1999.  The five-year
revolving credit agreement expires in 2002.  Separately, in July 1998, PP&L
Capital Funding entered into five separate $80 million, 364-day credit
facilities with five banks.  PP&L Resources guarantees all obligations of PP&L
Capital Funding under the foregoing facilities.  As of December 31, 1998, no
borrowings were outstanding under any revolving credit agreements.

     In April 1998, PP&L retired $150 million principal amount of First Mortgage
Bonds, 5-1/2% Series that matured at that time.

     In May 1998, PP&L issued $200 million First Mortgage Bonds, 6-1/8% Reset
Put Securities Series due 2006.  In connection with this issuance, PP&L assigned
to a third party the option to call the bonds from the holders on May 1, 2001.
These bonds will mature on May 1, 2006, but will be required to be surrendered
by the existing holders on May 1, 2001 either through the exercise of the call
option by the callholder or, if such option is not exercised, through the
automatic exercise of a mandatory put by the trustee on behalf of the
bondholders. If the call option is exercised, the bonds will be remarketed and
the interest rate will be reset for the remainder of their term to the maturity
date. If the call option is not exercised, 
<PAGE>
 
the mandatory put will be exercised and PP&L will be required to repurchase the
bonds at 100% of their principal amount on May 1, 2001. Proceeds from the sale
of the bonds were used by PP&L to retire $116 million of its unsecured term
loans and to reduce its outstanding commercial paper balances.

     During 1998, PP&L Capital Funding issued a total of $295 million of medium-
term notes with maturities varying from two to seven years.  The proceeds of
these notes were generally used to reduce commercial paper balances.  As of
December 31, 1998, $397 million of medium-term notes were outstanding.

     In September 1998, PP&L Resources purchased 17 million shares of its common
stock, or approximately 10% of the outstanding shares, from existing shareowners
at a price of $24.50 per share through a self tender process.  PP&L Resources
has authorization from the Board of Directors to purchase another three million
shares on the open market or in negotiated transactions.  PP&L Resources has not
repurchased any shares under this additional authorization.

     In October 1998, Penn Fuel Gas retired $27 million of long-term debt.  Of
this amount, $20 million of the retired notes had an interest rate of 7.51%, and
the remainder had an interest rate of 6.70%.  These notes would have required
annual installment payments through 2014.

     During 1998, PP&L Resources issued $56 million of common stock through the
DRIP and $6 million of common stock through the ESOP.

     Effective with the dividend payable October 1, 1998 to owners of record on
September 10, 1998, PP&L Resources' quarterly Common Stock dividend was reduced
to $0.25 per share ($1.00 annualized rate) from the previous level of $0.4175
per share ($1.67 annualized rate).

     Declaration of dividends on common stock is made at the discretion of the
Board of Directors of PP&L Resources and PP&L.  PP&L Resources and PP&L will
continue to consider the appropriateness of these dividend levels, taking into
account the respective financial positions, results of operations, conditions in
the industry and other factors which the respective Boards deem relevant.

     PP&L leases its nuclear fuel from a trust.  The maximum financing capacity
of the trust under existing credit arrangements is $200 million.  As of December
31, 1998, the trust had issued $188 million of commercial paper to support
nuclear fuel purchases.

     PP&L Capital Funding registered $400 million of debt securities with the
SEC in early January 1999.  It is expected these debt securities will be issued
from time to time as medium-term notes to provide long-term debt financing for
PP&L Resources and its subsidiaries other than PP&L.

     Under the PUC restructuring order of August 27, 1998, PP&L is permitted to
issue transition bonds to securitize up to $2.85 billion of its stranded costs.
PP&L is planning to pursue such securitization later in 1999.  The proceeds are
expected to be used by PP&L to retire outstanding debt and to repurchase common
stock from PP&L Resources.
<PAGE>
 
10.  WINDFALL PROFITS TAX - PP&L GLOBAL

     In July 1997, the U.K. assessed a windfall profits tax on privatized
utilities.  SWEB's windfall profits tax was approximately 90 million pounds
sterling, or about $148 million.  Based on PP&L Global's 25% ownership interest
in SWEB at that time, PP&L Resources incurred a one-time charge against earnings
of $37 million, or 23 cents per share, in 1997.  This charge is included in
"Other Income and Deductions."  The tax was fully paid.

11.  ACQUISITIONS

     In 1998 PP&L Resources acquired Penn Fuel Gas.  The transaction was treated
as a purchase for accounting and financial reporting purposes.  PP&L Resources
issued approximately 5.6 million shares of common stock with a value of
approximately $135 million, to acquire all Penn Fuel Gas common and preferred
stock.  Under the terms of the merger agreement, shareowners of Penn Fuel Gas
received 6.968 common shares of PP&L Resources for each common share of Penn
Fuel Gas that they owned and 0.682 common shares of PP&L Resources for each
preferred share of Penn Fuel Gas that they owned.

     In 1998, PP&L Resources also acquired H.T. Lyons and McClure, mechanical
contractor and engineering firms, in cash transactions for amounts that were not
material.  In January 1999, PP&L Resources announced that it had reached an
agreement to acquire McCarl's, another mechanical contractor and engineering
firm, in a cash transaction for an amount that is not material.  The closing of
the acquisition is expected to occur in February 1999.

     In September 1998, PP&L Global announced an agreement to acquire most of
Bangor Hydro-Electric Company's generating assets and certain transmission
rights. PP&L Global will purchase 100 percent of Bangor Hydro's hydroelectric
assets and certain transmission rights, as well as its interest in an oil-fired
generation facility, for $89 million. The acquisition has been approved by the
Maine Public Utilities Commission, and remains subject to the approval of the
FERC as well as certain third-party consents, which are expected in 1999.

     PP&L Global has signed definitive agreements with Montana Power Company,
Portland General Electric Company and Puget Sound Energy, Inc. to acquire 13
Montana power plants, with 2,614 MW of generating capacity, for a purchase price
of $1.586 billion.  The acquisition is subject to several conditions, including
the receipt of required state and federal regulatory approvals and third-party
consents.  In this regard, PacifiCorp, a co-owner of Colstrip Units 3 and 4, has
a right of first refusal to purchase a portion of the assets of these units.
PP&L Global expects to complete the acquisition by the end of 1999.  About 65%
of the acquisition cost is expected to be financed on a project credit basis,
non-recourse to PP&L Global and PP&L Resources.  The balance of the acquisition
cost is expected to be financed through a combination of debt and equity issued
by PP&L Resources, or with funds that PP&L Resources derives from PP&L's
securitization of transition costs.  The agreements also provide for PP&L
Global's acquisition of related transmission assets for $182 million, subject to
certain conditions, including federal regulatory approval.
<PAGE>
 
12. PENSION PLAN AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS

Pension Plan

     PP&L and Penn Fuel Gas have funded, noncontributory defined benefit pension
plans covering substantially all employees.  Benefits are based upon a
participant's earnings and length of participation in the plans, subject to
meeting certain minimum requirements.

     PP&L and Penn Fuel Gas have unfunded, supplemental retirement plans for
certain management employees.  Benefit payments pursuant to these supplemental
plans are made directly by PP&L and Penn Fuel Gas, respectively.  PP&L and Penn
Fuel Gas recently terminated similar nonqualified retirement plans for the
benefit of their directors.  At December 31, 1998, the projected benefit
obligation of these supplemental plans was approximately $29 million for PP&L
and Penn Fuel Gas.  PP&L Global has established, effective December 1, 1994, a
non-qualified retirement plan for its corporate officers.  The cost of the Plan
was not material in 1998.

     The components of PP&L's net periodic pension cost for the three plans were
(millions of dollars):
<TABLE>
<CAPTION>
 
                                   1998    1997    1996
<S>                               <C>     <C>     <C>
 
Service cost-benefits earned
  during the period               $  35   $  32   $  32
Interest cost                        67      64      61
Expected return on plan assets      (86)    (77)    (71)
Net amortization and deferral       (13)    (11)     (7)
                                  -----   -----   -----
Net periodic pension cost         $   3   $   8   $  15
                                  =====   =====   =====
</TABLE>
<PAGE>
 
     The net periodic pension cost charged to operating expenses was $2 million
in 1998, $5 million in 1997 and $9 million in 1996.  The balance was charged to
construction and other accounts.  The funded status of PP&L's Plan at December
31 was (millions of dollars):
<TABLE>
<CAPTION>
 
                                                     1998     1997
<S>                                                 <C>      <C>
 
Change in Plan Assets:
  Fair value of plan assets at beginning of year    $1,396   $1,187
  Actual return on plan assets                         240      254
  Actual expense paid                                   (3)      (3)
  Net benefits paid                                    (42)     (42)
                                                    ------   ------
  Fair value of plan at end of year                  1,591    1,396
                                                    ------   ------
Change in Benefit Obligation
  Net benefit obligation at beginning of year          962      887
  Service cost                                          35       32
  Interest cost                                         66       63
  Plan amendments                                       66
  Actuarial loss                                        70       25
  Special termination benefits                           9
  Actual expense paid                                   (3)      (3)
  Net benefits paid                                    (42)     (42)
                                                    ------   ------
Net benefit obligation at end of year                1,163      962
                                                    ------   ------
Plan assets in excess of projected
  benefit obligation                                   428      434
Unrecognized transition assets (being
  amortized over 23 years)                             (50)     (54)
Unrecognized prior service cost                        115       52
Unrecognized net gain                                 (707)    (636)
                                                    ------   ------
Accrued expense                                     $ (214)  $ (204)
                                                    ======   ======
</TABLE>

     The weighted average discount rate used in determining the actuarial
present value of projected benefit obligations was 6.25% and 6.75% on December
31, 1998 and 1997, respectively.  The rate of increase in future compensation
used in determining the actuarial present value of projected benefit obligations
was 5.0% on December 31, 1998 and 1997.  The assumed long-term rates of return
on assets used in determining pension cost in 1998 and 1997 was 8.0%.  Plan
assets consist primarily of common stocks, government and corporate bonds and
temporary cash investments.

     PP&L's subsidiaries formerly engaged in coal mining have a noncontributory
defined benefit pension plan covering substantially all non-bargaining unit,
full-time employees, which is fully funded and in a separate account managed by
an insurance company.  This plan was amended to freeze benefit accruals and
benefit increases effective June 1996.  In addition, the companies are liable
under federal and state laws to pay black lung benefits to claimants and
dependents with respect to approved claims, and are members of a trust which was
established to facilitate payment of such liabilities.  Such costs were not
material in 1998, 1997 and 1996.

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

     Substantially all employees of PP&L and its subsidiaries will become
eligible for certain health care and life insurance benefits upon retirement.
PP&L sponsors four health and welfare benefit plans 
<PAGE>
 
that cover substantially all management and bargaining unit employees upon
retirement. One plan provides for retiree health care benefits to certain
management employees, another plan provides retiree health care benefits to
bargaining unit employees, a third plan provides retiree life insurance benefits
to certain management employees up to a specified amount and a fourth plan
provides retiree life insurance benefits to bargaining unit employees.

     Dollar limits have been established for the amount PP&L will contribute
annually toward the cost of retiree health care for employees retiring after
March 1993.

     The PUC Decision in 1995 permitted recovery of the PUC-jurisdictional
amount of retiree health care costs resulting from the adoption of SFAS 106.
The PUC Decision permitted PP&L to recover, over a period of about 17 years, the
amount of SFAS 106 costs deferred.  In June 1998, the generation-related portion
of these costs were written off as part of the PUC restructuring proceeding and
the FERC settlement with 16 small utilities.

     In December 1993, PP&L established a separate VEBA for each of the four
health and welfare benefit plans for retirees.  After making initial
contributions, additional funding of the trusts was deferred pending resolution
of PP&L's ability to recover the costs of the plans in rates.  Continued funding
of these trusts was subject to the resolution of the OCA appeal of the PUC
Decision.  In 1997, the Pennsylvania Supreme Court ruled that the Commonwealth
Court's decision to uphold the PUC Decision was final.  In 1998, PP&L
contributed an additional $25 million to these VEBAs.
<PAGE>
 
     The following table sets forth the plans' combined funded status reconciled
with the amount shown on PP&L's Consolidated Balance Sheet as of December 31
(millions of dollars):
<TABLE>
<CAPTION>
 
                                                           1998    1997
<S>                                                        <C>     <C>
Change in Benefit Obligation:                    
  Net benefit obligation at beginning            
    of year                                                $ 237    $ 249
   Service cost                                                4        4
   Interest cost                                              16       17
   Plan amendments                                            10
   Actuarial (gain) loss                                      42      (22)
   Net benefits paid                                         (13)     (11)
                                                           -----   ------
  Net benefit obligation at end of year                      296      237
                                                           -----   ------
Change in Plan Assets:                           
  Fair value of plan assets at                   
    beginning of year                                         64       31
  Actual return on plan assets                                13        2
  Employer contributions                                      37       42
  Net benefits paid                                          (13)     (11)
                                                           -----   ------
Fair value of plan assets at end of year                     101       64
                                                           -----   ------
Accumulated postretirement benefit obligation    
  in excess of plan assets                                   195      173
Unrecognized prior service costs                             (14)      (4)
Unrecognized net loss                                        (44)     (11)
Unrecognized transition obligation (being        
  amortized over 20 years)                                  (122)    (131)
                                                           -----   ------
Accrued postretirement benefit cost                        $  15    $  27
                                                           =====   ======
 
     The net periodic postretirement benefit cost included the following
components (millions of dollars):

                                                          1998    1997     1996
                                           
Service cost - benefits attributed         
  to service during the period                           $   4   $   4    $   4
  Interest cost on accumulated             
  postretirement benefit obligation                         16      17       15
Actual return on plan assets                                (4)     (2)      (1)
Net amortization and deferral                                9      10        9
                                                         -----   -----   ------
                                           
Net periodic postretirement                
  benefit cost                                           $  25   $  29    $  27
                                                         =====   =====   ======
</TABLE>

     Retiree health and benefits costs charged to operating expenses were
approximately $19 million in 1998, $23 million in 1997, and $20 million in 1996.
Costs in excess of the amount charged to expense were charged to construction
and other accounts.

     For measurement purposes, an 7.75% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1999; the rate was
assumed to decrease gradually to 6% by 2006 and remain at that level thereafter.
Increasing the assumed health care cost trend rates by 1% in each year would
increase the accumulated postretirement benefit obligation as of December 31,
1998, by about $13 million and the aggregate of the service and interest cost
components of net 
<PAGE>
 
periodic postretirement benefit cost for the year then ended by about $1
million.

     In determining the accumulated postretirement benefit obligation, the
weighted average discount rate used was 6.25% and 6.75% on December 31, 1998 and
1997, respectively.  The trusts that are holding the plan assets, except for
retiree health care benefits to certain management employees, are tax-exempt.
The expected long-term rate of return on plan assets for the tax-exempt trusts
was 6.35% and 6.5% on December 31, 1998 and 1997, respectively.

     PP&L and its subsidiaries formerly engaged in coal mining accrued an
additional liability for the cost of health care of retired miners previously
employed by them.  The liability, based on the present value of future benefits,
was estimated at $50 million and $51 million as of December 1998 and 1997,
respectively.  In December 1997, PP&L contributed $25 million to a VEBA to
partially fund these health care costs.  There were no funding contributions
made in 1998.

POSTEMPLOYMENT BENEFITS

     PP&L 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 material.

13.  JOINTLY OWNED FACILITIES

     At December 31, 1998, PP&L or its subsidiary owned undivided interests in
the following facilities (millions of dollars):
<TABLE>
<CAPTION>
 
                                                                       MERRILL
                                       ------GENERATING STATIONS------  CREEK
                                     SUSQUEHANNA  KEYSTONE  CONEMAUGH RESERVOIR
<S>                                  <C>         <C>       <C>       <C>
Ownership interest                        90.00%    12.34%     11.39%     8.37%
Electric utility plant in
 service                                 $4,085    $   68     $  103
Other property                                                          $   22
Accumulated depreciation                  3,388        39         45        10
Construction work in progress                53                    1
</TABLE>

     Each participant in these facilities provides its own financing.  PP&L
receives a portion of the total output of the generating stations equal to its
percentage ownership.  PP&L's share of fuel and other operating costs associated
with the stations is reflected on the PP&L Consolidated Statement of Income.
The Merrill Creek Reservoir provides water during periods of low river flow to
replace water from the Delaware River used by PP&L and other utilities in the
production of electricity.

14.  COMMITMENTS AND CONTINGENT LIABILITIES

CONSTRUCTION EXPENDITURES

     PP&L's construction expenditures for the period 1999-2003 are estimated to
aggregate $1.8 billion, including AFUDC and capitalized interest.  For
discussion pertaining to construction expenditures, see 
<PAGE>
 
Review of Financial Condition and Results of Operations under the caption
"Financial Condition -Capital Expenditure Requirements."

NUCLEAR INSURANCE

     PP&L is a member of certain insurance programs which provide coverage for
property damage to members' nuclear generating stations.  Facilities at the
Susquehanna station are insured against property damage losses up to $2.75
billion under these programs.  PP&L is also a member of an insurance program
which provides insurance coverage for the cost of replacement power during
prolonged outages of nuclear units caused by certain specified conditions.
Under the property and replacement power insurance programs, PP&L could be
assessed retroactive premiums in the event of the insurers' adverse loss
experience.  At December 31, 1998, the maximum amount PP&L could be assessed
under these programs was about $25 million.

     PP&L's 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.  PP&L is protected against this liability
by a combination of commercial insurance and an industry assessment program.  In
the event of a nuclear incident at any of the reactors covered by The Price
Anderson Amendments Act of 1988, PP&L could be assessed up to $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.  PP&L has complied with the
1995 Phase I acid rain provisions by installing continuous emission monitors on
all units, burning lower sulfur coal and installing low NOx burners on most
units.  To comply with the year 2000 Phase II acid rain provisions, PP&L plans
to purchase lower sulfur coal and use banked or purchased emission allowances
instead of installing FGD on its wholly owned units.

     PP&L has met the 1995 ambient ozone requirements of the Clean Air Act by
reducing NOx emissions by nearly 50% through the use of low NOx burners.
Further seasonal (i.e., 5 month) NOx reductions to 55% and 75% of 1990 levels
for 1999 and 2003, respectively, are specified under the Northeast Ozone
Transport Region's Memorandum of Understanding.  The DEP has finalized
regulations which require PP&L to reduce its ozone seasonal NOx by 57% beginning
in 1999.  PP&L plans to comply with this reduction with operational initiatives
that rely, to a large extent, on the existing low NOx burners.

     The EPA has finalized new national standards for ambient levels of ground-
level ozone and fine particulates.  Based in part on the new ozone standard, the
EPA has finalized NOx emission limits for 22 states, including Pennsylvania,
which in effect require approximately an 80% reduction from the 1990 level in
Pennsylvania by May 2003; the state is required by September 1999 to develop
plans for implementing this reduction.  Pursuant to Section 126 of the Clean Air
Act, several 
<PAGE>
 
Northeast states have petitioned the EPA to find that major sources of NOx
emissions, including PP&L's power plants, are significantly contributing to non-
attainment in those states. The EPA has proposed to find such contribution and
require emissions reductions at those sources if the states in which those
sources are located fail to develop plans by September 1999 to implement the
proposed 2003 limits. PP&L estimates that compliance with these emissions
reduction requirements could require installation of NOx emissions removal
systems on PP&L's three largest coal-fired units, at a capital cost of
approximately $35 million per unit. The new particulates standard may require
further reductions in SO2 and may expand the planned seasonal NOx reductions to
year round in the 2010-2012 timeframe.

     Under the Clean Air Act, the EPA has been studying the health effects of
hazardous air emissions from power plants and other sources, in order to
determine whether those emissions should be regulated.  Recently, the EPA
released a technical report of its findings to date.  The EPA concluded that
mercury is the power plant air toxic of greatest concern, but that more
evaluation is needed before it can determine whether regulation of air toxics
from fossil fuel plants is necessary.  EPA is now seeking mercury and chlorine
sampling and other data from electric generating units including PP&L's.  In
addition, the EPA has announced a new enforcement initiative against older coal-
fired plants.  Several of PP&L's coal-fired plants could fall into this
category.  These EPA initiatives could result in compliance costs for PP&L in
amounts which are not now determinable but which could be material.

     Expenditures to meet the 2000 acid rain and 1999 NOx reduction requirements
are included in the table of projected construction expenditures in the section
entitled "Financial Condition - Capital Expenditure Requirements" in the Review
of the Financial Condition and Results of Operations.  PP&L currently estimates
that additional capital expenditures and operating costs for environmental
compliance under the Clean Air Act will be incurred beyond 2002 in amounts which
are not now determinable but which could be material.

     Water and Residual Waste
     ------------------------

     PP&L has installed dry fly ash handling systems at most of its power
stations, which reduces waste water discharge.  In other cases, PP&L has
modified the existing facilities to allow continued operation of the ash basins
under a DEP permit.  Any groundwater contamination caused by the basins must
also be addressed.

     Groundwater degradation related to fuel oil leakage from underground
facilities and seepage from coal refuse disposal areas and coal storage piles
has been identified at several PP&L generating stations.  Remedial work related
to oil leakage is substantially completed at two generating stations.  At this
time, the only other remedial work being planned is to abate a localized
groundwater degradation problem associated with a waste disposal impoundment at
the Montour plant.

     The final NPDES permit for the Montour plant contains stringent limits for
iron and chlorine discharges.  Depending on the results of 
<PAGE>
 
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 PP&L facilities are included in the table of construction
expenditures in the section entitled "Financial Condition - Capital Expenditure
Requirements" in the Review of the Financial Condition and Results of
Operations.  In this regard, PP&L currently estimates that $5.5 million of
additional capital expenditures may be required in the next four years to close
some of the ash basins and address other ash basin issues at various generating
plants.  Additional capital expenditures could be required beyond the year 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, PP&L entered into a consent order with the DEP to address a number
of sites where PP&L may be liable for remediation of contamination.  This may
include potential PCB contamination at certain PP&L substations and pole sites;
potential contamination at a number of coal gas manufacturing facilities
formerly owned and operated by PP&L; and oil or other contamination which may
exist at some of PP&L's former generating facilities.  As of December 31, 1998,
PP&L has completed work on slightly more than half of the sites included in the
consent order.

     In 1996, Penn Fuel Gas entered into a similar consent order with the DEP to
address a number of its sites where Penn Fuel Gas may be liable for remediation
of contamination.  The sites primarily include former coal gas manufacturing
facilities.  Prior to PP&L Resources acquiring Penn Fuel Gas on August 21, 1998,
Penn Fuel Gas had obtained a "no further action" determination from the DEP for
two of the 20 sites covered by the order.

     At December 31, 1998, PP&L had accrued approximately $6 million and Penn
Fuel Gas had accrued $15 million, representing the respective amounts PP&L and
Penn Fuel Gas can reasonably estimate they will have to spend to remediate sites
involving the removal of hazardous or toxic substances, including those covered
by each company's consent orders mentioned above.  Future cleanup or remediation
work at sites currently under review, or at sites not currently identified, may
result in material additional operating costs for PP&L or Penn Fuel Gas, which
neither company can estimate at this time.  In addition, certain federal and
state statutes, including Superfund and the Pennsylvania Hazardous Sites Cleanup
Act, empower certain governmental agencies, such as the EPA and the DEP, to seek
compensation from the responsible parties for the lost value of damaged natural
resources.  The EPA and the DEP may file such compensation claims against the
parties, including PP&L or Penn Fuel Gas, held responsible for cleanup of such
sites.  Such natural resource damage claims against PP&L or Penn Fuel Gas could
result in material additional liabilities.
<PAGE>
 
     General
     -------

     Due to the environmental issues discussed above or other environmental
matters, PP&L may be required to modify, replace or cease operating certain
facilities to comply with statutes, regulations and actions by regulatory bodies
or courts.  In this regard, PP&L also may incur capital expenditures, operating
expenses and other costs in amounts which are not now determinable but which
could be material.

LOAN GUARANTEES OF AFFILIATED COMPANIES

     At December 31, 1998, PP&L provided a guarantee in the amount of $12
million in support of one of its subsidiaries.

     PP&L Resources also provides certain guarantees for its subsidiaries.
Specifically, PP&L Resources guarantees all of the debt of PP&L Capital Funding.
As of December 31, 1998, PP&L Resources guaranteed $397 million of medium-term
notes and $552 million of commercial paper issued by PP&L Capital Funding.  PP&L
Resources also provided $13 million of loan guarantees to a PP&L Global
subsidiary in the fourth quarter of 1998.  Also in the fourth quarter, PP&L
Resources guaranteed $19 million of notes of North Penn Gas Co., a subsidiary of
Penn Fuel Gas.  Additionally, PP&L Resources has guaranteed certain obligations
of PP&L EnergyPlus for up to $31 million under power purchase and sales
agreements.

Source of Labor Supply

     As of December 31, 1998, PP&L Resources and its subsidiaries had
approximately 7,600 employees, including 6,344 full-time PP&L employees.
Approximately 65 percent of PP&L's full-time employees are represented by the
IBEW.  PP&L reached a new labor agreement with the IBEW in 1998.  This agreement
expires in May 2002.

15.  New Accounting Standards

     In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15, 1997.  The adoption of this statement did not have
a material impact on the financial statements of PP&L Resources or PP&L.

     In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 1999.  This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities.  It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value.  SFAS 133 also expanded the definition of a derivative to include
most commodity contracts that require physical delivery.  The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation.  PP&L Resources and its subsidiaries
intend to adopt this statement as of January 1, 2000.  The impact of the
adoption of this statement on 
<PAGE>
 
the net income of PP&L Resources and PP&L is not yet determinable but may be
material.

     In November 1998, the EITF reached a consensus on EITF Issue 98-10,
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities."  For purposes of Issue 98-10, energy trading activities refer to
energy contracts entered into with the objective of generating profits on or
from exposure to shifts or changes in market prices, and risk management
activities refer to energy contracts that are designated as, and effective as,
hedges of nontrading activities.  Effective January 1, 1999, EITF Issue 98-10
requires that companies "mark to market" (that is, record the fair value of the
contracts on the balance sheet, with gains and losses reflected in earnings)
energy contracts that constitute energy trading activities.  Energy contracts
that are hedges of nontrading activities should continue to be accounted for in
accordance with a company's existing hedge accounting policies.  PP&L Resources
and PP&L will continue, until the adoption of SFAS 133, to use accrual
accounting for contracts that are hedges of nontrading activities.  PP&L
Resources and PP&L adopted EITF 98-10 on January 1, 1999 and expect to recognize
an after-tax credit to income of approximately $6.0 million as an offset to
energy purchases.
<PAGE>
 
                              PP&L Resources, Inc
                                  PP&L, INC.
 
         SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>
 
                      Column A                         Column B                  Column C                  Column D        Column E
- ----------------------------------------------------  ----------                 ---------                -----------     ----------

                                                                                                          Deductions
                                                                                 Additions                   from  
                                                        Balance    ----------------------------------      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)
<S>                                                  <C>           <C>                    <C>           <C>                <C> 
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
 
Year Ended December 31, 1996
- ----------------------------------------------------
 
Reserves deducted from assets in
  the Balance Sheet
    Uncollectible accounts..........................          35             20                                30               25
    Obsolete inventory - Materials and supplies.....          15                                               15
</TABLE>
<PAGE>
 
QUARTERLY FINANCIAL, COMMON STOCK PRICE AND DIVIDEND DATA (UNAUDITED)
PP&L Resources, Inc. and Subsidiaries
(Millions of Dollars, except per share data)

<TABLE>

                                                                              For the Quarters Ended (a)
                                                   MARCH 31              JUNE 30                  SEPT. 30               DEC. 31
<S>                                              <C>                   <C>            <C>       <C>                   <C>
                        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.....................................           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
                                               
                        1997                                           
Operating revenues.............................     $     795               $   693                 $    792              $     797
Operating income...............................           264                   166                      201                    169
Net income before extraordinary items..........           117                    65                       42                     72
Net income.....................................           117                    65                       42                     72
Earnings per common share (b)..................          0.72                  0.39                     0.25                   0.44
Dividends declared per common share (c)........        0.4175                0.4175                   0.4175                 0.4175
Price per common share                         
  High.........................................            24                20-7/8                  23-1/16                 24-1/4
  Low..........................................            20                    19                  19-7/16                     20
 
(a)  PP&L'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. In addition, PP&L Resources' second quarter results
     of 1998 include an after-tax charge of $948 million. See Note 4.
(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)  PP&L Resources has paid quarterly cash dividends on its common stock in every year since 1946. The dividends paid per share in
     1997 were $1.67 and in 1998 were $1.50. The most recent regular quarterly dividend paid by PP&L Resources was 25 cents per
     share (equivalent to $1.00 per annum) paid January 1, 1999. Future dividends will be dependent upon future earnings, financial
     requirements and other factors.
 
QUARTERLY FINANCIAL DATA (UNAUDITED)
PP&L, Inc. and Subsidiaries
(Millions of Dollars)
                                                                            For the Quarters Ended (a)
                                                 MARCH 31              JUNE 30                  SEPT. 30               DEC. 31
                          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...................................           109                  (885)                     137                    100
Earnings available to PP&L Resources.........            97                  (897)                     125                     88
                                            
                          1997              
Operating revenues...........................     $     785               $   686                 $    778              $     800
Operating income.............................           258                   163                      191                    178
Net income before extraordinary items........           120                    70                       81                     77
Net income...................................           120                    70                       81                     77
Earnings available to PP&L Resources.........           113                    61                       69                     65
 
(a)  PP&L's electric utility business is seasonal in nature with peak sales periods generally occurring in the winter months.
     Accordingly, comparisons among quarters of a year may not be indicative of overall trends and changes in operations. In
     addition, PP&L's second quarter results of 1998 include an after-tax charge of $948 million. See Note 4.

</TABLE>
<PAGE>
 
                     ITEM 9. CHANGES IN AND DISAGREEMENTS
                        WITH ACCOUNTANTS ON ACCOUNTING
                           AND FINANCIAL DISCLOSURE
                           ------------------------

None.
<PAGE>
 
                                   PART III
                                   --------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------

     Information for this item concerning directors of PP&L Resources will be
set forth in the sections entitled "Nominees for Directors" and "Directors
Continuing in Office" in PP&L Resources' 1999 Notice of Annual Meeting and Proxy
Statement, which will be filed with the SEC not later than 120 days after
December 31, 1998, and which information is incorporated herein by reference.
Information required by this item concerning the executive officers of PP&L
Resources is set forth at the end of Part I of this report.

     Information for this item concerning directors of PP&L will be set forth in
the sections entitled "Nominees for Directors" and "Directors Continuing in
Office" in PP&L's 1999 Notice of Annual Meeting and Proxy Statement, which will
be filed with the SEC not later than 120 days after December 31, 1998, and which
information is incorporated herein by reference.  Information required by this
item concerning the executive officers of PP&L is set forth at the end of Part I
of this report.


                        ITEM 11. EXECUTIVE COMPENSATION
                        -------------------------------

     Information for this item for PP&L Resources will be set forth in the
sections entitled "Compensation of Directors," "Summary Compensation Table" and
"Retirement Plans for Executive Officers" in PP&L Resources' 1999 Notice of
Annual Meeting and Proxy Statement, which will be filed with the SEC not later
than 120 days after December 31, 1998, and which information is incorporated
herein by reference.

     Information for this item for PP&L will be set forth in the sections
entitled "Compensation of Directors," "Summary Compensation Table" and
"Retirement Plans for Executive Officers" in PP&L's 1999 Notice of Annual
Meeting and Proxy Statement, which will be filed with the SEC not later than 120
days after December 31, 1998, and which information is incorporated herein by
reference.


                    ITEM 12. SECURITY OWNERSHIP OF CERTAIN
                       BENEFICIAL OWNERS AND MANAGEMENT
                       --------------------------------


     Information for this item for PP&L Resources will be set forth in the
section entitled "Stock Ownership" in PP&L 
<PAGE>
 
Resources' 1999 Notice of Annual Meeting and Proxy Statement, which will be
filed with the SEC not later than 120 days after December 31, 1998, and which
information is incorporated herein by reference.

     Information for this item for PP&L will be set forth in the section
entitled "Stock Ownership" in PP&L's 1999 Notice of Annual Meeting and Proxy
Statement, which will be filed with the SEC not later than 120 days after
December 31, 1998, and which information is incorporated herein by reference.


            ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
            -------------------------------------------------------


     Information for this item for PP&L Resources will be set forth in the
section entitled "Certain Transactions Involving Directors or Executive
Officers" in PP&L Resources' 1999 Notice of Annual Meeting and Proxy Statement,
which will be filed with the SEC not later than 120 days after December 31,
1998, and which information is incorporated herein by reference.

     Information for this item for PP&L will be set forth in the section
entitled "Certain Transactions Involving Directors or Executive Officers" in
PP&L's 1999 Notice of Annual Meeting and Proxy Statement, which will be filed
with the SEC not later than 120 days after December 31, 1998, and which
information is incorporated herein by reference.
<PAGE>
 
                                    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.

     PP&L RESOURCES, INC.
      Report of Independent Accountants
      Consolidated Statement of Income for each of the Three
       Years Ended December 31, 1998, 1997 and 1996
      Consolidated Statement of Cash Flows for each of
       the Three Years Ended December 31, 1998,
       1997 and 1996
      Consolidated Balance Sheet at December 31, 1998
       and 1997
      Consolidated Statement of Shareowners' Common Equity
       for each of the Three Years Ended December 31,
       1998, 1997 and 1996
      Consolidated Statement of Preferred Stock at
       December 31, 1998 and 1997
      Consolidated Statement of Company-Obligated
       Mandatorily Redeemable Securities at
       December 31, 1998 and 1997
      Consolidated Statement of Long-Term Debt at
       December 31, 1998 and 1997
      Notes to Financial Statements

     PP&L, INC.
      Report of Independent Accountants
      Consolidated Statement of Income for each of the
       Three Years Ended December 31, 1998, 1997 and 1996
      Consolidated Statement of Cash Flows for each of
       the Three Years Ended December 31, 1998, 1997
       and 1996
      Consolidated Balance Sheet at December 31, 1998
       and 1997
      Consolidated Statement of Shareowner's Common Equity
       for each of the Three Years Ended December 31, 1998,
       1997 and 1996
      Consolidated Statement of Preferred Stock at
       December 31, 1998 and 1997
      Consolidated Statement of Company-Obligated
       Mandatorily Redeemable Securities at
       December 31, 1998 and 1997
      Consolidated Statement of Long-Term Debt at
       December 31, 1998 and 1997
      Notes to Financial Statements


  2.  Supplementary Data and Supplemental Financial Statement
      Schedule - included in response to Item 8.
<PAGE>
 
      Schedule II - Valuation and Qualifying Accounts and
                    Reserves for the Three Years Ended
                    December 31, 1998

      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 107.

(b)  Reports on Form 8-K:

     The following Reports on Form 8-K were filed during the three months ended
December 31, 1998:

     Report dated October 2, 1998
     ----------------------------

     Item 5.  Other Events

     Information regarding PP&L Global's acquisition of generating assets and
     transmission resources of Bangor Hydro-Electric Company.

     Report dated October 19, 1998
     -----------------------------

     Item 5.  Other Events

     Information regarding PP&L Resources' projected earnings for 1998 through
     2000.

     Report dated November 2, 1998
     -----------------------------

     Item 5.  Other Events

     Information regarding PP&L Global's acquisition of Montana generation
     assets.
<PAGE>
 
                      SHAREOWNER AND INVESTOR INFORMATION
                      ----------------------------------


ANNUAL MEETINGS:  The annual meetings of shareowners of PP&L Resources and PP&L
are held each year on the fourth Friday of April.  The 1999 annual meetings will
be held on Friday, April 23, 1999, at Lehigh University's Stabler Arena, at the
Goodman Campus Complex located in Lower Saucon Township, outside Bethlehem, PA.

PROXY MATERIAL:  A proxy statement and notice of PP&L Resources' and PP&L's
annual meetings are mailed to all shareowners of record as of February 26, 1999.

DIVIDENDS:  The 1999 dates for consideration of the declaration of dividends on
PP&L Resources common stock and PP&L preferred stock by the board of directors
or its finance committee are February 26, May 28, August 27 and November 19.
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 1999 record dates for dividends are expected to be the 10th day of March,
June, September and December.

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
PP&L Resources common stock or PP&L preferred stock reinvested in PP&L Resources
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 PP&L 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.
<PAGE>
 
PP&L RESOURCES 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 PP&L Resources 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 PP&L Resources' 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 PP&L Resources and its subsidiaries, please call the Shareowner
Information Line, or write to:

     George I. Kline
     Manager-Investor Services
     PP&L Resources, Inc.
     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 [email protected].
<PAGE>
 
LISTED SECURITIES:            FISCAL AGENTS:
NEW YORK STOCK EXCHANGE       STOCK TRANSFER AGENTS AND REGISTRARS
PP&L RESOURCES, INC.:           Norwest Bank Minnesota, N.A.
Common Stock (Code:  PPL)       Shareowner Services
                                161 North Concord Exchange
PP&L, INC.:                     South St. Paul, MN  55075
4-1/2% Preferred Stock
  (Code:  PPLPRB)               PP&L, Inc.
4.40% Series Preferred Stock    Investor Services Department
  (Code:  PPLPRA)
                              DIVIDEND DISBURSING OFFICE AND
                              DIVIDEND REINVESTMENT PLAN AGENT
PP&L CAPITAL TRUST:             PP&L, Inc.
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
PP&L RESOURCES, INC.:         BOND INTEREST PAYING AGENT
Common Stock                    PP&L, Inc.
                                Investor Services Department
PP&L, INC.
4-1/2% Preferred Stock
3.35% Series Preferred Stock
4.40% Series Preferred Stock
4.60% Series Preferred Stock
<PAGE>
 
                                  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.

                PP&L RESOURCES, INC.
                --------------------
                  (Registrant)

                   PP&L, INC.
                   ----------
                  (Registrant)


By /S/ William F. Hecht
- ----------------------------------------
William F. Hecht - Chairman, President
           and Chief Executive
           Officer (PP&L Resources,
           Inc. and PP&L, Inc.)

          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
- ---------------------------------------            Officer and Director
William F. Hecht - Chairman, President            
           and Chief Executive
           Officer (PP&L Resources,
           Inc. and PP&L, Inc.)


By /S/ John R. Biggar                             Principal Financial
- ----------------------------------------           Officer                 
John R. Biggar - Senior Vice President            
         and Chief Financial Officer
         (PP&L Resources, Inc.
         and PP&L, Inc.)


By /S/ Joseph J. McCabe                           Principal Accounting
- ----------------------------------------           Officer                  
Joseph J. McCabe - Vice President and             
           Controller(PP&L Resources,
           Inc. and PP&L, Inc.)

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 3, 1999 
<PAGE>
 
                                 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 Resources,
                    dated March 9, 1995)
 
     3(a)-2    -    Restated Articles of Incorporation of PP&L, Inc. (Exhibit A
                    to Proxy Statement of PP&L and Prospectus of Resources,
                    dated March 9, 1995)

     3(a)-3    -    Articles of Amendment of PP&L, Inc., dated September 12,
                    1997 (Exhibit 3(a)-3 to PP&L's Form 10-K Report (File No. 1-
                    905) for the year ended December 31, 1997)
                    
     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

     *4(a)-2   -    Amendment No. 1 to said Employee Stock Ownership Plan,
                    effective January 1, 1998

     *4(a)-3   -    Amendment No. 2 to said Employee Stock Ownership Plan,
                    effective December 1, 1998
<PAGE>
 
     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)
<PAGE>
 
     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(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's 8-K (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's 8-K (File No. 1-905) dated November
                    12, 1997)
<PAGE>
 
     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 November 19, 1998, among PP&L, Inc., PP&L
                    Capital Funding, Inc. and PP&L Resources, Inc. and the banks
                    named therein

     10(b)     -    Five-Year Revolving Credit Agreement, dated as of November
                    20, 1997, among PP&L, Inc., PP&L Capital Funding, Inc. and
                    PP&L Resources, Inc. and the banks named therein (Exhibit
                    10(b) to PP&L's Form 10-K Report (File No. 1-905) for the
                    year ended December 31, 1997)

     *10(c)    -    Credit Agreement and Guarantee, dated as of July 8, 1998,
                    among PP&L Resources, Inc., PP&L Capital Funding, Inc., and
                    The Chase Manhattan Bank
<PAGE>
 
     *10(d)    -    Credit Agreement and Guarantee, dated as of July 8, 1998,
                    among PP&L Resources, Inc., PP&L Capital Funding, Inc. and
                    Citibank, N.A.

     *10(e)    -    Credit Agreement and Guarantee, dated as of July 8, 1998,
                    among PP&L Resources, Inc., PP&L Capital Funding, Inc. and
                    First Union National Bank

     *10(f)    -    Credit Agreement and Guarantee, dated as of July 8, 1998,
                    among PP&L Resources, Inc., PP&L Capital Funding Inc. and
                    Mellon Bank, N.A.

     *10(g)    -    Credit Agreement and Guarantee, dated as of July 8, 1998,
                    among PP&L Resources, Inc., PP&L Capital Funding, Inc. and
                    NationsBank, N.A.

     10(h)     -    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(i)    -    Amended and Restated Operating Agreement of the PJM
                    Interconnection, L.L.C., dated October 15, 1998

     10(j)-1   -    Capacity and Energy Sales Agreement, dated March 9, 1984,
                    between PP&L, Inc. and Jersey Central Power & Light Company
                    (Exhibit l0(f)-3 to PP&L's Form 10-K Report (File No. 1-905)
                    for the year ended December 31, 1984)

     10(j)-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(j)-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)
<PAGE>
 
     10(j)-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(j)-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(j)-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(k)-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(k)-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(k)-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(k)-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(k)-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)
<PAGE>

     10(k)-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(k)-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(l)        Amended and Restated Directors Deferred Compensation Plan,
                  effective January 1, 1998
 
    *10(m)-1      Amended and Restated Officers Deferred Compensation Plan,
                  effective January 1, 1998
 
    *10(m)-2      Amendment No. 1 to said Officers Deferred Compensation Plan,
                  effective September 14, 1998
 
    *10(n)-1      Amended and Restated Supplemental Executive Retirement Plan,
                  effective January 1, 1998
 
    *10(n)-2      Amendment No. 1 to said Supplemental Executive Retirement
                  Plan, effective September 1, 1998
 
     10(o)-1      Amended and Restated Incentive Compensation Plan, effective
                  January 1, 1995 (Exhibit D to Proxy Statement of PP&L and
                  Prospectus of Resources, dated March 9, 1995)

     10(o)-2   -  Amendment No. 1 to said Amended and Restated Incentive
                  Compensation Plan, effective April 27, 1995 (Exhibit 10(m)-2
                  to PP&L's Form 10-K Report (File No. 1-905) for the year ended
                  December 31, 1995)

     10(o)-3   -  Amendment No. 2 to said Amended and Restated Incentive
                  Compensation Plan, effective January 1, 1996 (Exhibit 10(o)-3
                  to PP&L's Form 10-K Report (File No. 1-905) for the year ended
                  December 31, 1996)


<PAGE>

    10(o)-4   -   Amendment No. 3 to said Amended and Restated Incentive
                  Compensation Plan, effective January 1, 1997 (Exhibit 10(o)-4
                  to PP&L, Inc.'s Form 10-K Report (File No. 1-905) for the year
                  ended December 31, 1996)

    10(p)     -   Description of Executive Incentive Compensation Award Program
                  (Exhibit 10(p) to PP&L's Form 10-K Report (File No. 1-905) for
                  the year ended December 31, 1996)/1/

   *10(q)     -   Terry H. Hunt Employment Agreement, dated as of October 1,
                  1998, among PP&L Resources, Inc., Terry H. Hunt and Penn Fuel
                  Gas, Inc.

    10(r)     -   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(s)     -   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(t)-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(t)-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(u)-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) 
- -------------------
/1/ This description is provided pursuant to 17 C.F.R.(S)229.601(b)(10)(iii)(A).


<PAGE>
 
     10(u)-2   -    Equity Contribution Agreement among PP&L Resources, Inc.,
                    PP&L Global, Inc. and Portland General Electric Company
                    (Exhibit 10(d) to PP&L's Form 10-Q Report (File No. 1-905)
                    for the quarter ended September 30, 1998)

     10(v)-1   -    Asset Purchase Agreement between PP&L Global, Inc. and Puget
                    Sound Energy, Inc. (Exhibit 10(e) to PP&L's Form 10-Q Report
                    (File No. 1-905) for the quarter ended September 30, 1998)

     10(v)-2   -    Equity contribution Agreement among PP&L Resources, Inc.,
                    PP&L Global, Inc. and Puget Sound Energy, Inc. (Exhibit
                    10(f) to PP&L's Form 10-Q Report (File No. 1-905) for the
                    quarter ended September 30, 1998)

     *10(w)-1  -    Asset Purchase Agreement, dated as of September 25, 1998
                    among PP&L Global, Inc., Penobscot Hydro Co., Inc., and
                    Bangor Hydro-Electric Company

     *10(w)-2  -    Equity Contribution Agreement, dated as of September 25,
                    1998, among PP&L Global, Inc., PP&L Resources, Inc.,
                    Penobscot Hydro Co., Inc. and Bangor Hydro-Electric Company

     *12(a)    -    PP&L Resources, Inc. and Subsidiaries Computation of Ratio
                    of Earnings to Fixed Charges
 
     *23       -    Consent of PricewaterhouseCoopers LLP
 
     *24       -    Power of Attorney
 
     *27       -    Financial Data Schedule
 


<PAGE>
 
                                                                  Exhibit 4(a)_1


                                      PP&L



                         EMPLOYEE STOCK OWNERSHIP PLAN

                           EFFECTIVE JANUARY 1, 1975



                                                            Amended and Restated
                                                       Effective January 1, 1998
<PAGE>
 
                                      PP&L


                         EMPLOYEE STOCK OWNERSHIP PLAN

                           EFFECTIVE JANUARY 1, 1975

                               TABLE OF CONTENTS
                               -----------------

ARTICLE                                                                  PAGE
- -------                                                                  ----
     I.   PURPOSE....................................................... I-1
 
     II.  DEFINITIONS................................................... II-1
 
          2.1  Account.................................................. II-1
          2.2  Additional Investment Credit............................. II-1
          2.3  Affiliated Company or Affiliated Companies............... II-1
          2.4  Average Contribution Percentage.......................... II-1
          2.5  Board of Directors....................................... II-2
          2.6  Code..................................................... II-2
          2.7  Compensation............................................. II-2
          2.8  Contribution Percentage.................................. II-3
          2.9  Credited Service......................................... II-3
         2.10  Deferred Savings Plan.................................... II-4
         2.11  Dividend-based Contribution.............................. II-4
         2.12  Effective Date........................................... II-4
         2.13  Eligible Employee........................................ II-4
         2.14  Employee................................................. II-4
         2.15  Employee Benefit Plan Board.............................. II-4
         2.16  Employee Savings Plan.................................... II-4
         2.17  ERISA.................................................... II-5
         2.18  Fund..................................................... II-5
         2.19  Highly Compensated Eligible Employee..................... II-5
         2.20  Hour of Service.......................................... II-6
         2.21  Limitation Year.......................................... II-7
         2.22  Matching Contributions................................... II-7
         2.23  Market Value............................................. II-7
         2.24  Officer.................................................. II-7
         2.25  Participant.............................................. II-7
         2.26  PAYSOP Contributions..................................... II-7 

                                       i
<PAGE>
 
         2.27  Plan..................................................... II-8
         2.28  Plan Year................................................ II-8
         2.29  PP&L..................................................... II-8
         2.30  Qualified Military Service............................... II-8
         2.31  Resources................................................ II-8
         2.32  Retirement Plan.......................................... II-8
         2.33  Returning Veteran........................................ II-8
         2.34  Spouse................................................... II-8
         2.35  Stock.................................................... II-8
         2.36  Total Disability......................................... II-8
         2.37  TRASOP Contributions..................................... II-8
         2.38  Trust or Trust Agreement................................. II-9
         2.39  Trustee.................................................. II-9
         2.40  Uniformed Services....................................... II-9
         2.41  Valuation Date........................................... II-9
 
   III.  ELIGIBILITY.................................................... III-1
 
         3.1  Eligibility............................................... III-1
         3.2  Participation............................................. III-2
         3.3  Reemployment after Break of Service....................... III-2
         3.4  Officers, Directors, and Shareholders..................... III-2
         3.5  Rights Affected........................................... III-2
         3.6  Data...................................................... III-2
 
    IV.  CONTRIBUTIONS TO THE FUND...................................... IV-1
 
         4.1  TRASOP Contributions...................................... IV-1
         4.2  Matching Contributions.................................... IV-3
         4.3  PAYSOP Contributions...................................... IV-4
         4.4  Dividend-based Contribution............................... IV-5
         4.5  Investment in Stock....................................... IV-5
         4.6  Limitation on Matching Contributions
              and TRASOP Contributions.................................. IV-5
         4.7  Prevention of Violation of Limitation
               on Matching Contributions and TRASOP
               Contributions............................................ IV-7
         4.8  Suspension of Matching Contributions...................... IV-9
 
     V.  ALLOCATION..................................................... V-1
 
         5.1  Accounts.................................................. V-1
         5.2  Allocation of Contributions............................... V-1
         5.3  Allocation of Earnings.................................... V-3

                                       ii
<PAGE>
 
         5.4  Special Allocation Rule................................... V-4
         5.5  Maximum Allocation........................................ V-4
 
    VI.  PARTICIPANTS' ACCOUNTS......................................... VI-1
 
         6.1  Accounts.................................................. VI-1
         6.2  Valuation................................................. VI-1
         6.3  Accounting for Allocations................................ VI-1

                                      iii
<PAGE>
 
   VII.  DISTRIBUTION.................................................... VII-1
 
         7.1  General.................................................... VII-1
         7.2  Death...................................................... VII-1
         7.3  Beneficiary Designation.................................... VII-1
         7.4  Disability................................................. VII-3
         7.5  Termination of Employment.................................. VII-3
         7.6  Valuation for Distribution................................. VII-4
         7.7  Timing of Distribution..................................... VII-4
         7.8  Mode of Distribution....................................... VII-5
         7.9  Withdrawals................................................ VII-6
         7.10 Optional Direct Transfer of 
              Eligible Rollover Distributions............................ VII-7
 
  VIII.  ADMINISTRATION.................................................. VIII-1
 
         8.1  Administration by Employee Benefit Plan
              Board...................................................... VIII-1
         8.2  Duties and Powers of Employee Benefit Plan Board........... VIII-2
         8.3  Reliance on Reports and Certificates....................... VIII-4
         8.4  Functions.................................................. VIII-4
         8.5  Indemnification of the Employee Benefit Plan Board......... VIII-4
         8.6  Allocation of Fiduciary Responsibilities................... VIII-5
 
         IX.  THE FUND................................................... IX-1
 
         9.1  Designation of Trustee..................................... IX-1
         9.2  Exclusive Benefit.......................................... IX-1
         9.3  No Interest in Fund........................................ IX-1
         9.4  Trustee.................................................... IX-1
         9.5  Expenses................................................... IX-1
 
     X.  AMENDMENT OR TERMINATION OF THE PLAN............................ X-1
 
         10.1  Amendment................................................. X-1
         10.2  Termination............................................... X-1
         10.3  Special Rule.............................................. X-2
         10.4  Merger.................................................... X-3

                                       iv
<PAGE>
 
    XI.  TOP HEAVY PROVISIONS............................................ XI-1
 
         11.1      General............................................... XI-1
         11.2      Definitions........................................... XI-1
           (a)     "Aggregation Group"................................... XI-1
           (b)     "Determination Date".................................. XI-2
           (c)     "Key Employee"........................................ XI-2
           (d)     "Key Employee Ratio".................................. XI-3
           (e)     "Non-Key Employee".................................... XI-5
           (f)     "Super Top Heavy Plan"................................ XI-5
           (g)     "Top Heavy Plan"...................................... XI-5
         11.3      Minimum Contributions for Non-Key
                   Employees............................................. XI-5 
         11.4      Social Security....................................... XI-7
         11.5      Adjustment to Maximum Allocation
                   Limitation............................................ XI-7
 
    XII. GENERAL PROVISIONS.............................................. XII-1
 
         12.1      No Employment Rights.................................. XII-1
         12.2      Source of Benefits.................................... XII-1
         12.3      Governing Law......................................... XII-1
         12.4      Spendthrift Clause.................................... XII-1
         12.5      Incapacity............................................ XII-2
         12.6      Gender and Number..................................... XII-3
         12.7      Voting or Tendering Shares............................ XII-3
         12.8      Use of Loan Proceeds.................................. XII-6
         12.9      Put Option............................................ XII-6
         12.10     Compliance with Rule 16b-3............................ XII-8
   
  XIII.  TREATMENT OF RETURNING VETERANS
   
         13.1      Applicability and Effective Date...................... XIII-1
         13.2      Eligibility to Participate............................ XIII-1
         13.3      Restoration of TRASOP, PAYSOP, and
                   Dividend-based Contributions.......................... XIII-1
         13.4      Restoration of Matching Contributions................. XIII-2
         13.5      Determination of Compensation......................... XIII-2
         13.6      Application of Certain Limitations.................... XIII-3
         13.7      Administrative Rules and Procedures................... XIII-3
 

                                       v
<PAGE>
 
         WHEREAS, PP&L, Inc. ("PP&L") adopted the PP&L Employee Stock Ownership
Plan, effective January 1, 1975, for certain of its employees; and

         WHEREAS, PP&Ldesires to amend and restate the PP&L Employee Stock
Ownership Plan;

         NOW, THEREFORE, effective January 1, 1998, except as may be provided to
the contrary herein, the PP&L Employee Stock Ownership Plan is continued,
amended and restated as hereinafter set forth:

                                   ARTICLE I
                                    PURPOSE
                                    -------

  1.1  The purpose of this Plan is (a) to provide for a portion of the present
and future capital needs of PP&L (b) to provide Employees some ownership of
stock of PP&L Resources, Inc., substantially in proportion to their relative
incomes, without requiring any reduction in pay or other employee benefits, or
the surrender of any other rights on the part of Employees, and (c) to invest
primarily in the stock of PP&L Resources, Inc.

                                      I-1
<PAGE>
 
                                   ARTICLE II
                                  DEFINITIONS
                                  -----------

  2.1  "ACCOUNT" shall mean the separate record maintained at the direction of
the Employee Benefit Plan Board which represents the individual interest of a
Participant in the Fund.
 
  2.2  "ADDITIONAL INVESTMENT CREDIT" shall mean that portion of the investment
tax credit provided for under the Code which is allowable as a tax credit by
reason of the fact that PP&L will make a contribution to the Plan equal in
amount thereto and shall include (a) the one percent (1%) additional investment
tax credit which is allowable without regard to Matching Contributions by
Participants and (b) the one-half percent (0.5%) additional investment tax
credit which is allowable if Matching Contributions are made by Participants.

  2.3  "AFFILIATED COMPANY" OR "AFFILIATED COMPANIES" shall mean (a) such
subsidiaries of PP&L (or companies under common control with PP&L) which would
qualify as includible corporations within the meaning of section 1563(a) of the
Code; (b) such trades or businesses under common control with PP&L, as
determined under section 414(c) of the Code; and (c) such members of an
affiliated service group, as determined under section 414(m) of the Code, of
which PP&L is a member. "50% AFFILIATED COMPANY" shall mean an Affiliated
Company, but with the phrase "more than 50%" substituted for the phrase "at
least 80%" of section 1563(a) of the Code.

  2.4  "AVERAGE CONTRIBUTION PERCENTAGE" shall mean for a specified group of
Eligible Employees for a Plan Year the average of the Contribution Percentages
for



                                     II-1
<PAGE>
 
such Eligible Employees for the Plan Year.

  2.5  "BOARD OF DIRECTORS" shall mean the Board of Directors of PP&L or the
Executive Committee of the Board of Directors with respect to any powers which
have been assigned thereto by the Board of Directors.

  2.6 "CODE" shall mean the Internal Revenue Code of 1986, as amended from time
to time or any predecessor or successor thereto.

  2.7  "COMPENSATION" shall mean the annual compensation received by an Employee
from PP&Las 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 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.

  2.8 "CONTRIBUTION PERCENTAGE" shall mean the ratio of (a) the sum of an
Eligible



                                     II-2
<PAGE>
 
Employee's Matching Contributions and TRASOP Contributions under section 4.1(b)
for the Plan Year, plus such other amounts required or (at the election of the
Employee Benefit Plan Board) permitted to be taken into account in accordance
with section 401(m) of the Code and governmental regulations thereunder,
including in the case of a Highly Compensated Eligible Employee, (1) any
employee contributions and employer matching contributions for the year under
any other qualified retirement plan maintained by PP&L or any Affiliated
Company, and (2) at the election of the Employee Benefit Plan Board, any portion
of the Eligible Employee's elective deferrals for the year under any other
qualified retirement plan maintained by PP&L or any Affiliated Company that may
be disregarded without causing such plan to fail to satisfy the requirements of
section 401(k)(3) of the Code, as adjusted in accordance with governmental
regulations for purposes of Section 4.6(b), to (b) the Eligible Employee's
compensation (as defined in section 414(s) of the Code, but subject to the
limitation of section 401(a)(17) of the Code) for the Plan Year.

  2.9   "CREDITED SERVICE" shall mean that portion of an Employee's employment
with PP&L and all Affiliated Companies which is used to calculate the Employee's
eligibility for participation and vesting status hereunder.

  2.10  "DEFERRED SAVINGS PLAN" shall mean the PP&L Deferred Savings Plan for
Managers  Compensation Plan Employees.
  
  2.11  "DIVIDEND-BASED CONTRIBUTION" shall mean the contribution made by PP&L
or Resources in accordance with Section 4.4.

  2.12  "EFFECTIVE DATE" shall mean January 1, 1998, the effective date of this



                                     II-3
<PAGE>
 
amended and restated Plan, except as provided to the contrary herein.  The Plan
was effective originally on January 1, 1975.

  2.13  "ELIGIBLE EMPLOYEE" shall mean an Employee who has satisfied the
eligibility requirements of Section 3.1.

  2.14  "EMPLOYEE" shall mean, effective November 6, 1997, any person
classified by PP&L as an employee of PP&L, 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 PP&Las independent contractors, regardless of
whether they are subsequently determined to be employees for employment tax or
any other purpose;

   (c)  persons classified by PP&L as leased employees, whether or not as
described in section 414(n) of the Code;

   (d)  persons classified by PP&L as specific professional employees,
cooperative associates, or college interns, as those terms are defined under
PP&L policy.

  2.15  "EMPLOYEE BENEFIT PLAN BOARD" shall mean the Board described in Article
VIII.

  2.16  "EMPLOYEE SAVINGS PLAN" shall mean the PP&L Employee Savings Plan.

  2.17  "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as it may be amended from time to time.

  2.18  "FUND" shall mean the separate fund established for this Plan,



                                     II-4
<PAGE>
 
administered under the Trust Agreement, out of which benefits payable under this
Plan shall be paid.

  2.19  "HIGHLY COMPENSATED ELIGIBLE EMPLOYEE" shall mean an Eligible Employee
who:

   (a)  is a five-percent owner, as defined in section 416(i) of the Code,
either for the current Plan Year or the immediately preceding Plan Year; or

   (b) (1)  received more than $80,000 (as indexed) in Compensation from PP&L or
an Affiliated Company in the immediately preceding Plan Year, and

       (2)  if so elected by PP&L, was among the top 20% of Employees of
PP&Land Affiliated Companies ranked by  Compensation (excluding Employees
described in section 414(q)(5) of the Code to the extent (A) permitted under the
Code and regulations thereunder and (B) elected by the Employee Benefit Plan
Board, for purposes of identifying the number of  Employees in the top 20%).

     For purposes of this Section 2.20 "compensation" shall have the meaning set
forth in section 415(c)(3) of the Code, but including amounts that would be
excluded from an Employee's gross income under a plan described in section 125,
401(k) or 403(b) of the Code.

  2.20  "HOUR OF SERVICE" shall mean an hour for which:

   (a)  an employee is directly or indirectly paid or entitled to payment by
PP&L or an Affiliated Company for the performance of employment duties;

   (b)  back pay, irrespective of mitigation of damages, is either awarded or
agreed to; or



                                     II-5
<PAGE>
 
   (c)  an employee is directly or indirectly paid or entitled to payment by
PP&L or an Affiliated Company on account of a period of time during which no
duties are performed due to vacation, holiday, illness, incapacity (including
disability), layoff, jury duty, military duty, or leave of absence.

   There shall be excluded from the foregoing those periods during which
payments are made or due under a plan maintained solely for the purpose of
complying with applicable workers' for the compensation, unemployment
compensation or disability insurance laws.  No more than 501 Hours of Service
shall be credited under Subsection (c) on account of any single continuous
period during which no duties are performed except to the extent otherwise
provided in this Plan.  An Hour of Service shall not be credited where an
employee is being reimbursed solely for medical or medically related expenses.
An Hour of Service shall be credited in accordance with the rules set forth in
U.S. Department of Labor Reg.  (S)2530.200b-2(b) and (c).

   Hours of Service shall also be credited for any individual who is considered
a leased employee for purposes of this Plan under section 414(n) of the Code.

   Notwithstanding the foregoing, Hours of Service shall be credited for an
employee for whom no records of hours are maintained on the basis of 45 Hours of
Service for each week of employment.

  2.21 "LIMITATION YEAR" shall mean the Plan Year or such other twelve-
consecutive-month period as may be designated by PP&L.

  2.22 "MATCHING CONTRIBUTIONS" shall mean the contributions made by
Participants in accordance with Section 4.2.



                                     II-6

                                     
<PAGE>
 
  2.23  "MARKET VALUE" shall mean, with respect to the Stock the average of the
closing prices of the Stock based on consolidated trading as defined by the
Consolidated Tape Association and reported as part of the consolidated trading
prices of New York Stock Exchange listed securities for the twenty consecutive
trading days immediately preceding the date on which the Stock is contributed to
the Plan.

  2.24  "OFFICER" shall mean those persons who are defined as officers in Rule
16a-1(f) promulgated under the Securities Exchange Act of 1934.

  2.25  "PARTICIPANT" shall mean an Employee entitled to participate in this
Plan under Article III hereof or any former Employee for whom an Account is
maintained under the Plan.

  2.26  "PAYSOP CONTRIBUTIONS" shall mean the contributions made by PP&L in
accordance with Section 4.3.

  2.27 "PLAN" shall mean the PP&L Employee Stock Ownership Plan, an employee
stock ownership plan within the meaning of section 4975(e)(7) of the Code, as
set forth herein and as hereafter amended from time to time.

  2.28  "PLAN YEAR" shall mean the fiscal year of PP&L, which shall commence
each January 1 and end on the next following December 31.

  2.29  "PP&L" shall mean PP&L, Inc. and its successors.

  2.30  "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 PP&L with respect to such service.

  2.31  "RESOURCES" shall mean PP&L Resources, Inc. and its successors.



                                     II-7

                                     
<PAGE>
 
  2.32  "RETIREMENT PLAN" shall mean the PP&L Retirement Plan.

  2.33 "RETURNING VETERAN" means a former Employee who on or after December 12,
1994, returns from Qualified Military Service to employment by PP&L within the
period of time during which his reemployment rights are protected by law.

  2.34  "SPOUSE" shall mean the person to whom a Participant is married on any
date of reference.

  2.35  "STOCK" shall mean the common stock of Resources.

  2.36  "TOTAL DISABILITY" shall mean a disability of a nature which renders a
Participant eligible to participate in PP&L's Long Term Disability Plan.

  2.37  "TRASOP CONTRIBUTIONS" shall mean the contributions made by PP&L in
accordance with Sections 4.1(a) and 4.1(b).

  2.38  "TRUST" or "TRUST AGREEMENT" shall mean the Agreement and Declaration
of Trust, if any, executed under this Plan.

  2.39  "TRUSTEE" shall mean the corporate Trustee or one or more individuals
collectively appointed and acting under the Trust Agreement, if any.

  2.40 "UNIFORMED SERVICES" means the Armed Forces, the Army National Guard and
Air National Guard (when engaged in active duty for training, inactive duty
training, or full-time National Guard duty), the commissioned corps of the
Public Health Service, and any other category of persons designated by the
President of the United States in time of war or emergency.

  2.41  "VALUATION DATE" shall mean the last day of each Plan Year and each
interim date on which a valuation of the Fund is made.



                                     II-8

                                     
<PAGE>
 
                                  ARTICLE III
                                  ELIGIBILITY
                                  -----------
  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 PP&L 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.

  3.2  PARTICIPATION. A Participant shall share in contributions under Article V
for any Plan Year during which he (a) completes at least one Hour of Service and
(b) 




                                     III-1

                                    
<PAGE>
 
receives Compensation. A Participant shall cease to be a Participant on the date
on which his entire Account is distributed to him. Notwithstanding the
foregoing, for Plan Year 1990, any Participant who is totally and permanently
disabled shall share in contributions under Article V.

  3.3 REEMPLOYMENT AFTER BREAK OF SERVICE. In the event a Participant ceases to
be an Employee and subsequently again becomes an Employee, he shall be
readmitted as a Participant as of the date of his reemployment.

  3.4 OFFICERS, DIRECTORS, AND SHAREHOLDERS. Officers, directors, and
shareholders of PP&L who are Participants shall participate in the Plan on the
same basis as other Participants.

  3.5 RIGHTS AFFECTED. Except as expressly provided to the contrary in the Plan,
any former Employee who has retired or whose employment has terminated before
the Effective Date shall receive no additional rights as a result of this
amended and restated Plan, but shall have his rights and benefits determined
solely under the Plan as it existed prior to the Effective Date. However, any
former Employee who has terminated employment and who is reemployed as an
Employee after the Effective Date shall have the rights and benefits provided
hereunder.

  3.6 DATA. Each Participant shall furnish to the Employee Benefit Plan Board
such data as may be considered necessary by the Employee Benefit Plan Board for
the determination of his rights and benefits under the Plan.





                                     III-2

                                     
<PAGE>
 
                                  ARTICLE IV
                           CONTRIBUTIONS TO THE FUND
                           -------------------------

  4.1  TRASOP CONTRIBUTIONS.

  (a) With respect to each Plan Year, PP&L shall contribute to the Plan an
amount equal to the one percent (1%) Additional Investment Credit claimed on its
United States corporation income tax return for such Plan Year which is
allowable without regard to whether Matching Contributions are made by
Participants.

  (b) Commencing with the 1977 Plan Year, PP&L shall also contribute, with
respect to each Plan Year, an amount equal to the one-half percent (0.5%)
Additional Investment Credit claimed on its United States corporation income tax
return for such Plan Year which is allowable if Matching Contributions are made
by Participants.

  (c) Contributions pursuant to this Section 4.1 shall be made within 30 days
following the due date (including extensions of time) for filing PP&L's United
States corporation income tax return for such Plan Year; provided, however, that
if the Additional Investment Credit cannot be utilized in such Plan Year and
results in a carryover to future years, the contribution with respect to the
Additional Investment Credit carried over may be made no later than 30 days
after the due date (including extensions of time) for filing PP&L's federal
corporation income tax return for the Plan Year to which such Additional
Investment Credit is carried over.

  (d) If PP&L is subsequently determined to be entitled to an Additional
Investment Credit for any Plan Year that is larger than that claimed, PP&L shall
contribute, with respect to such Plan Year, an amount equal to the increase in
the 



                                     IV-1

                                     
<PAGE>
 
Additional Investment Credit within 30 days of the date such determination
becomes final.

   (e) If PP&L is subsequently determined to be entitled to an Additional
Investment Credit that is less than that claimed, or if any Additional
Investment Credit is recaptured, PP&L may reduce its contributions for the Plan
Year (or any succeeding Plan Year) in which such determination or recapture
becomes final by the amount of the reduction in, or recapture of, the Additional
Investment Credit.

   (f) If the aggregate total amount of Matching Contributions by Participants
with respect to a Plan Year, determined no later than the close of the second
Plan Year following such Plan Year, is less than the aggregate total amount of
PP&L's TRASOP Contributions under Section 4.1(b) with respect to such Plan Year,
the excess of such TRASOP Contributions over Matching Contributions may be
withdrawn from the Plan by PP&L.

   (g) Notwithstanding the foregoing, PP&L shall not be under any obligation to
make any TRASOP Contributions under the Plan with respect to any Plan Year in
which it is not entitled to an Additional Investment Credit equal to the amount
of such TRASOP Contributions.

   4.2   MATCHING CONTRIBUTIONS.

   (a) Commencing with the 1977 Plan Year, a Participant may elect to make
Matching Contributions on a prospective basis, subject to Sections 4.6, 4.7 and
4.8. Such election shall be made on a form prescribed by the Employee Benefit
Plan Board and shall specifically designate that the contributions are intended



                                     IV-2

                                     
<PAGE>
 
to be matched by TRASOP Contributions made by PP&L under Section 4.1(b).

   (b) The amount that a Participant may contribute as a Matching Contribution
with respect to a Plan Year shall be determined by the Employee Benefit Plan
Board, subject to Sections 4.6, 4.7 and 4.8.  Initially, the amount which may be
contributed by each Participant shall bear the same proportion to the total
amount which may be contributed under this Section 4.2 as the amount of
Compensation paid to such Participant bears to the total Compensation paid to
all Participants during such Plan Year.  If all Participants do not elect to, or
fail to, contribute the maximum amount permitted, the Employee Benefit Plan
Board may permit other Participants to elect to increase their contributions
proportionately.

   (c) Matching Contributions by Participants may be made by payroll deductions
or in cash and shall be made no later than the close of the second Plan Year
following the Plan Year with respect to which they are made; provided, however,
if PP&L is determined to be entitled to an Additional Investment Credit that is
larger than that claimed, additional Matching Contributions may be made by
Participants who are still Employees no later than the second Plan Year
following the Plan Year in which such determination becomes final.  All Matching
Contributions shall be invested in Stock each month.  The Employee Benefit Plan
Board may prescribe such rules and regulations with respect to Matching
Contributions by Participants as it deems desirable.

   (d) If the aggregate total amount of Matching Contributions by Participants
with respect to a Plan Year, determined as of the close of the second Plan Year



                                     IV-3

                                     
<PAGE>
 
following such Plan Year, is greater than the aggregate total amount of PP&L's
TRASOP Contributions under Section 4.1(b) with respect to such Plan Year, each
Participant's proportionate share of such excess shall be returned to him.

   (e) Any election by an Officer to make Matching Contributions must be made
not less than six months prior to the allocation of such Matching Contributions
to such Officers' account and such election shall be irrevocable.

   4.3 PAYSOP CONTRIBUTIONS.

   (a) For each Plan Year for which a tax credit is allowed under the Code, PP&L
may contribute to the Fund an amount up to one-half percent (0.5%) of the
Compensation of all Participants for such Plan Year.  Such amount shall be paid
within 30 days following the due date (including extensions of time) for filing
PP&L's federal corporation income tax return for such Plan Year.

   (b) All PAYSOP Contributions shall remain in the Plan, as allocated, even
though all or a part of the employee stock ownership credit for which such
contributions may qualify under section 41 of the Code is redetermined.

   4.4 DIVIDEND-BASED CONTRIBUTION. Commencing with the 1990 Plan Year, PP&L 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 are expressly conditioned
upon their deductibility for federal income tax purposes.



                                     IV-4

                                   
<PAGE>
 
   4.5 INVESTMENT IN STOCK.  All TRASOP, PAYSOP, Dividend-based, and Matching
Contributions may be in cash or in Stock; provided, however, that (a) if a
Contribution is in cash, the Trustee shall use such Contribution to purchase
Stock from Resources or others on or before the last day on which the
Contribution could have been made under Section 4.1(c) and (b) if a Contribution
is in Stock, the number of shares contributed will be determined by the Market
Value of the Stock.

   4.6 LIMITATION ON MATCHING CONTRIBUTIONS AND TRASOP CONTRIBUTIONS.
   (a) For any Plan Year, the Average Contribution Percentage for the Highly
Compensated Eligible Employees shall not exceed the greater of (1) or (2) as
follows:

         (1) The Average Contribution Percentage for all other Eligible
Employees, multiplied by one hundred twenty-five percent (125%); or

         (2) The Average Contribution Percentage for all other Eligible
Employees, multiplied by two hundred percent (200%); provided, however, the
Average Contribution Percentage for the Highly Compensated Eligible Employees
may not exceed the Average Contribution Percentage for all other Eligible
Employees by more than two percentage points.

   (b) Effective January 1, 1989, for any Plan Year in which a Participant in
this Plan is also a participant in any other qualified retirement plan
maintained by PP&L or any Affiliated Company under which the Participant makes
elective deferrals, the sum of the actual deferral percentage (as defined in
section 401(k)(3)(B) of the Code and regulations thereunder) and the Average
Contribution Percentage for the Highly Compensated Eligible Employees shall not
exceed the sum of:



                                     IV-5

                                      
<PAGE>
 
         (1) One hundred twenty-five percent (125%) multiplied by the greater of
the actual deferral percentage or the Average Contribution Percentage for all
other Eligible Employees; plus

         (2) The lesser of

             (A) Two hundred percent (200%) multiplied by the lesser of the
actual deferral percentage or the Average Contribution Percentage for all other
Eligible Employees; or

             (B) Two (2) percentage points plus the lesser of the actual
deferral percentage or the Average Contribution Percentage for all other
Eligible Employees.

   (c) The application of this Section 4.6 shall satisfy such other requirements
as may be prescribed by the Secretary of the Treasury.

   4.7 PREVENTION OF VIOLATION OF LIMITATION ON MATCHING CONTRIBUTIONS AND
TRASOP CONTRIBUTIONS.  The Employee Benefit Plan Board shall monitor the level
of Participants' Matching Contributions and TRASOP Contributions under Section
4.1(b) and elective deferrals, employee contributions, and employer matching
contributions under any other qualified retirement plan maintained by PP&L or
any Affiliated Company to ensure against exceeding the limitations of Section
4.6 for any Plan Year.  If the Employee Benefit Plan Board determines that the
limitations of Section 4.6 may be or have been exceeded, it shall take the
appropriate following actions for such Plan Year:

   (a) The Average Contribution Percentage for the Highly Compensated Eligible



                                     IV-6

                                     
<PAGE>
 
Employees shall be reduced to the extent necessary to satisfy at least one of
the tests in Section 4.6(a) and the test in Section 4.6(b).

   (b) The reduction shall be accomplished by reducing the maximum Contribution
Percentage for any Highly Compensated Eligible Employee to an adjusted maximum
Contribution Percentage, which shall be the highest Contribution Percentage that
would cause one of the tests in Section 4.6(a) and the test in Section 4.6(b) to
be satisfied, if each Highly Compensated Eligible Employee with a higher
Contribution Percentage had instead the adjusted maximum Contribution
Percentage, reducing the Highly Compensated Eligible Employees' Matching
Contributions, TRASOP Contributions under Section 4.1(b), and employee
contributions and employer matching contributions under any other qualified
retirement plan maintained by PP&L or any Affiliated Company in order of
priority based on the dollar amount of each Eligible Highly Compensated
Employee's Matching Contributions and TRASOP Contributions, beginning with the
Highly Compensated Eligible Employee(s) with the highest dollar amount of
Matching Contributions and TRASOP Contributions.

   (c) (1)  To the extent practicable, the Employee Benefit Plan Board shall
prospectively limit a Highly Compensated Eligible Employee's (A) voluntary
employee contributions under the Employee Savings Plan, (B) voluntary employee
contributions under the Deferred Savings Plan and (C) Matching Contributions to
reduce his Contribution Percentage to his adjusted maximum Contribution
Percentage.

         (2) In addition, not later than two and one half months after the close
of the Plan Year for which such contributions were made, the remaining
difference 



                                     IV-7

                                     
<PAGE>
 
between a Highly Compensated Eligible Employee's Contribution Percentage and the
Highly Compensated Eligible Employee's adjusted maximum contribution Percentage,
with earnings attributable thereto, shall be paid to the Highly Compensated
Eligible Employee; provided, however, that, for any Participant who is also a
Participant in any other qualified retirement plan maintained by PP&L or any
Affiliated Company under which the Participant makes elective deferrals or
employee contributions or is credited with employer matching contributions for
such year, the Employee Benefit Plan Board shall coordinate corrective actions
under this Plan and such other plan for the year.

   4.8 SUSPENSION OF MATCHING CONTRIBUTIONS.  In the event that a Participant
takes a withdrawal from his salary reduction account under the Deferred Savings
Plan or the Employee Savings Plan prior to his attainment of age 59 1/2, the
Participant shall not be permitted to make any additional Matching Contributions
under this Plan for a period of twelve (12) months commencing on the date of his
receipt of the withdrawal.




                                     IV-8

                                     
<PAGE>
 
                                   ARTICLE V
                                  ALLOCATION
                                  ----------

   5.1   ACCOUNTS.  A separate Account shall be created for each Participant.
Separate subaccounts shall also be maintained with respect to the Stock acquired
with (a) TRASOP and PAYSOP Contributions, (b) Matching Contributions and (c)
Dividend-based Contributions.  Additional subaccounts may be established at the
Employee Benefit Plan Board's discretion.

   5.2   ALLOCATION OF CONTRIBUTIONS.  Contributions made for any Plan Year
shall be allocated among the Participants entitled to share in the allocation of
contributions pursuant to Section 3.2 in accordance with the following rules.

   (a)  All Stock acquired through TRASOP and PAYSOP Contributions made with
respect to a Plan Year under Sections 4.1(a) and 4.3(a) shall be allocated, as
of the close of such Plan Year, to the Account of each Participant (who was a
Participant at any time during such Plan Year).  The amount of such Stock
allocated to each Participant's Account shall bear the same proportion to the
total amount of such Stock allocated with respect to such Plan Year as the
amount of the Compensation paid to such Participant bears to the total
Compensation paid to all Participants during such Plan Year.

   (b)  Stock acquired through TRASOP Contributions made with respect to a Plan
Year under Section 4.1(b) and dividends thereon, shall be allocated, as of the
close of such Plan Year, to the Account of each Participant (who made Matching
Contributions for such Plan Year); such allocation shall be made no later than
the end 



                                      V-1

                                     
<PAGE>
 
of the second Plan Year following the Plan Year with respect to which such
Contributions were made. The amount of such Stock allocated to a Participant's
Account as provided by this Section 5.2(b) shall bear the same proportion to the
total amount of such Stock allocated with respect to such Plan Year as the
amount of Matching Contributions made by such Participant bears to the total
Matching Contributions made by all Participants with respect to such Plan Year.

   (c)  Stock acquired with Matching Contributions by Participants shall be
allocated to the Accounts of each Participant making such contributions.

   (d)  Subject to Section 5.2(e), Stock acquired with the Dividend-based
Contribution made with respect to a Plan Year shall be allocated, as of the
close of such Plan Year, as follows:

         (1) 75% of the Dividend-based Contribution shall be allocated to the
         Account of each Participant to whom or on whose behalf dividends were
         paid at any time during the portion of such Plan Year in which the
         Participant was an Employee.  The amount of such Stock allocated to
         each Participant's Account shall bear the same proportion to the total
         amount of such Stock allocated with respect to such Plan Year as the
         amount of dividends paid to such Participant during the portion of the
         Plan Year in which he was an Employee bears to the total amount of
         dividends paid to all Participants during the portion of such Plan Year
         in which they were Employees; and



                                      V-2

                                     
<PAGE>
 
         (2) 25% of the Dividend-based Contribution shall be allocated to the
         Account of each Participant who was a Participant at any time during
         such Plan Year.  The amount of such Stock allocated to each
         Participant's Account shall bear the same proportion to the total
         amount of such Stock allocated with respect to such Plan Year as the
         amount of the Compensation paid to such Participant bears to the total
         Compensation paid to all Participants during such Plan Year.

   (e) In the event the allocation under Section 5.2(d)(1) above for any Plan
Year discriminates in favor of the Highly Compensated Eligible Employees, as
determined under section 401(a)(4) of the Code and regulations thereunder, then
the percentage of the Dividend-based Contribution to be allocated under Section
5.2(d)(1) shall be decreased and the percentage to be allocated under Section
5.2(d)(2) shall be correspondingly increased until the allocation under Section
5.2(d)(1) no longer discriminates in favor of the Highly Compensated Eligible
Employees.

   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 or Resources.

   5.4   SPECIAL ALLOCATION RULE.

   (a)  The TRASOP and PAYSOP Contributions shall be allocated in accordance
with Section 5.2; however, no more than one-third of TRASOP and PAYSOP
Contributions 



                                      V-3

                                     
<PAGE>
 
with respect to a Plan Year may be allocated to the group of Employees
consisting of Highly Compensated Eligible Employees.

   (b)  No Participant may receive an allocation under the Dividend-based
Contribution provided for in Section 5.2(d) above which equals or exceeds 5% of
such Participant's Compensation for the Plan Year for which such allocation is
being made.

   5.5   MAXIMUM ALLOCATION.  The provisions of this Section shall be construed
to comply with section 415 of the Code.

   (a)  Notwithstanding anything in this Article to the contrary, in no event
shall the sum of (1) any PP&L 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.

   (b)  If the amount otherwise allocable to the accounts of a Participant would
exceed the amount described in Section 5.5(a) as a result of a reasonable error
in estimating the Participant's Compensation, the Employee Benefit Plan Board
shall determine which portion of such excess amount is attributable to the
Participant's (1) voluntary employee contributions under the Employee Savings
Plan, (2) voluntary 



                                      V-4

                                      
<PAGE>
 
employee contributions under the Deferred Savings Plan, (3) elective deferrals
under the Employee Savings Plan, (4) elective deferrals under the Deferred
Savings Plan, (5) Matching Contributions under Section 4.2, (6) Company
Contributions under the Deferred Savings Plan and (7) TRASOP, PAYSOP, or
Dividend-based Contributions under Article IV.

   (c)  Amounts attributable to voluntary employee contributions under the
Employee Savings Plan under Section 5.5(b)(1) and earnings thereon shall be
returned to the Participant.

   (d)  Amounts attributable to voluntary employee contributions under the
Deferred Savings Plan under Section 5.5(b)(2) and earnings thereon shall be
returned to the Participant.

   (e)  Amounts attributable to elective deferrals under the Employee Savings
Plan under Section 5.5(b)(3) shall be treated as voluntary employee
contributions and, along with earnings thereon, returned to the Participant.

   (f)  Amounts attributable to elective deferrals under the Deferred Savings
Plan under Section 5.5(b)(4) shall be treated as voluntary employee
contributions and, along with earnings thereon, returned to the Participant.

   (g)  Amounts attributable to a Participant's Matching Contributions under
Section 5.5(b)(5) and earnings thereon shall be returned to the Participant.

   (h)  Amounts attributable to Company Contributions under the Deferred Savings
Plan under Section 5.5(b)(6) will be held in a suspense account until the
following Plan Year at which time the amounts will be used to reduce Company
Contributions for the 



                                      V-5

                                     
<PAGE>
 
year.

   (i)  Amounts attributable to excess TRASOP, PAYSOP, or Dividend-based
Contributions under Section 5.5(b)(7) shall be allocated to the accounts of
other Participants in accordance with Section 5.2.  Any excess Contributions or
Stock purchased with such Contributions which cannot be allocated in a Plan Year
to Participants' Accounts shall be held in a suspense account until the Plan
Year in which it is first possible to allocate such Contributions or Stock to
Participants' Accounts.

   (j) (1)  If in any Limitation Year beginning before January 1, 2000, a
Participant in this Plan is also a participant in one or more qualified defined
benefit plans maintained by PP&L or any 50% Affiliated Company, the projected
annual benefit under such qualified defined benefit plan or plans shall be
reduced if necessary, so that the sum of the fractions described in (A) and (B)
does not exceed 1.0 for such Limitation Year:

          (A) DEFINED BENEFIT FRACTION - a fraction, the numerator of which is
the Participant's projected annual benefit under the defined benefit pension
plans in which he has participated, determined as of the close of the limitation
years of such plans, and the denominator of which is the lesser of: (i) 1.25 x
$90,000 or (ii) 140% of the Participant's highest average compensation over any
three consecutive calendar years.  For purposes of this Section, "projected
annual benefit" shall mean the annual benefit to which a participant would be
entitled under the terms of a qualified defined benefit plan if he had continued
employment until his normal retirement date under such plan and if his
compensation for the purpose of such plan continued at the same 



                                      V-6

                                     
<PAGE>
 
rate.

          (B) DEFINED CONTRIBUTION FRACTION  - A fraction, the numerator of
which is the sum of the annual additions to the Participant's accounts under all
defined contribution plans sponsored by PP&L or any 50% Affiliated Company for
all limitation years, and the denominator of which is the sum of the lesser of
the following amounts, determined for each of such Limitation Years and for each
prior limitation year of service with PP&L or 50% Affiliated Company: (i) 1.25 x
$30,000 or (ii) 35% of the Participant's compensation for such limitation year.

      (2) If the Plan and the defined benefit plan referred to in Subsection
(j)(1)(A) satisfied section 415 of the Code for the Limitation Year ended
December 31, 1986, an amount shall be subtracted from the numerator of the
fraction described in Subsection (j)(1)(B) (not exceeding such numerator). The
amount to be subtracted shall be the product of:

          (A) the sum of the defined contribution fraction under Subsection
(j)(1)(B) plus the defined benefit fraction under Subsection (j)(1)(A) as of
December 31, 1986, minus one, multiplied by

          (B) the denominator of the defined contribution plan fraction under
Subsection (j)(1)(B) as of December 31, 1986.

   (k)(1)  The dollar limitations described in Subsections (a) and (j) shall be
adjusted in accordance with governmental regulations prescribing the method and
amount of such adjustments.

         (2) The dollar limitations described in Subsections (a) and (j) shall
not 



                                      V-7

                                     
<PAGE>
 
reduce the annual additions to the Accounts of any Participant under the Plan
prior to the Effective Date using the applicable maximum dollar limitations then
in effect.

   (l) (1)  To the extent that any qualified defined contribution was in
existence on July 1, 1982, the Employee Benefit Plan Board may elect to apply
Subsection (j)(1)(B) with respect to any Plan Year ending after December 31,
1982, by calculating the denominator under Subsection (j)(1)(B) for all Plan
Years ending before January 1, 1983.  The alternate amount shall be equal to the
amount determined for the denominator under Subsection (j)(1)(B) as in effect
for the Plan Year ending in 1982, multiplied by the "transition fraction."

         (2) The transition fraction shall be a fraction determined as follows:

          (A) The numerator shall consist of the lesser of: (i) $51,875, or (ii)
thirty-five percent (35%) of the Participant's compensation for the Plan Year
ending in 1981.

          (B) The denominator shall consist of the lesser of: (i) $41,500, or
(ii) twenty-five percent (25%) of the Participant's compensation for the Plan
Year ending in 1981.

   (m)  For the purpose of this Section 5.5, "compensation" shall be defined in
accordance with section 415(c)(3) of the Code and regulations thereunder so
that, for years beginning on or after January 1, 1998, "compensation" shall also
include amounts excluded from gross income under sections 125, 402(e)(3),
402(h)(1)(B) or 403(b).



                                      V-8

                                      
<PAGE>
 
                                  ARTICLE VI
                            PARTICIPANTS' ACCOUNTS
                            ----------------------

   6.1   ACCOUNTS. All contributions and earnings thereon may be invested in one
commingled Fund for the benefit of all Participants.  However, in order that the
interest of each Participant may be accurately determined and computed, a
separate Account shall be maintained for each Participant which shall represent
his interest in the Fund.

   6.2   VALUATION.  The value of each investment medium in the Fund shall be
computed by the Trustee as of the close of business on each Valuation Date on
the basis of the fair market value of all assets of the Fund.

   6.3   ACCOUNTING FOR ALLOCATIONS.  The Employee Benefit Plan Board shall
provide for the establishment of accounting procedures for the purpose of making
the allocations, valuations and adjustments to Participants' Accounts provided
for in this Article.  From time to time, such procedures may be modified for the
purpose of achieving equitable and nondiscriminatory allocations among the
Accounts of Participants in accordance with the general concepts of the Plan and
the provisions of this Article.



                                     VI-1

                                     
<PAGE>
 
                                  ARTICLE VII
                                 DISTRIBUTION
                                 ------------

   7.1   GENERAL.  The interest of each Participant in the Fund shall be
distributed in the manner, in the amount and at the time provided in this
Article, except that in the event of termination of the Plan the provisions of
Article X shall govern.  Each Participant shall have a nonforfeitable right to
all Stock allocated to his Account, except as set forth in Sections 4.1(f),
4.7(c) and 5.5.  The provisions of this Article shall be construed in accordance
with section 401(a)(9) of the Code and regulations thereunder.

   7.2   DEATH. If a Participant dies either while in the employment of PP&L 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.

   7.3   BENEFICIARY DESIGNATION.

   (a) Death benefits under the Plan shall be paid to the  surviving Spouse of a
Participant, including the Spouse of a Participant who has retired or whose
employment has terminated before the Effective Date, (1) unless (A) such Spouse
consents in writing not to receive such benefit and consents to the specific
beneficiary designated by the Participant, (B) such consent acknowledges its own
effect, and (C) such consent is witnessed by a Plan representative or notary
public; or (2) unless the Participant establishes to the satisfaction of a Plan
representative either that he has no Spouse, that his Spouse cannot be located,
or that his Spouse's 






                                     VII-1

                                     
<PAGE>
 
consent is not required under such other circumstances as are prescribed under
governmental regulations.

   (b) Except as provided in this Section, each Participant shall have the
unrestricted right at any time to designate the beneficiary or beneficiaries who
shall receive, upon or after his death, his interest in the Fund by executing
and filing with the Employee Benefit Plan Board a written instrument in such
form as may be prescribed by the Employee Benefit Plan Board for that purpose.
Except as provided in this Section, the Participant shall have the unrestricted
right to revoke and to change, at any time and from time to time, any
beneficiaries previously designated by him by executing and filing with the
Employee Benefit Plan Board a written instrument in such form as may be
prescribed by the Employee Benefit Plan Board for that purpose.  No designation,
revocation or change of beneficiaries shall be valid and effective unless and
until filed with the Employee Benefit Plan Board.

   If no designation is made, or if the beneficiaries named in such designation
predecease the Participant, or if the beneficiary cannot be located by the
Employee Benefit Plan Board, the interest of the deceased Participant shall be
paid to the surviving spouse or if none, to the Participant's estate.

   The amount payable upon the death of a Participant shall be paid in Stock or
cash as elected by the recipients.

   7.4   DISABILITY.

   (a)  If a Participant suffers a Total Disability prior to his termination of
employment with PP&L and all Affiliated Companies and is on inactive status on
account of such 



                                     VII-2
<PAGE>
 
Total Disability, the full amount of his interest in the Fund shall be paid to
him or applied for his benefit upon Participant's consent in writing to such
payment or application following the determination of his Total Disability in
accordance with the provisions of this Article VII.

   (b) Total Disability shall be determined by the Employee Benefit Plan Board
which may consult with a medical examiner selected by it.  The medical examiner
shall have the right to make such physical examinations and other investigations
as may be reasonably required to determine Total Disability.

   7.5   TERMINATION OF EMPLOYMENT.  Upon a Participant's retirement or other
termination of employment with PP&L and all Affiliated Companies, he shall be
entitled to receive his interest in the Fund.  Subject to Subsection 7.7(b), (a)
if the value of his interest in the Fund exceeds, or exceeded at the time of any
prior distribution, $5,000, his interest shall not be paid to him or applied for
his benefit until (1) he consents in writing to such payment or application, or
(2) he attains his 65th birthday or (3) he dies; whichever occurs first; (b)
otherwise, his interest shall be paid to him or applied for his benefit in a
single sum within 60 days after such termination takes place.

   7.6   VALUATION FOR DISTRIBUTION.  For the purposes of paying the amounts to
be distributed to a Participant or his beneficiaries under the provisions of
this Article, the value of the Fund and the amount of the Participant's interest
shall be determined in accordance with the provisions of Article VI as of the
Valuation Date coincident with or next following the event which gives rise to a
payment under this Article.  There 




                                     VII-3
<PAGE>
 
shall be added to such amount the additional contributions, if any, which are to
be allocated to the Participant's Account pursuant to Article IV.

   7.7   TIMING OF DISTRIBUTION.

   (a)  Subject to Subsection (b), a Participant entitled to receive benefits
under this Article shall commence to receive benefits as soon as
administratively practicable, but in no event shall any Participant receive
benefits later than the earliest of the dates determined under (1), (2) or (3)
below:

         (1)  the 60th day after the close of the Plan Year in which occurs the
later of (A) the Participant's attainment of age 65 or (B) the Participant's
termination of employment with PP&L and all Affiliated Companies;

         (2) the April 1st after the end of the calendar year in which occurs
the Participant's attainment of age 70 1/2; or

         (3) in the event of the Participant's death, December 31 of the
calendar year following the year of the Participant's death.

   (b) A Participant who terminates employment with PP&L 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).

   (c) The Employee Benefit Plan Board shall supply to each Participant who is
entitled to distribution before his death or attainment of age 65 and the value
of whose Account exceeds, or exceeded at the time of any prior distribution,
$5,000, written information relating to his right to defer distribution under
Section 7.4, 7.5 or 



                                     VII-4
<PAGE>
 
7.7(b). Such notice shall be furnished not less than 30 days nor more than 90
days prior to the Participant's benefit commencement date, except that such
notice may be furnished less than 30 days prior to the Participant's benefit
commencement date if (1) the Employee Benefit Plan Board informs the Participant
that the Participant has the right to a period of at least 30 days after
receiving such notice to consider the decision whether to elect a distribution,
and the mode in which he desires such distribution to be made, and (2) the
Participant, after receiving such notice, affirmatively elects a distribution.

   7.8   MODE OF DISTRIBUTION.  The sole form of benefit under Sections 7.2, 7.4
and 7.5 shall be a single sum payment.  Any additional Stock which is
subsequently allocated to the Participant's Account shall be distributed within
60 days following the date on which such allocation is actually made.  At the
election of the Participant, all distributions will be either in cash or 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, if the
Stock is not sold.

   7.9   WITHDRAWALS.

   (a) A Participant may, by filing a written election with the Employee Benefit
Plan Board, withdraw from his Account all Stock which has been allocated with
respect to a Plan Year ending at least 84 months prior to the end of the Plan
Year in which such election was made.  The number of shares eligible for
withdrawal during a Plan Year will be determined on or before October 1 of the
preceding Plan Year.  Elections must be received by the first day of March,
June, September or December 


                                     VII-5
<PAGE>
 
of the year in which the withdrawal is made. Payments of withdrawals under this
Subsection 7.9(a) will be made within 60 days following the end of the quarter
for which the election is made.

   (b)(1)  Any Participant who has completed at least ten years of participation
in the Plan and attained age 55 may elect within 90 days after the close of each
Plan Year in the election period (as defined in Subsection (b)(2) below) to
withdraw 25% of his Account attributable to Stock acquired by or contributed to
the Plan on or after the Effective Date to the extent such portion of his
Account exceeds the sum of (A) the amount to which a prior election under this
Subsection applies and (B) any amount withdrawn under Subsection (a) pursuant to
an election made within 90 days after the close of any Plan Year in the election
period.  In the case of a Participant's final election, "50%" shall be
substituted for "25%" in the preceding sentence to determine the amount the
Participant may withdraw.  The determination of the date on which Stock is
acquired by or contributed to the Plan shall be made in accordance with section
401(a)(28) of the Code and regulations thereunder.

         (2) The election period for purposes of this Subsection is the six Plan
Year period that begins with the Plan Year in which occurs the later of (A) the
Participant's attainment of age 55 or (B) the first Plan Year in which the
Participant has completed ten years of participation, except that the election
period shall not begin before the Effective Date.

         (3) Payments of withdrawals under this Subsection 7.9(b) will be made
within 90 days following the end of the 90-day period during which the



                                     VII-6
<PAGE>
 
withdrawal election is made.

   (c) Notwithstanding the provisions of Section 7.9(a) and (b) above, Officers
may not withdraw any Stock which has been in the Plan less than six months.  Any
election by an Officer to make a withdrawal pursuant to this Section 7.9 must be
made not less than six months prior to the date of the withdrawal and such
election shall be irrevocable.

   7.10  OPTIONAL DIRECT TRANSFER OF ELIGIBLE ROLLOVER DISTRIBUTIONS.

   (a) Except to the extent otherwise provided by section 401(a)(31) of the Code
and regulations thereunder, a Participant or an alternate payee under a
Qualified Domestic Relations Order who is the spouse or former spouse of a
Participant, entitled to receive a withdrawal or distribution from the Plan may
elect to have the Trustee transfer all or a portion of the amount to be
distributed directly to:

         (1) an individual retirement account described in section 408(a) of the
Code,

         (2) an individual retirement annuity described in section 408(b) of the
Code (other than an endowment contract),

         (3) a qualified defined contribution retirement plan described in
section 401(a) of the Code, the terms of which permit the acceptance of rollover
contributions from this Plan, or

         (4) an annuity plan described in section 403(a), the terms of which
permit the acceptance of rollover contributions from this Plan.

A beneficiary entitled to receive a distribution from the Plan who is the spouse
of a



 
                                     VII-7
<PAGE>
 
Participant shall have the right to transfer all or a portion of the amount to
be distributed directly to a section 408(a) or 408(b) plan described in
Subsections (a)(1) and (a)(2) above.

   (b) the Participant or beneficiary must specify the name of the plan to which
the amount is to be transferred, on a form and in a manner prescribed by the
Employee Benefit Plan Board.

   (c) Subsection (a) shall not apply to the following distributions:

         (1) any distribution of Matching Contributions,

         (2) any distribution which is one of a series of substantially equal
installments over either (1) a period of ten (10) years or more, or (2) a period
equal to the life or life expectancy of the Participant or the joint lives or
life expectancy of the Participant and his beneficiary,

         (3) that portion of any distribution after the Participant's Required
Beginning Date that is required to be distributed to the Participant by the
minimum distribution rules of section 401(a)(9) of the Code, or

         (4) such other distributions as may be exempted by applicable statute
or regulation from the requirements of section 401(a)(31) of the Code.




                                     VII-8
<PAGE>
 
                                  ARTICLE VIII
                                 ADMINISTRATION
                                 --------------

   8.1   ADMINISTRATION BY EMPLOYEE BENEFIT PLAN BOARD.

   (a) The Plan shall be administered by an Employee Benefit Plan Board,
consisting of not more than five persons nor fewer than three persons.  Members
of the Employee Benefit Plan Board shall be appointed from time to time by the
Board of Directors and shall serve at the pleasure of the Board of Directors.
Vacancies shall be filled in the same manner as appointments.  Any member of the
Employee Benefit Plan Board may resign by delivering a written resignation to
the Board of Directors or to the Secretary of the Employee Benefit Plan Board
effective upon delivery or at any other future date specified therein.

   (b) The Employee Benefit Plan Board shall elect a chairman from its members
and shall appoint a secretary who may be, but need not be, a member of the
Employee Benefit Plan Board.  The Employee Benefit Plan Board shall not receive
any compensation for its services.

   (c) The Employee Benefit Plan Board may act at a meeting or in writing
without a meeting.  A majority of the members of the Employee Benefit Plan Board
at the time in office shall constitute a quorum for the transaction of business
at all meetings and a majority of those present at any meeting shall be required
for action.  All decisions by the Employee Benefit Plan Board arrived at without
a meeting shall be made by the vote or assent of a majority of its members.  No
member of the Employee Benefit Plan Board may act, vote or otherwise influence a
decision of the 




                                    VIII-1
<PAGE>
 
Employee Benefit Plan Board specifically relating to the Employee Benefit Plan
Board member's own participation under the Plan.

   (d) The Employee Benefit Plan Board may adopt such rules and regulations as
it deems desirable for the conduct of its affairs.  All rules and decisions of
the Employee Benefit Plan Board shall be uniformly and consistently applied.
The Employee Benefit Plan Board shall have the final right of interpretation,
construction and determination under the Plan and decisions of the Employee
Benefit Plan Board are final and conclusive for all purposes.

   8.2   DUTIES AND POWERS OF EMPLOYEE BENEFIT PLAN BOARD.  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:

   (a) to retain such consultants, accountants, agents, clerical assistants and
attorneys as may be deemed necessary or desirable to render statements, reports
and advice with respect to the Plan and to assist the Employee Benefit Plan
Board in complying with all applicable rules and regulations affecting the Plan.
Any consultants, accountants, or attorneys may be the same as those retained by
PP&L;

   (b) to make such amendments as provided for in Article X;

   (c) to establish a claims procedure 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 




                                    VIII-2
<PAGE>
 
full and fair review by the Employee Benefit Plan Board;

   (d) to enact uniform and nondiscriminatory rules and regulations to carry out
the provisions of the Plan;

   (e) to compute the amount of any distribution payable to a Participant or
other amounts payable under the Plan and authorize disbursement from the Fund;

   (f) to resolve questions or disputes relating to eligibility for
distributions or the amount of distributions under the Plan;

   (g) to interpret the provisions of the Plan;

   (h) to determine whether any domestic relations order received by the Plan is
a qualified domestic relations order as provided in section 414(p) of the Code;

   (i) to evaluate administrative procedures; and

   (j) to delegate such duties and powers as the Employee Benefit Plan Board
shall determine from time to time to any person or persons or to an
administrative committee.  To the extent of any such delegation, the delegate
shall have the duties, powers, authority, and discretion of the Employee Benefit
Plan Board.

   The Employee Benefit Plan Board shall have the discretionary authority and
final right to interpret, construe and make benefit determinations (including
eligibility and amount) under the Plan.  The decisions of the Employee Benefit
Plan Board are final and conclusive for all purposes.

   8.3   RELIANCE ON REPORTS AND CERTIFICATES.  The members of the Employee
Benefit Plan Board and the officers and directors of PP&L and Resources shall be
entitled to rely upon all valuations, certificates and reports made by the
Trustee or by 



                                    VIII-3
<PAGE>
 
any duly appointed accountant, and upon all opinions given by any duly appointed
legal counsel.

   8.4   FUNCTIONS.  The Employee Benefit Plan Board shall cause to be
maintained such books of account, records and other data as may be necessary or
advisable in its judgment for the purpose of the proper administration of the
Plan.

   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 PP&L against expenses (other than amounts paid
in settlement to which PP&L 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.



                                    VIII-4
<PAGE>
 
   8.6   ALLOCATION OF FIDUCIARY RESPONSIBILITIES.  A fiduciary shall have only
those specific powers, duties, responsibilities and obligations as are
specifically given under this Plan or the Trust Agreement.  A fiduciary may
serve in more than one fiduciary capacity with respect to the Plan.  It is
intended that each fiduciary shall be responsible for the proper exercise of the
fiduciary's own powers, duties, responsibilities and obligations under this Plan
and the Trust Agreement, and generally shall not be responsible for any act or
failure to act of another fiduciary.




                                    VIII-5
<PAGE>
 
                                  ARTICLE IX
                                   THE FUND
                                   --------

   9.1   DESIGNATION OF TRUSTEE.  PP&L, by appropriate resolution of its Board
of Directors, shall name and designate a Trustee and enter into a Trust
Agreement with such Trustee.  PP&L shall have the power to amend the Trust
Agreement, remove the Trustee, and designate a successor Trustee, all as
provided in the Trust Agreement.  All of the assets of the Plan shall be held by
the Trustee for use in accordance with this Plan in providing for the benefits
hereunder.

   9.2   EXCLUSIVE BENEFIT.  Prior to the satisfaction of all liabilities under
the Plan in the event of termination of the Plan, no part of the corpus or
income of the Fund shall be used for or diverted to purposes other than for the
exclusive benefit of Participants and their beneficiaries except as expressly
provided in this Plan and in the Trust Agreement.

   9.3   NO INTEREST IN FUND.  No persons shall have any interest in, or right
to, any part of the assets or income of the Fund, except as to and to the extent
expressly provided in this Plan and in the Trust Agreement.

   9.4   TRUSTEE. The Trustee shall be the fiduciary with respect to management
and control of Plan assets held by it and shall have exclusive and sole
responsibility for the custody and investment thereof in accordance with the
Trust Agreement.

   9.5   EXPENSES. All expenses of administration of this Plan shall be paid
from the Fund unless they are paid directly by the Participating Companies.



                                     IX-1
<PAGE>
 
                                   ARTICLE X
                     AMENDMENT OR TERMINATION OF THE PLAN
                     ------------------------------------

   10.1  AMENDMENT.  The Plan  may be amended or terminated at any time by or
pursuant to action of the board of directors of Resources.  In addition, the
EBPB 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 significantly alter the benefit design or eligibility requirements of
the Plan.  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 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 PP&L is 



                                      X-1
<PAGE>
 
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. In making such
distributions, any and all determinations, divisions, appraisals, apportionments
and allotments so made shall be final and conclusive.

   10.3  SPECIAL RULE.  In the event that the Plan is terminated in accordance
with Section 10.2, unallocated amounts held in a suspense account described in
Section 5.5 shall be allocated among Participants, subject to the limitations of
Section 5.5, in the year of termination and amounts which cannot be allocated by
reason of the limitations of Section 5.5 may be withdrawn from the Fund and
returned to PP&L or Resources.

   10.4  MERGER.  The Plan shall not be merged with or consolidated with, or its
assets be transferred to, any other qualified retirement plan unless each
Participant 



                                      X-2
<PAGE>
 
would (assuming the Plan then terminated) receive a benefit after such merger,
consolidation or transfer which is of actuarial value equal to or greater than
the benefit he would have received from the value of his Account if the Plan had
been terminated on the day before such merger, consolidation or transfer. No
amounts shall be transferred to this Plan which would cause the Plan to be a
direct or indirect transferee of a plan to which the joint and survivor annuity
and pre-retirement survivor annuity requirements of sections 401(a)(11) and 417
of the Code apply.



                                      X-3
<PAGE>
 
                                   ARTICLE XI
                              TOP HEAVY PROVISIONS
                              --------------------

   11.1  GENERAL.  The following provisions shall apply automatically to the
Plan and shall supersede any contrary provisions for each Plan Year in which the
Plan is a Top Heavy Plan. It is intended that this Article shall be construed in
accordance with the provisions of section 416 of the Code.

   11.2   DEFINITIONS.  The following definitions shall supplement those set
forth in Article II of the Plan:

   (a) "AGGREGATION GROUP" shall mean:

         (1) each plan (including a frozen plan or a plan which has been
terminated during the 60-month period ending on the Determination Date) of PP&L
or an Affiliated Company in which a Key Employee is a participant,

         (2) each other plan (including a frozen plan or a plan which has been
terminated during the 60-month period ending on the Determination Date) of PP&L
or an Affiliated Company which enables any plan in which a Key Employee
participates to meet the requirements of section 401(a)(4) or 410 of the Code,
and

         (3) each other plan (including a frozen plan or a plan which has been
terminated during the 60-month period ending on the Determination Date) of PP&L
or an Affiliated Company which is included by the Employee Benefit Plan Board if
the Aggregation Group, including such plan, would continue to meet the
requirements of sections 401(a)(4) and 410 of the Code.

   (b) "DETERMINATION DATE" shall mean the last day of the preceding Plan Year,



                                     XI-1
<PAGE>
 
except for the first Plan Year, it shall mean the last day of that Plan Year.

   (c) "KEY EMPLOYEE" shall mean any employee, former employee or beneficiary of
either who at any time during the 60-month period ending on the Determination
Date is described in subparagraphs 1 through 4 below of this Subsection ll.2(c).
Notwithstanding the foregoing, the number of persons described in Subsection
(c)(2) for the entire 60-month period shall be limited to 10.
 
        (1) an officer of PP&L having annual compensation, as defined in
section 414(q)(7) of the Code, from PP&L and all Affiliated Companies for a Plan
Year during such period greater than fifty percent (50%) of the amount in effect
under section 415(b)(1)(A) of the Code for the calendar year in which such Plan
Year ends;

         (2) one of the ten employees with annual compensation, as defined in
section 414(q)(7) of the Code, from PP&L and all Affiliated Companies greater
than the amount described in section 415(c)(1)(A) of the Code owning (or
considered as owning within the meaning of section 318 of the Code) the largest
interests in PP&L or any Affiliated Company, provided that such interest exceeds
one-half of one percent (.5%) of the total share ownership of PP&L or Affiliated
Company;

         (3) a five percent (5%) owner of PP&L; or

         (4) a one percent (1%) owner of PP&L who has annual compensation, as
defined in section 414(q)(7) of the Code, from PP&L and all Affiliated
Companies, which in the aggregate is in excess of $150,000.

   The above determinations will be made in accordance with section 416(i) of
the Code.  No more than fifty (50) employees (or, if less, the greater of three
employees 



                                     XI-2
<PAGE>
 
or ten percent (10%) of the greatest number of employees, including leased
employees within the meaning of section 414(n) of the Code, but excluding
employees described in section 414(q)(8) of the Code, employed by PP&L and all
Affiliated Companies during the 60-month period ending on the Determination
Date) shall be treated as officers.

   (d) "KEY EMPLOYEE RATIO" shall mean the ratio for any Plan Year, calculated
as of the Determination Date of such Plan Year, determined by comparing the
amount described in Subsection (d)(1) with the amount described in Subsection
(d)(2) after deducting from each such amount any portion thereof described in
Subsection (d)(3).

         (1) The sum of (A) the present value of all accrued benefits of Key
Employees under all qualified defined benefit plans included in the Aggregation
Group, (B) the balances in all of the accounts of Key Employees under all
qualified defined contribution plans included in the Aggregation Group, and (C)
the amounts distributed from all plans in such Aggregation Group to or on behalf
of any Key Employee during the period of five Plan Years ending on the
Determination Date, except benefits paid on account of death in excess of the
accrued benefit or account balances immediately prior to death.

         (2) The sum of (A) the present value of all accrued benefits of all
participants under all qualified defined benefit plans included in the
Aggregation Group, (B) the balances in all of the accounts of all participants
under all qualified defined contribution plans included in the Aggregation Group
and (C) the amounts distributed from all plans in such Aggregation Group to or
on behalf of any participant 



                                     XI-3
<PAGE>
 
during the period of five Plans Years ending on the Determination Date.

         (3) The sum of (A) all rollover contributions (or fund to fund
transfers) to the Plan by an Employee after December 31, 1983, from a plan
sponsored by an employer which is not PP&L or an Affiliated Company, (B) any
amount that is included in Subsections (d)(1) and (2) for a person who is a Non-
Key Employee as to the Plan Year of reference but who was a Key Employee as to
any earlier Plan Year, and (C) for Plan Years beginning after December 31, 1984,
any amount that is included in Subsections (d)(1) and (2) for a person who had
not performed any services for PP&L during the five-year period ending on the
Determination Date.

         (4) The present value of accrued benefits under all qualified defined
benefit plans included in the Aggregation Group shall be determined (A) on the
basis of the 1971 TPF&C Forecast Mortality Table and an interest rate of six and
one-half percent (6 1/2%) and (B) under the accrual method used for all
qualified defined benefit plans maintained by PP&L or any Affiliated Company, if
a single method is used for all such plans, or otherwise, the slowest accrual
method permitted under section 411 (b) (1) (C) of the Code.

   (e) "NON-KEY EMPLOYEE" shall mean any person who is an Employee or a former
Employee of PP&L or an Affiliated Company in any Plan Year but who is not a Key
Employee as to that Plan Year.  The term Non-Key Employee shall also include the
beneficiaries of such persons.

   (f) "SUPER TOP HEAVY PLAN" shall mean each plan in an Aggregation Group if,
as of the applicable Determination Date, the Key Employee Ratio in the plan
exceeds 



                                     XI-4
<PAGE>
 
ninety percent (90%), determined in accordance with Section 416 of the Code.

   (g) "TOP HEAVY PLAN" shall mean each plan in an Aggregation Group if, as of
the applicable Determination Date, the Key Employee Ratio exceeds sixty percent
(60%) determined in accordance with Section 416 of the Code.

   11.3  MINIMUM CONTRIBUTIONS FOR NON-KEY EMPLOYEES.

   (a) In each Plan Year in which the Plan is a Top Heavy Plan, each Eligible
Employee who is not a Key Employee (except an Eligible Employee who is not a Key
Employee as to the Plan Year of reference but who was a Key Employee as to any
earlier Plan Year or an Eligible Employee who is covered by a collective
bargaining agreement) and who is actively employed by PP&L on the last day of
such Plan Year will receive a total minimum Company Contribution (including
forfeitures) under all plans described in Section 11.2(a)(1) and (2) of not less
than three percent (3%) of the Eligible Employee's annual compensation as
defined in Section 5.5(m).  Salary reduction contributions to such plans made on
behalf of an Eligible Employee in plan years beginning after December 31, 1984
but before January 1, 1989, shall be deemed to be Company Contributions for the
purpose of this Subsection.

   (b) The percentage set forth in Section 11.3(a) shall be reduced to the
percentage at which contributions, including forfeitures are made (or are
required to be made) for a Plan Year for the Key Employee for whom such
percentage is the highest for such Plan Year.  This percentage shall be
determined for each Key Employee by dividing the contribution for such Key
Employee by his compensation, as defined in Section 5.5(m), for the Plan Year,
determined under Section 11.4.  All 



                                     XI-5
<PAGE>
 
defined contribution plans required to be included in an Aggregation Group shall
be treated as one plan for the purpose of this Section 11.3; however, this
Section 11.3(b) shall not apply to any plan which is required to be included in
an Aggregation Group if such plan enables a defined benefit plan in such group
to meet the requirements of section 401(a)(4) or section 410 of the Code.

   (c) If a Non-Key Employee described in Subsection (a), participates in both a
defined benefit plan and a defined contribution plan described in Sections
11.2(a)(1) and (2) maintained by PP&L, PP&L is not required to provide such
Employee with both the minimum benefit and the minimum contribution.
Regulations prescribed by the Secretary of the Treasury shall serve to prevent
inappropriate omissions or duplications of minimum benefits or contributions.

   11.4   SOCIAL SECURITY.  The Plan for each Plan Year in which it is a Top
Heavy Plan, must meet the requirements of this Article XI without regard to any
Social Security or similar contributions or benefits.

   11.5   ADJUSTMENT TO MAXIMUM ALLOCATION LIMITATION.

   (a) For each Plan Year in which the Plan is (1) a  Super  Top Heavy Plan or
(2) a Top Heavy Plan and the Employee Benefit Plan Board does not make the
election described in Subsection (c) and for which a similar election has not
been made as to another plan in the Aggregation Group, the 1.25 factor in the
defined benefit and defined contribution fractions described in Article V shall
be reduced to 1.0.  The adjustment described in this Subsection shall not apply
to any Participant during the period in which the Participant earns no
additional accrued benefit under any defined 




                                     XI-6
<PAGE>
 
benefit plan and has no employer contributions, forfeitures, or voluntary
contributions allocated in his accounts under any defined contribution plan.

   (b) In the case of any Top Heavy Plan to which Section 5.5(l) applies,
"$41,500" shall be substituted for "$51,875" in the calculation of the
transition fraction.

   (c) If, in any Plan Year in which the Plan is a Top Heavy Plan but not a
Super Top Heavy Plan, the Aggregation Group described in Sections 11.2(a)(1) and
(2) also includes a defined benefit plan, the Employee Benefit Plan Board may
elect to use a factor of 1.25 in computing the denominator of the defined
benefit and defined contribution fractions described in Article V.  In the event
of such an election, the minimum Company Contribution described in Section
11.3(a) for each Non-Key Employee who is not covered under a defined benefit
plan shall be increased from three percent (3%) to four percent (4%), and the
minimum benefit described in Section 11.3(c) for each Non-Key Employee who is
covered under a defined benefit plan shall be increased in accordance with the
terms of such defined benefit plan.




                                     XI-7
<PAGE>
 
                                  ARTICLE XII
                              GENERAL PROVISIONS
                              ------------------

   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 PP&L
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 PP&L nor Resources assume
liability or responsibility therefor.

   12.3  GOVERNING LAW.  All questions pertaining to the validity, construction
and operation of the Plan shall be determined in accordance with the laws of
Pennsylvania, except to the extent superseded by ERISA.

   12.4   SPENDTHRIFT CLAUSE.

   (a) No benefit payable at any time under this Plan, and no interest or
expectancy herein shall be anticipated, assigned, or alienated by any
Participant or beneficiary, or be subject to attachment, garnishment, levy,
execution or other legal or equitable process, except for (1) an amount
necessary to satisfy a federal tax levy made pursuant to section 6331 of the
Code and (2) any benefit payable pursuant to a domestic relations order within
the meaning of the Code.

   (b) Any attempt to alienate or assign such benefit, whether presently or
thereafter payable, shall be void.  No benefit shall in any manner be liable for
or 




                                     XII-1
<PAGE>
 
subject to the debts or liability of any Participant or beneficiary. If any
Participant or beneficiary shall attempt to, or shall, alienate or assign his
benefits under the Plan or any part thereof, or if by reason of his bankruptcy
or other event happening at any time, such benefits would devolve upon anyone
else or would not be enjoyed by him, then the Employee Benefit Plan Board may
terminate payment of such benefit and hold or apply it to or for the benefit of
the Participant or beneficiary.

   (c) The Employee Benefit Plan Board shall review any domestic relations order
to determine whether it is qualified within the meaning of section 414(p) of the
Code.  An order shall not be qualified unless it complies with all applicable
provisions of the Plan concerning mode of payment and manner of elections.
Notwithstanding the preceding sentence and any restrictions on timing of
distributions and withdrawals under the Plan, an order may provide for
distribution immediately or at any other time specified in the order.

   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 




                                     XII-2
<PAGE>
 
discharge to the extent thereof of any and all liability of PP&L, Resources, the
Employee Benefit Plan Board, the Administrative Committee (if any), the Trustee,
and the Fund.

   12.6   GENDER AND NUMBER.  Except where otherwise clearly indicated by
context, the masculine shall include the feminine, the singular shall include
the plural, and vice versa.

   12.7   VOTING  OR TENDERING SHARES.  Each Participant (or, in the event of
his or her death, his or her beneficiary) is, for purposes of this Section 12.7,
hereby designated a "named fiduciary," within the meaning of section 403(a)(1)
of ERISA with respect to his or her proportionate number of shares (such
proportionate shares being determined at the respective times such fiduciary
rights are exercisable, as set forth below).

         (a) VOTING RIGHTS.  Each Participant (or beneficiary) shall have the
right, to the extent of his or her proportionate number of shares (as determined
in the last sentence of this Section 12.7(a)) to instruct the Trustee in writing
as to the manner in which to vote such shares at any stockholders' meeting of
PP&L.  PP&L shall use its best efforts to timely distribute or cause to be
distributed to each Participant (or beneficiary) the information distributed to
stockholders of PP&L in connection with any such stockholders' meeting, together
with a form requesting confidential instructions to the Trustee on how such
shares shall be voted on each such matter.  Upon timely receipt of such
instructions, the Trustee shall, on each such matter, vote as directed the
appropriate number of shares (including fractional shares).  




                                     XII-3
<PAGE>
 
The instructions received by the Trustee from individual Participants (or
beneficiaries) shall be held by the Trustee in strict confidence and shall not
be divulged to any person, including employees, officers and directors of PP&L
or any affiliate; provided, however, that, to the extent necessary for the
operation of the Plan, such instructions may be relayed by the Trustee to a
recordkeeper, auditor or other person providing services to the Plan if such
person (i) is not PP&L, an affiliate or any employee, officer or director
thereof, and (ii) agrees not to divulge such directions to any other person,
including employees, officers and directors of PP&L and its affiliates. An
individual's proportionate number of shares held in the trust shall be equal to
the product of multiplying the total number of shares by a fraction, the
numerator of which shall be the respective number of shares which are held in
such individual's account for which he or she provides instructions to the
Trustee and the denominator of which shall be the number of such shares in all
such accounts for which instructions are provided to the Trustee.

         (b) RIGHTS ON TENDER OR EXCHANGE OFFER.  Each Participant (or
beneficiary) shall have the right, to the extent of his or her proportionate
number (as determined in the last sentence of this Section 12.7(b)) of shares to
instruct the Trustee in writing as to the manner in which to respond to a tender
or exchange offer with respect to such shares.  PP&L shall use its best efforts
to timely distribute or cause to be distributed to each such Participant (or
beneficiary) the information distributed to stockholders of PP&L in connection
with any such tender or exchange offer.  Upon timely receipt of such
instructions, the Trustee shall respond as 



                                     XII-4
<PAGE>
 
instructed with respect to such shares. If, and to the extent that, the Trustee
shall not have received timely instructions from any individual given a right to
instruct the Trustee with respect to certain shares by the first sentence of
this Section 12.7(b), such individual shall be deemed to have timely instructed
the Trustee not to tender or exchange such shares. The instructions received by
the Trustee from individual Participants (or beneficiaries) shall be held by the
Trustee in strict confidence and shall not be divulged or released to any
person, including employees, officers and directors of PP&L or an Affiliated
Company; provided, however, that, to the extent necessary for the operation of
the Plan, such instructions may be relayed by the Trustee to a recordkeeper,
auditor or other person providing services to the Plan if such person (i) is not
PP&L, an Affiliated Company or any employee, officer or director thereof, and
(ii) agrees not to divulge such instructions to any other person, including
employees, officers and directors of PP&L and Affiliated Companies. An
individual's proportionate number of shares shall be equal to the product of
multiplying the total number of shares by a fraction, the numerator of which
shall be the number of shares which are held in such individual's account and
the denominator of which shall be the total number of shares.

   12.8  USE OF LOAN PROCEEDS.  Subject to 12.9, no Stock acquired with the
proceeds of an exempt loan (within the meaning of section 4975(e)(7) of the
Code) shall be subject to a put, call, or other option or buy-sell or similar
arrangement while held by or when distributed from the Plan, whether or not the
Plan is an employee stock ownership plan at such time.



                                     XII-5
<PAGE>
 
   12.9  PUT OPTION.  In the event the Stock is ever not readily tradeable on an
established market (whether or not the Plan is an employee stock ownership plan
at such time), PP&L or Resources shall issue a "put option" to each Participant
or beneficiary receiving a distribution of Stock from the Plan.  Such put option
shall permit the Participant or beneficiary to sell such Stock to PP&L or
Resources, at any time during two option periods (described below), at the then
fair-market value, as determined by an independent appraiser (as defined in
section 401(a)(28) of the Code).  The first put option period shall be a period
of 60 days commencing on the date the Stock is distributed to the Participant or
beneficiary.  If the put option is not exercised within that period, it will
temporarily lapse.  Upon the close of the Plan Year in which such temporary
lapse of the put option occurs, the Employee Benefit Plan Board shall establish
the value of the Stock, as determined by an independent appraiser, and shall
notify each distributee who did not exercise the initial put option prior to its
temporary lapse in the preceding Plan Year of the revised value of the Stock.
The second period during which the put option may be exercised shall commence on
the date such notice of revaluation is given and shall permanently terminate 60
days thereafter.  The Trustee may be permitted by PP&L to purchase Stock
tendered to PP&L or Resources under a put option.  The Participant may elect
that the payment for Stock sold pursuant to a put option shall be made in one of
the following forms:

         (a) in substantially equal annual installments commencing within 30
days from the date of the exercise of the put option and over a period not
exceeding 



                                     XII-6
<PAGE>
 
five years, with interest payable at a reasonable rate on any unpaid installment
balance, with adequate security provided, and without penalty for any prepayment
of such installments; or

         (b) in a lump sum as soon as practicable after the exercise of the put
option.

   The Trustee, on behalf of the Trust, may offer to purchase any shares of
Stock (which are not sold pursuant to a put option) from any former Participant
or beneficiary, at any time in the future, at their then fair-market value as
determined by an independent appraiser.

   12.10  COMPLIANCE WITH RULE 16B-3.  With respect to Participants subject to
section 16 of the Securities Exchange Act of 1934, transactions under this Plan
are intended to comply with all applicable conditions of Rule 16b-3 or its
successors under the 1934 Act.  To the extent any provision of the Plan or
action by the Board of Directors, the board of directors of Resources or
Employee Benefit Plan Board involving such a Participant is deemed not to comply
with an applicable condition of Rule 16b-3, it shall be deemed null and void to
the extent permitted by law and deemed advisable by the Board of Directors, the
board of directors of Resources or Employee Benefit Plan Board.


                                     XII-7
<PAGE>
 
                                 ARTICLE XIII
                        TREATMENT OF RETURNING VETERANS
                        -------------------------------

   13.1  APPLICABILITY AND EFFECTIVE DATE.  The rights of any Returning Veteran
who resumes employment with PP&L on or after December 12, 1994 shall be modified
as set forth in this Article.

   13.2  ELIGIBILITY TO PARTICIPATE.  For purposes of Section 3.1,

   (a) A Returning Veteran who was an Eligible Employee immediately prior to his
Qualified Military Service shall be deemed to have remained an Eligible Employee
throughout his Qualified Military Service.

   (b) A Returning Veteran who would have become an Eligible Employee during the
period of his Qualified Military Service, but for the resulting absence from
employment, shall be deemed to have become an Eligible Employee as of the date
he would have become an Eligible Employee if he had not entered into Qualified
Military Service.

   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, PP&L 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.


                                    XIII-1
<PAGE>
 
   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 PP&L 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 PP&L; or

   (b) if the amount described in (a) above is not reasonably certain, his
average compensation from PP&L 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.



                                    XIII-2
<PAGE>
 
   13.6  APPLICATION OF CERTAIN LIMITATIONS.

   (a) For purposes of applying the limitations of Section 5.5, any TRASOP,
PAYSOP, or Dividend-based Contributions described in Section 13.3, and any make-
up contributions described in Section 13.4, shall be treated as contributions
for the Limitation Year to which they relate, rather than the Limitation Year in
which they are actually made.

   (b) For purposes of applying the limitations of Section 4.6, any make-up
contributions described in Section 13.4 shall be disregarded, both for the Plan
Year to which the contributions relate, and for the Plan Year in which they are
actually made.

   13.7  ADMINISTRATIVE RULES AND PROCEDURES.  The Employee Benefit Plan Board
shall establish such rules and procedures as it deems necessary or desirable to
implement the provisions of this Article, provided that they are not in
violation of the Uniformed Services Employment and Reemployment Rights Act of
1994, any regulations thereunder, or any other applicable law.

   Executed this _____ day of ____________, 1998.

                    PP&L, INC.


                    By ___________
 
                    John M. Chappelear
                    Vice President
                    Investments & Pension




                                    XIII-3

<PAGE>
 
                                                                  Exhibit 4(a)-2
                                AMENDMENT NO. 1

                                       TO

                      PP&L EMPLOYEE STOCK OWNERSHIP PLAN

          WHEREAS, PP&L, Inc. ("PP&L") adopted the PP&L Employee Stock Ownership
Plan (the "Plan"), effective January 1, 1975, for certain of its employees; and
          WHEREAS, PP&L amended and restated the Plan, effective January 1,
1998; and
          WHEREAS, PP&L desires to amend the plan;
          NOW, THEREFORE, the Plan is hereby amended as follows:

I.   Effective January 1, 1998, Article XII, Section 12.7 is amended to read:

     12.7 VOTING OR TENDERING STOCK.  Each Participant (or, in the event of his
or her death, his or her beneficiary) is, for purposes of this Section 12.7,
designated a 'named fiduciary," within the meaning of section 403(a)(1) of ERISA
with respect to his or her proportionate number of shares of Stock (such
proportionate number of shares being determined at the respective   times such
fiduciary rights are exercisable, as set forth below).

     (a) VOTING RIGHTS.  Each Participant (or beneficiary) shall have the right,
to the extent of his or her proportionate number of shares of Stock (as
determined in the last sentence of this Section 12.7(a)) to instruct the Trustee
in writing as to the manner in which to vote such Stock at any stockholders'
meeting of Resources.  PP&L shall use its best efforts to timely distribute or
cause to be distributed to each Participant (or beneficiary) the information
distributed to stockholders of Resources in connection with any such
stockholders' meeting, together with a form requesting confidential instructions
to the Trustee on how such shares of Stock shall be voted on each such matter.
Upon timely receipt of such instructions, the Trustee shall, on each such
matter, vote as directed the appropriate number of shares of shares of Stock
(including fractional shares).  An individual's proportionate number of shares
of Stock held in the trust shall be equal to the product of multiplying the
total number of shares of Stock by a fraction, the numerator of which shall be
the respective number of shares of Stock which are held in such individual's
account for 

                                      -1-
<PAGE>
 
which he or she provides instructions to the Trustee and the denominator of
which shall be the number of shares of Stock in all such accounts for which
instructions are provided to the Trustee.

     (b) RIGHTS ON TENDER OR EXCHANGE OFFER.  Each Participant (or beneficiary)
shall have the right, to the extent of his or her proportionate number of shares
of Stock (as determined in the last sentence of this Section 12.7(b)) of shares
to instruct the Trustee in writing as to the manner in which to respond to a
tender or exchange offer with respect to such Stock. PP&L shall use its best
efforts to timely distribute or cause to be distributed to each such Participant
(or beneficiary) the information distributed to stockholders of Resources in
connection with any such tender or exchange offer. Upon timely receipt of such
instructions, the Trustee shall respond as instructed with respect to such
shares. If, and to the extent that, the Trustee shall not have received timely
instructions from any individual given a right to instruct the Trustee with
respect to certain shares of Stock by the first sentence of this Section
12.7(b), such individual shall be deemed to have timely instructed the Trustee
not to tender or exchange such shares of Stock. An individual's proportionate
number of shares of Stock shall be equal to the product of multiplying the total
number of shares of Stock by a fraction, the numerator of which shall be the
number of shares which are held in such individual's account and the denominator
of which shall be the total number of shares of 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 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 the Company or an Affiliated Company or an
              employee, officer or director of the Company or an Affiliated
              Company and who agrees not to divulge such instructions to any
              other person, including the Company, an Affiliated Company, or
              employees, officers and directors of the Company or an Affiliated
              Company; or

          (2) a person who is an employee of the 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 

                                      -2-
<PAGE>
 
              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.

     IN WITNESS WHEREOF, this Amendment No. 1 is executed this 6th day of
August, 1998.

                                        PP&L INC.


                                        By:
                                           -------------------------     
                                           John M. Chappelear
                                           Vice President-Investments & 
                                           Pensions

                                      -3-

<PAGE>
                                                                  Exhibit 4(a)-3

                                AMENDMENT NO. 2

                                      TO

                      PP&L EMPLOYEE STOCK OWNERSHIP PLAN

       WHEREAS, PP&L, Inc. ("PP&L") adopted the PP&L Employee Stock Ownership
Plan (the "Plan"), effective January 1, 1975, for certain of its employees; and

       WHEREAS, PP&L amended and restated the Plan, effective January 1, 1998;
and subsequently amended by Amendment No. 1; and

       WHEREAS, PP&L desires to amend the plan;

       NOW, THEREFORE, the Plan is hereby amended as follows:

    I. Effective December 1, 1998, the following sections of Articles I, VII
       and VIII, are amended to read:

    1.1   The purpose of this Plan is to provide Employees some ownership of
stock of PP&L Resources, Inc., without requiring any reduction in pay or other
employee benefits, or the surrender of any other rights on the part of
Employees, and to invest primarily in the stock of PP&L Resources, Inc.

    7.9   Withdrawals.

    (b)(1) Any Participant who has completed at least ten years of participation
in the Plan and attained age 55 may elect within 90 days after the close of each
Plan Year in the election period (as defined in Subsection (b)(2) below) to
withdraw 25% of his Account attributable to Stock acquired by or contributed to
the Plan on or after December 31, 1986 to the extent such portion of his Account
exceeds the sum of (A) the amount to which a prior election under this
Subsection applies and (B) any amount withdrawn under Subsection (a) pursuant to
an election made 

                                      -1-
<PAGE>
 
within 90 days after the close of any Plan Year in the election period. In the
case of a Participant's final election, "50%" shall be substituted for "25%" in
the preceding sentence to determine the amount the Participant may withdraw. The
determination of the date on which Stock is acquired by or contributed to the
Plan shall be made in accordance with section 401 (a) (28) of the Code and
regulations thereunder.

     (2) The election period for purposes of this Subsection is the six Plan
Year period that begins with the Plan Year in which occurs the later of (A) the
Participant's attainment of age 55 or (B) the first Plan Year in which the
Participant has completed ten years of participation, except that the election
period shall not begin before December 31, 1986.

    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:

       (1) to retain such consultants, accountants, agents, clerical assistants
and attorneys as may be deemed necessary or desirable to render statements,
reports and advice with respect to the Plan and to assist the Employee Benefit
Plan Board in complying with all applicable rules and regulations affecting the
Plan. Any consultants, accountants, or attorneys may be the same as those
retained by PP&L;

       (2) to make such amendments as provided for in Article X;

                                      -2-
<PAGE>
 
       (3) to enact uniform and nondiscriminatory rules and regulations to carry
out the provisions of the Plan;

       (4) to compute the amount of any distribution payable to a Participant or
other amounts payable under the Plan and authorize disbursement from the Fund;

       (5) to interpret the provisions of the Plan;

       (6) to determine whether any domestic relations order received by the
Plan is a qualified domestic relations order as provided in section 414(p) of
the Code;

       (7) to evaluate administrative procedures;

       (8) to delegate such duties and powers as the Employee Benefit Plan Board
shall determine from time to time to any person or persons or to an
administrative committee. To the extent of any such delegation, the delegate
shall have the duties, powers, authority, and discretion of the Employee Benefit
Plan Board; and

       (9) to establish a claims procedure under which claims will be reviewed
by the Manager- Employee Benefits, or such other individual as may be designated
by the Vice President-Human Resources 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;

     (b) In addition, to any other duties and powers it may possess, the
Administrative Committee of the Employee Benefit Plan Board shall have the

                                      -3-
<PAGE>
 
following specific duties and powers:

       (1) to resolve questions or disputes relating to eligibility for
distributions or the amount of distributions under the Plan;

       (2) to interpret the provisions of the Plan;

    The Employee Benefit Plan Board and the Administrative Committee of the
Employee Benefit Plan Board shall have the discretionary authority and final
right to interpret, construe and make benefit determinations (including
eligibility and amount) under the Plan. The decisions of the Employee Benefit
Plan Board and the Administrative Committee of the Employee Benefit Plan Board
are final and conclusive for all purposes.

    II. 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 12th day of
November, 1998.

                               PP&L, INC.

                               By: /s/ John M. Chappelear
                                  -------------------------------
                                  John M. Chappelear
                                  Chairman
                                  Employee Benefit Plan Board

                                      -4-

<PAGE>
 
                                                                   Exhibit 10(a)

 
- --------------------------------------------------------------------------------


                                 $350,000,000


            AMENDED AND RESTATED 364-DAY REVOLVING CREDIT AGREEMENT


                                     Among


                                  PP&L, INC.
                          PP&L CAPITAL FUNDING, INC.,
                                 as Borrowers
                             PP&L RESOURCES, INC.,
                      as Guarantor of the obligations of
                          PP&L Capital Funding, Inc.


                           THE CHASE MANHATTAN BANK,
                            as Administrative Agent


                                CITIBANK, N.A.
                            as Documentation Agent

                                      and

                            THE BANKS NAMED HEREIN,


         Dated as of November 20, 1997 as amended and restated as of 
                               November 19, 1998

                          ___________________________

                            CHASE SECURITIES INC.,
                        Lead Arranger and Book Manager


- --------------------------------------------------------------------------------
<PAGE>
 
                               TABLE OF CONTENTS
                               -----------------

<TABLE>
<CAPTION>
                                                                                     Page
                                                                                     ---- 
<S>                                                                                  <C>
SECTION 1.   Amounts and Terms of Loans.........................................        1
        1.1  Commitments........................................................        1
        1.2  Notices of Borrowing...............................................        2
        1.3  Disbursement of Funds..............................................        2
        1.4  Repayment of Loans; Evidence of Debt...............................        3
        1.5  Special Payment Provisions.........................................        4
        1.6  Fees...............................................................        5
        1.7  Reductions in Total Commitments....................................        5
        1.8  Compensation.......................................................        6

SECTION 1A.  Letters of Credit..................................................        6

SECTION 2.   Interest...........................................................       11
        2.1  Rates of Interest..................................................       11
        2.2  Determination of Rate of Borrowing.................................       12
        2.3  Interest Payment Dates.............................................       12
        2.4  Conversions; Interest Periods......................................       12
        2.5  Increased Costs, Illegality, Etc...................................       14
        2.6  Extension of Expiry Date...........................................       18

SECTION 3.   Payments...........................................................       19
        3.1  Payments on Non-Business Days......................................       19
        3.2  Voluntary Prepayments..............................................       20
        3.3  Method and Place of Payment, Etc...................................       20
        3.4  Net Payments.......................................................       21

SECTION 4.   Conditions Precedent...............................................       22
        4.1  Conditions to Effectiveness........................................       22
        4.2A Conditions to Each Loan to PPL and Each Issuance of
             Letter of Credit on behalf of PPL..................................       23
        4.2B Conditions to Each Loan to Finance Co. and Each Issuance
             of a Letter of Credit on behalf of Finance Co......................       24

SECTION 5.A  Covenants of PPL...................................................       25
        5.1A Financial Statements...............................................       25
        5.2A Mergers............................................................       26
        5.3A Ratings............................................................       26
        5.4A Consolidated Indebtedness to Consolidated Capitalization...........       27

SECTION 5.B  Covenants of Finance Co. and Resources.............................       27
        5.1B Financial Statements...............................................       27
        5.2B Mergers............................................................       28
        5.3B Ratings............................................................       29
        5.4B Liens..............................................................       29
        5.5B Consolidated Indebtedness to Consolidated Capitalization...........       29

SECTION 6.A  Events of Default for PPL..........................................       29
</TABLE> 
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                                     Page
                                                                                     ----
<S>                                                                                  <C> 
        6.1A  Representations, Etc................................................    29
        6.2A  Principal and Interest..............................................    29
        6.3A  Defaults by PPL Under Other Agreements..............................    30
        6.4A  Judgments...........................................................    30
        6.5A  Bankruptcy, Etc.....................................................    30
        6.6A  Other Covenants.....................................................    31

SECTION 6.B   Events of Default for Finance Co....................................    31
        6.1B  Representations, Etc................................................    31
        6.2B  Principal and Interest..............................................    31
        6.3B  Defaults by PPL, Finance Co. or Resources Under This
              Agreement or Other Agreements.......................................    31
        6.4B  Judgments...........................................................    32
        6.5B  Bankruptcy, Etc.....................................................    32

        6.6B  Other Covenants.....................................................    33
        6.7B  Events of Default With Respect to PPL...............................    33

SECTION 7.A   Representations and Warranties of PPL...............................    34
        7.1A  Corporate Status....................................................    34
        7.2A  Authority; No Conflict..............................................    34
        7.3A  Legality, Etc.......................................................    35
        7.4A  Financial Statements................................................    35
        7.5A  Litigation..........................................................    35
        7.6A  No Violation........................................................    35
        7.7A  ERISA...............................................................    36
        7.8A  Consents............................................................    36
        7.9A  Subsidiaries........................................................    36
        7.10A Investment Company Act..............................................    36
        7.11A Public Utility Holding Company Act..................................    36
        7.12A Tax Returns.........................................................    36
        7.13A Compliance with Laws................................................    36
        7.14A Year 2000...........................................................    37

SECTION 7.B   Representations and Warranties of Finance Co. and
              Resources...........................................................    37
        7.1B  Corporate Status....................................................    37
        7.2B  Authority; No Conflict..............................................    37
        7.3B  Legality, Etc.......................................................    37
        7.4B  Financial Statements................................................    37
        7.5B  Litigation..........................................................    38
        7.6B  No Violation........................................................    38
        7.7B  ERISA...............................................................    38
        7.8B  Consents............................................................    38
        7.9B  Investment Company Act..............................................    39
        7.10B Public Utility Holding Company Act..................................    39
        7.11B Tax Returns.........................................................    39
        7.12B Compliance with Laws................................................    39
        7.13B Year 2000...........................................................    40

SECTION 8.    Agent...............................................................    39
        8.1   Appointment.........................................................    39
</TABLE> 
<PAGE>
 
<TABLE> 
<CAPTION>
                                                                                     Page
                                                                                     ----
<S>                                                                                  <C>
        8.2   Nature of Duties....................................................    40
        8.3   Rights, Exculpation, Etc............................................    40
        8.4   Reliance............................................................    41
        8.5   Indemnification.....................................................    41
        8.6   The Agent, Individually.............................................    42
        8.7   Resignation by the Agent............................................    42

SECTION 9.    Resources' Guarantee................................................    43

SECTION 10.   Miscellaneous.......................................................    44
        10.1  Definitions.........................................................    44
        10.2  Accounting Principles...............................................    56
        10.3  Exercise of Rights..................................................    57
        10.4  Amendment and Waiver................................................    57
        10.5  Expenses; Indemnification...........................................    58
        10.6  Successors and Assigns..............................................    59
        10.7  Notices, Requests, Demands..........................................    62
        10.8  Survival of Representations and Warranties..........................    62
        10.9  Governing Law.......................................................    62
        10.10 Counterparts........................................................    63
        10.11 Effectiveness.......................................................    63
        10.12 Transfer of Office..................................................    63
        10.13 Proration of Payments...............................................    63
        10.14 Jurisdiction; Consent to Service of Process.........................    64
        10.15 WAIVER OF JURY TRIAL................................................    65
        10.16 Headings Descriptive................................................    65


Bank Address Schedule
SCHEDULE I - Commitments

EXHIBIT A - Form of Opinion of senior counsel of PPL, Finance Co. and Resources
EXHIBIT B - Form of Opinion of Thelen Reid & Priest LLP
EXHIBIT C - Form of Extension Letter
EXHIBIT D1- Form of PPL Compliance Certificate
EXHIBIT D2- Form of Resources Compliance Certificate
</TABLE> 
<PAGE>
 
          364-DAY REVOLVING CREDIT AGREEMENT, dated as November 20, 1997, as
amended and restated as of November 19, 1998, among PP&L, INC., a Pennsylvania
corporation ("PPL"), and PP&L CAPITAL FUNDING, INC., a Delaware corporation
("Finance Co."), as Borrowers; PP&L RESOURCES, INC., a Pennsylvania corporation
("Resources"), as guarantor of the obligations of Finance Co. hereunder; the
banks listed on Schedule I hereto (each a "Bank" and collectively the "Banks");
THE CHASE MANHATTAN BANK, as fronting bank (in such capacity, the "Fronting
Bank") and as administrative agent for the Banks to the extent and in the manner
provided in (S) 8 below (in such capacity, the "Agent"); and CITIBANK, N.A., as
documentation agent (in such capacity, the "Documentation Agent") (all
capitalized terms used herein shall have the meanings specified therefor in (S)
10.1 unless otherwise defined herein).


                             W I T N E S S E T H :
                             - - - - - - - - - -  


          WHEREAS, subject to and upon the terms and conditions set forth
herein, the Banks are willing to make available to PPL and Finance Co. the
credit facility herein provided for working capital and other general corporate
purposes of the Borrowers, including investments in, or loans to, affiliates of
the Borrowers;


          NOW, THEREFORE, it is agreed:


          SECTION 1.  Amounts and Terms of Loans.
                      -------------------------- 

          1.1  Commitments.  Subject to and upon the terms and conditions herein
               -----------                                                      
set forth, each Bank severally and not jointly agrees, at any time and from time
to time prior to the Expiry Date, as such date may be extended pursuant to (S)
2.6, to make a loan or loans (each a "Loan" and collectively for all Banks, the
"Loans") to PPL or Finance Co., as requested by such Borrower, which Loans (i)
shall at the option of PPL or Finance Co., as applicable, be initially
maintained as Base Rate Loans or Eurodollar Loans, provided that all the Loans
made by all the Banks at any one Borrowing to a Borrower hereunder must be
either all Base Rate Loans or all Eurodollar Loans, (ii) may be repaid and
borrowed in accordance with the provisions hereof and (iii) shall not exceed in
aggregate principal amount at any time outstanding the difference between such
<PAGE>
 
                                                                               2

Bank's Commitment and the L/C Exposure of such Bank at such time.

          1.2  Notices of Borrowing.  Whenever a Borrower  desires to make a
               --------------------                                         
Borrowing hereunder, it shall give the Agent at the Payment Office (i) no later
than 12:00 Noon (New York time) at least three Business Days' prior written
notice or telephonic notice (confirmed in writing) of each Eurodollar Loan to be
made hereunder and (ii) no later than 11:30 A.M. (New York time) on the date of
such Borrowing written notice or telephonic notice (confirmed in writing) of
each Base Rate Loan to be made hereunder.  Each such notice (each a "Notice of
Borrowing") shall state that the Borrowing is being made hereunder and shall
specify the aggregate principal amount the applicable Borrower desires to borrow
hereunder, the date of Borrowing (which shall be a Business Day), the Type of
Loans to be made pursuant to such Borrowing and the Interest Period to be
applicable thereto.  The Agent shall promptly give each Bank telephonic notice
(confirmed in writing) of the proposed Borrowing, of such Bank's proportionate
share thereof and of the other matters covered by the Notice of Borrowing.  Each
Borrowing shall be in an integral multiple of $500,000 and not less than
$10,000,000 and shall be made from each Bank in the proportion which its
respective Commitment bears to the Total Commitment except as otherwise
specifically provided in (S) 2.5.  The failure of any Bank to make any Loan
required hereby shall not release any other Bank from its obligation to make
Loans as provided herein.

          1.3  Disbursement of Funds.  (a) No later than 12:00 Noon (New York
               ---------------------                                         
time) (or, in the case of Base Rate Loans, 2:00 P.M. (New York time)) on the
date specified in each Notice of Borrowing each Bank will make available the
amount of its pro rata portion of the Loans requested to be made on such date in
              --- ----                                                          
U.S. dollars and in immediately available funds, to the Agent at the Payment
Office.  The Agent will make available to the applicable Borrower not later than
1:00 P.M. (New York time) (or, in the case of Base Rate Loans, 3:00 P.M. (New
York time)) on such date at the Payment Office the aggregate of the amounts in
immediately available funds made available by the Banks against delivery to the
Agent at the Payment Office, or at such other office as the Agent may specify,
of the documents and papers provided for herein.  The Agent shall deliver the
documents and papers received by it for the account of each Bank to such Bank or
upon its order.

          (b) If the Fronting Bank shall not have received from a Borrower the
payment required to be made by such Borrower pursuant to (S) 1A(e) within the
time specified in such Section, the Fronting Bank will promptly notify the 
<PAGE>
 
                                                                               3

Agent of the L/C Disbursement and the Agent will promptly notify each Bank of
such L/C Disbursement and its Applicable Percentage thereof. Not later than 2:00
P.M. (New York time) on such date (or, if such Bank shall have received such
notice later than 12:00 Noon (New York time) on any day, no later than 10:00
A.M. (New York time) on the immediately following Business Day), each Bank will
make available the amount of its Applicable Percentage of such L/C Disbursement
(it being understood that such amount shall be deemed to constitute a Base Rate
Loan of such Bank and such payment shall be deemed to have reduced the L/C
Exposure) in immediately available funds, to the Agent at the Payment Office,
and the Agent will promptly pay to the Fronting Bank amounts so received by it
from the Banks. The Agent will promptly pay to the Fronting Bank any amounts
received by it from such Borrower pursuant to (S) 1A(e) prior to the time that
any Bank makes any payment pursuant to this paragraph (b), and any such amounts
received by the Agent thereafter will be promptly remitted by the Agent to the
Banks that shall have made such payments and to the Fronting Bank, as their
interests may appear. If any Bank shall not have made its Applicable Percentage
of such L/C Disbursement available to the Agent as provided above, such Bank
agrees to pay interest on such amount, for each day from and including the date
such amount is required to be paid in accordance with this paragraph to but
excluding the date such amount is paid, to the Agent for the account of the
Fronting Bank at, for the first such day, the Federal Funds Rate, and for each
day thereafter, the Base Rate.

          1.4  Repayment of Loans; Evidence of Debt.  (a) The outstanding
               ------------------------------------                      
principal balance of each Loan shall be payable by the Borrower to which such
Loan was made on the Expiry Date, subject to the provisions of (S) 2.6.  Each
Loan shall bear interest from the date thereof on the outstanding principal
balance thereof as set forth in (S) 2.1.  Each Bank shall maintain in accordance
with its usual practice an account or accounts evidencing the indebtedness to
such Bank resulting from each Loan made by such Bank from time to time to each
Borrower, including the amounts of principal and interest payable and paid to
such Bank from time to time under this Agreement.  The Agent shall maintain the
Register pursuant to (S)1.4(b), and a subaccount for each Bank and each
Borrower, in which Register and subaccounts (taken together) shall be recorded
(i) the amount of each Loan made hereunder, the Type of each Loan made and the
Interest Period applicable thereto, (ii) the amount of any principal or interest
due and payable or to become due and payable from the applicable Borrower to
each Bank hereunder and (iii) the amount of any 
<PAGE>
 
                                                                               4
sum received by the Agent hereunder from each Borrower and each Bank's share
thereof. The entries made in the Register and accounts maintained pursuant to
this (S)1.4 shall be prima facie evidence of the existence and amounts of the
obligations therein recorded; provided, however, that the failure of any Bank or
                              --------  -------
the Agent to maintain such account, such Register or such subaccount, as
applicable, or any error therein shall not in any manner affect the obligations
of each Borrower to repay the Loans in accordance with their terms. The
obligations of the Borrowers with respect to their respective Loans shall be
several, not joint.

          (b)  The Agent shall maintain at the Payment Office a register for the
recordation of the names and addresses of the Banks, the Commitments of the
Banks from time to time, and the principal amount of the Loans owing to each
Bank from each Borrower from time to time (the "Register").  The entries in the
Register shall be conclusive and binding for all purposes, absent manifest
error.  The Register shall be available for inspection by each Borrower, the
Agent or any Bank at any reasonable time and from time to time upon reasonable
prior notice.

          1.5  Special Payment Provisions.  Unless the Agent shall have been
               --------------------------                                   
notified by any Bank prior to any date of a Borrowing that such Bank does not
intend to make available to the Agent such Bank's portion of the Loans to be
made on such date, the Agent may assume that such Bank has made such amount
available to the Agent on such date of a Borrowing and the Agent may, in
reliance upon such assumption, make available to the applicable Borrower a
corresponding amount.  If such amount is not in fact made available to the Agent
by such Bank, the Agent shall be entitled to recover such amount on demand from
such Bank.  If such Bank does not pay such amount forthwith upon the Agent's
demand therefor, the Agent shall promptly notify the applicable Borrower and the
applicable Borrower shall pay such amount to the Agent.  The Agent shall also be
entitled to recover from such Bank or the applicable Borrower, as the case may
be, interest on such amount in respect of each day from the date such amount was
made available by the Agent to the applicable Borrower to the date such amount
is recovered by the Agent, at a rate per annum equal to (i) in the case of such
Bank, the Federal Funds Rate and (ii) in the case of either Borrower, the
applicable rate provided in  (S) 2.1 for the applicable Type of Loan.  Nothing
herein shall be deemed to relieve any Bank from its obligation to fulfill its
Commitment hereunder or to prejudice any rights which the applicable 
<PAGE>
 
                                                                               5

Borrower may have against any Bank as a result of the failure of such Bank to
perform its obligations hereunder.

          1.6  Fees.  (a) The Borrowers agree to pay to the Agent for pro rata
               ----                                                   --- ----
distribution to each Bank a Commitment  Fee (the "Commitment Fee"), for the
period from the Closing Date until the Expiry Date (or such earlier date as the
Total Commitment shall be terminated as to both Borrowers), on the average daily
unused amount of the Commitments, computed at the Applicable Commitment Fee
Percentage per annum computed on the basis of the number of days actually
elapsed over a year of 365 or 366 days and payable quarterly in arrears on the
last day of each calendar quarter and on the Expiry Date (or such earlier date
as the Total Commitment shall be terminated as to both Borrowers).

          (b) Each Borrower agrees to pay to the Agent for pro rata distribution
                                                           --- ----             
to each Bank a fee (an "L/C Participation Fee"), for the period from the Closing
Date until the Expiry Date (or such earlier date as all Letters of Credit shall
be canceled or expire and the Total Commitment shall be terminated as to both
Borrowers), on that portion of the average daily L/C Exposure attributable to
Letters of Credit issued for the account of such Borrower (excluding the portion
thereof attributable to unreimbursed L/C Disbursements), at the rate per annum
equal to the Applicable Eurodollar Margin from time to time in effect for such
Borrower and payable quarterly in arrears on the last day of each calendar
quarter and on the date on which the Total Commitment shall be terminated as
provided herein.  All L/C Participation Fees shall be computed on the basis of
the number of days actually elapsed over a year of 365 or 366 days.

          1.7  Reductions in Total Commitments.  The Borrowers shall have the
               -------------------------------                               
right, upon at least 3 Business Days' prior written notice to the Agent at the
Payment Office (which notice the Agent shall promptly transmit to each of the
Banks), to reduce permanently the Total Commitment, in an aggregate amount equal
to an integral multiple of $1,000,000 and not less than $10,000,000, or to
terminate the unutilized portion of the Total Commitment, provided that (i) any
                                                          --------             
such reduction or termination shall apply proportionately to the Commitments of
the Banks and (ii) no such termination or reduction shall be made that would
reduce the Total Commitments to an amount less than the sum  of the aggregate
outstanding principal amount of Loans and the aggregate L/C Exposure.

          1.8  Compensation.  The applicable Borrower shall compensate each
               ------------                                                
Bank, upon such Bank's written request 
<PAGE>
 
                                                                               6

given promptly after learning of the same, for all losses, expenses and
liabilities (including, without limitation, any interest paid by such Bank to
lenders of funds borrowed by it to make or carry its Eurodollar Loans and any
loss sustained by such Bank in connection with the re-employment of such funds),
which the Bank sustains: (i) if for any reason (other than a failure of such
Bank to perform its obligations) a Borrowing of any Eurodollar Loan does not
occur on a date specified therefor in a Notice of Borrowing or notice of
conversion (whether or not withdrawn or canceled pursuant to (S) 2.5 or
otherwise), (ii) if any repayment or conversion (pursuant to (S) 2.5 or
otherwise) of any of its Eurodollar Loans occurs on a date which is not the last
day of the Interest Period applicable thereto, or (iii) without duplication of
any amounts paid pursuant to (S) 2 hereof, as a consequence of any other default
by such Borrower to repay its Eurodollar Loans when required by the terms of
this Agreement. A certificate as to any amounts payable to any Bank under this
(S) 1.8 submitted to the applicable Borrower by such Bank shall show 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.

          SECTION 1A.  Letters of Credit.  (a)  General.  A Borrower may from
                       ------------------       --------                     
time to time request the issuance of Letters of Credit for its own account (for
obligations of such Borrower or any of its Subsidiaries, or in the case of
Finance Co., for any of Resources' Subsidiaries (other than PPL and its
Subsidiaries)), denominated in dollars, in form reasonably acceptable to the
Agent and the Fronting Bank, at any time and from time to time while the
Commitments remain in effect.  This Section shall not be construed to impose an
obligation upon the Fronting Bank to issue any Letter of Credit that is
inconsistent with the terms and conditions of this Agreement.

          (b)  Notice of Issuance, Amendment, Renewal, Extension; Certain
               ----------------------------------------------------------
Conditions.  In order to request the issuance of a Letter of Credit (or to
- -----------                                                               
amend, renew or extend an existing Letter of Credit), the applicable Borrower
shall hand deliver or telecopy to the Fronting Bank and the Agent (reasonably in
advance of the requested date of issuance, amendment, renewal or extension) a
notice requesting the issuance of a Letter of Credit, or identifying the Letter
of Credit to be amended, renewed or extended, the date of issuance, amendment,
renewal or extension, the date on which such Letter of Credit is to expire
(which shall comply with paragraph (c) below), the amount of such Letter of
Credit, the name and address of the beneficiary thereof and such other
information as shall be necessary to prepare such Letter of Credit.  A Letter of
<PAGE>
 
                                                                               7

Credit shall be issued, amended, renewed or extended only if, and upon issuance,
amendment, renewal or extension of each Letter of Credit the applicable Borrower
shall be deemed to represent and warrant that, after giving effect to such
issuance, amendment, renewal or extension (A) the L/C Exposure shall not exceed
$5,000,000 and (B) the Aggregate Credit Exposure shall not exceed the Total
Commitment.

          (c)  Expiration Date.  Each Letter of Credit shall expire at the close
               ----------------                                                 
of business on the date that is five Business Days prior to the Expiry Date,
unless such Letter of Credit expires by its terms on an earlier date.

          (d)  Participations.  By the issuance of a Letter of Credit and
               ---------------                                           
without any further action on the part of the Fronting Bank or the Banks, the
Fronting Bank hereby grants to each Bank, and each such Bank hereby acquires
from the Fronting Bank, a participation in such Letter of Credit equal to such
Bank's Applicable Percentage from time to time of the aggregate amount available
to be drawn under such Letter of Credit, effective upon the issuance of such
Letter of Credit.  In consideration and in furtherance of the foregoing, each
Bank hereby absolutely and unconditionally agrees to pay to the Agent, for the
account of the Fronting Bank, such Bank's proportionate share of each L/C
Disbursement made by the Fronting Bank and not reimbursed by the applicable
Borrower forthwith on the date due as provided in (S) 1.3(b).  Each Bank
acknowledges and agrees that its obligation to acquire participations pursuant
to this paragraph in respect of Letters of Credit is absolute and unconditional
and shall not be affected by any circumstance whatsoever, including the
occurrence and continuance of a Default or an Event of Default or the
termination of the Commitments, and that each such payment shall be made without
any offset, abatement, withholding or reduction whatsoever.

          (e)  Reimbursement.  If the Fronting Bank shall make any L/C
               --------------                                         
Disbursement in respect of a Letter of Credit, the applicable Borrower shall pay
to the Agent an amount equal to such L/C  Disbursement not later than two hours
after the applicable Borrower shall have received notice from the Fronting Bank
that payment of such draft will be made, or, if the applicable Borrower shall
have received such notice later than 10:00 A.M. (New York time) on any Business
Day, not later than 10:00 A.M. (New York time) on the immediately following
Business Day.
<PAGE>
 
                                                                               8

          (f)   Obligations Absolute.  The applicable Borrower's obligations to
                ---------------------                                          
reimburse L/C Disbursements as provided in paragraph (e) above shall be
absolute, unconditional and irrevocable, and shall be performed strictly in
accordance with the terms of this Agreement, under any and all circumstances
whatsoever, and irrespective of:

          (i)   any lack of validity or enforceability of any Letter of Credit
     or any Loan Document, or any term or provision therein;

          (ii)  any amendment or waiver of or any consent to departure from all
     or any of the provisions of any Letter of Credit or any Loan Document;

          (iii) the existence of any claim, setoff, defense or other right that
     the applicable Borrower, any other party guaranteeing, or otherwise
     obligated with, either Borrower or any subsidiary or other affiliate
     thereof or any other person may at any time have against the beneficiary
     under any Letter of Credit, the Fronting Bank, the Agent or any Bank or any
     other person, whether in connection with this Agreement, any other Loan
     Document or any other related or unrelated agreement or transaction;

          (iv)  any draft or other document presented under a Letter of Credit
     proving to be forged, fraudulent, invalid or insufficient in any respect or
     any statement therein being untrue or inaccurate in any respect;

          (v)   payment by the Fronting Bank under a Letter of Credit against
     presentation of a draft or other document that does not comply with the
     terms of such Letter of Credit; and

          (vi)  any other act or omission to act or delay of any kind of the
     Fronting Bank, the Banks, the Agent or any other person or any other event
     or circumstance whatsoever, whether or not similar to any of the foregoing,
     that might, but for the provisions of this Section, constitute a legal or
     equitable discharge of the applicable Borrower's obligations hereunder.

          Without limiting the generality of the foregoing, it is expressly
understood and agreed that the absolute and unconditional obligation of the
Borrowers hereunder to reimburse L/C Disbursements will not be excused by the
gross negligence or wilful misconduct of the Fronting Bank.  However, the
foregoing shall not be construed to excuse 
<PAGE>
 
                                                                               9

the Fronting Bank from liability to the applicable Borrower to the extent of any
direct damages (as opposed to consequential damages, claims in respect of which
are hereby waived by the applicable Borrower to the extent permitted by
applicable law) suffered by the applicable Borrower that are caused by the
Fronting Bank's gross negligence or wilful misconduct in determining whether
drafts and other documents presented under a Letter of Credit comply with the
terms thereof; it is understood that the Fronting Bank may accept documents that
appear on their face to be in order, without responsibility for further
investigation, regardless of any notice or information to the contrary and, in
making any payment under any Letter of Credit (i) the Fronting Bank's exclusive
reliance on the documents presented to it under such Letter of Credit as to any
and all matters set forth therein, including reliance on the amount of any draft
presented under such Letter of Credit, whether or not the amount due to the
beneficiary thereunder equals the amount of such draft and whether or not any
document presented pursuant to such Letter of Credit proves to be insufficient
in any respect, if such document on its face appears to be in order, and whether
or not any other statement or any other document presented pursuant to such
Letter of Credit proves to be forged or invalid or any statement therein proves
to be inaccurate or untrue in any respect whatsoever and (ii) any noncompliance
in any immaterial respect of the documents presented under such Letter of Credit
with the terms thereof shall, in each case, be deemed not to constitute wilful
misconduct or gross negligence of the Fronting Bank.

          (g)  Disbursement Procedures.  The Fronting Bank shall, promptly
               ------------------------                                   
following its receipt thereof, examine all documents purporting to represent a
demand for payment under a Letter of Credit.  The Fronting Bank shall as
promptly as possible give telephonic notification, confirmed by telecopy, to the
Agent and the applicable Borrower (and, if the applicable Borrower is Finance
Co., Resources) of such demand for payment and whether the Fronting Bank has
made or will make an L/C Disbursement thereunder; provided that any failure to
                                                  --------                    
give or delay in giving such notice shall not relieve the applicable Borrower of
its obligation to reimburse the Fronting Bank and the Banks with respect to any
such L/C Disbursement.  The Agent shall promptly give each Bank notice thereof.

          (h)  Interim Interest.  If the Fronting Bank shall make any L/C
               -----------------                                         
Disbursement in respect of a Letter of Credit, then, unless the applicable
Borrower shall reimburse such L/C Disbursement in full on the date thereof, the
unpaid amount thereof shall bear interest for 
<PAGE>
 
                                                                              10

the account of the Fronting Bank, for each day from and including the date of
such L/C Disbursement, to but excluding the earlier of the date of payment by
the applicable Borrower or the date on which interest shall commence to accrue
on the Base Rate Loans resulting from such L/C Disbursement as provided in (S)
1.3(b), at the rate per annum that would apply to such amount if such amount
were a Base Rate Loan.

          (i)  Cash Collateralization.  If any Event of Default with respect to
               -----------------------                                         
a Borrower shall occur and be continuing, such Borrower shall, on the Business
Day it receives notice from the Agent or the Required Banks thereof and of the
amount to be deposited, deposit in an account with the Agent, for the benefit of
the Banks, an amount in cash equal to the portion of the L/C Exposure
attributable to Letters of Credit issued for the account of such Borrower and
outstanding as of such date.  Such deposit shall be held by the Agent as
collateral for the payment and performance of the obligations under this
Agreement.  The Agent shall have exclusive dominion and control, including the
exclusive right of withdrawal, over such account.  Such deposits shall not bear
interest.  Moneys in such account shall automatically be applied by the Agent to
reimburse the Fronting Bank for L/C Disbursements attributable to Letters of
Credit issued for the account of the Borrower depositing such moneys for which
the Fronting Bank has not been reimbursed, and any remaining amounts will either
(i) be held for the satisfaction of the reimbursement obligations of such
Borrower for the L/C Exposure at such time or (ii) if the maturity of the Loans
of such Borrower has been accelerated, be applied to satisfy the obligations of
such Borrower under this Agreement.  If a Borrower is required to provide an
amount of cash collateral hereunder as a result of the occurrence of an Event of
Default, such amount (to the extent not applied as aforesaid) shall be returned
to such Borrower within three Business Days after all Events of Default have
been cured or waived.

          SECTION 20  Interest.
                      -------- 

          2.1  Rates of Interest.  (a)  Each Borrower agrees to pay interest in
               -----------------                                               
respect of the unpaid principal amount of each Base Rate Loan made to it from
the date the proceeds thereof are made available to it until prepayment pursuant
to (S) 3 or maturity (whether by acceleration or otherwise) at a rate per annum
which shall be the Base Rate in effect from time to time.
<PAGE>
 
                                                                              11

          (b)  Each Borrower agrees to pay interest in respect of the unpaid
principal amount of each Eurodollar Loan made to it from the date the proceeds
thereof are made available to it until prepayment pursuant to (S) 3 or maturity
(whether by acceleration or otherwise) at a rate per annum which shall be the
relevant Quoted Rate plus the Applicable Eurodollar Margin.

          (c)  Each Borrower agrees to pay interest in respect of overdue
principal of, and (to the extent permitted by law) overdue interest in respect
of, each Loan made to it, on demand, at a rate per annum which shall be 2% in
excess of the Base Rate in effect from time to time.

          (d)  Interest shall be computed on the actual number of days elapsed
on the basis of a 360-day year; provided, however, that for any rate of interest
                                --------  -------                               
determined by reference to the Prime Rate, interest shall be computed on the
actual number of days elapsed on the basis of a year of 365 or 366 days.

          (e)  In computing interest on the Loans, the date of the making of a
Loan shall be included and the date of payment shall be excluded, provided,
                                                                  -------- 
however, that if a Loan is repaid on the same day on which it is made, such day
- -------                                                                        
shall nevertheless be included in computing interest thereon.

          2.2  Determination of Rate of Borrowing.  As soon as practicable after
               ----------------------------------                               
10:00 A.M. (New York time) on the second Business Day prior to the commencement
of any Interest Period with respect to a Eurodollar Loan, the Agent shall
determine (which determination, absent manifest error, shall be final,
conclusive and binding upon all parties) the rate of interest which shall be
applicable to such Eurodollar Loan for the Interest Period applicable thereto
and shall promptly give notice thereof (in writing or by telephone, confirmed in
writing) to the applicable Borrower and the Banks.  In the event that there is
no applicable rate for such Eurodollar Loan:  (i) the Agent shall promptly give
notice thereof (in writing or by telephone, confirmed in writing) to the
applicable Borrower and the Banks and (ii) such Loan shall be deemed to have
been requested to be made as a Base Rate Loan and (iii) the rate applicable to
such Loan shall be the Base Rate in effect from time to time.

          2.3  Interest Payment Dates.  Accrued interest shall be payable (i) in
               ----------------------                                           
respect of each Eurodollar Loan, at the end of the Interest Period relating
thereto and in respect of each Loan with an Interest Period of longer than 
<PAGE>
 
                                                                              12

3 months, on each 3-month anniversary of the first day of such Interest Period,
(ii) in respect of each Base Rate Loan, at the end of each Interest Period
relating thereto and (iii) in respect of each Loan, on any prepayment (on the
amount prepaid), at maturity (whether by acceleration or otherwise) and, after
maturity, on demand.

          2.4  Conversions; Interest Periods.  (a)  Each Borrower shall have the
               -----------------------------                                    
option to convert on any Business Day, all or a portion at least equal to
$10,000,000 of the outstanding principal amount of the Loans made to it pursuant
to one or more Borrowings of one Type of Loans into a Borrowing or Borrowings of
another Type of Loan, provided that (i) except as provided in (S)2.5(b),
                      --------                                          
Eurodollar Loans may be converted into Base Rate Loans only on the last day of
an Interest Period applicable thereto and no partial conversion of a Borrowing
of Eurodollar Loans shall reduce the outstanding principal amount of the Loans
pursuant to such Borrowing to less than $10,000,000 and (ii) Loans may only be
converted into Eurodollar Loans if no Default or Event of Default with respect
to such Borrower is in existence on the date of the conversion.  Each such
conversion shall be effected by such Borrower by giving the Agent at its Payment
Office, prior to 12:00 Noon (New York time), at least three Business Days (or by
12:00 Noon on the same Business Day in the case of a conversion into Base Rate
Loans) prior written notice (or telephonic notice promptly confirmed in writing)
(each a "Notice of Conversion") specifying the Loans to be so converted, the
Borrowing or Borrowings pursuant to which such Loans were made, the Type of
Loans to be converted into and, if to be converted into a Borrowing of
Eurodollar Loans, the Interest Period to be initially applicable thereto.  The
Agent shall give each Bank prompt notice of any such proposed conversion
affecting any of its Loans.
<PAGE>
 
                                                                              13

          (b)   At the time a Borrower gives a Notice of Borrowing or Notice of
Conversion in respect of the making of, or conversion into, a Borrowing of
Eurodollar Loans (in the case of the initial Interest Period applicable thereto)
or prior to 12:00 Noon (New York time) on the third Business Day prior to the
expiration of an Interest Period applicable to a Borrowing of Eurodollar Loans
(in the case of any subsequent Interest Period), such Borrower shall have the
right to elect, by giving the Agent written notice (or telephonic notice
promptly confirmed in writing), the Interest Period applicable to such
Borrowing, which Interest Period shall, at the option of such Borrower, be a
one, two, three or six month period or, subject to availability on the part of
each Bank, such shorter period as ends on the Expiry Date.  Notwithstanding
anything to the contrary contained above:

          (i)   the initial Interest Period for any Borrowing of Eurodollar
     Loans shall commence on the date of such Borrowing (including the date of
     any conversion from a Borrowing of Base Rate Loans) and each Interest
     Period occurring thereafter in respect of such Borrowing shall commence on
     the day on which the next preceding Interest Period expires;

          (ii)  if any Interest Period applicable to a Borrowing of Eurodollar
     Loans begins on a day for which there is no numerically corresponding day
     in the calendar month at the end of such Interest Period, such Interest
     Period shall end on the last Business Day of such calendar month;

          (iii) no Interest Period in respect of any Borrowing of Loans shall
     extend beyond the Expiry Date; and

          (iv)  all Eurodollar Loans comprising a Borrowing shall at all times
     have the same Interest Period.

If upon the expiration of any Interest Period, a Borrower has failed to elect a
new Interest Period to be applicable to the respective Borrowing of Eurodollar
Loans as provided above or is unable to elect a new Interest Period as a result
of (S) 2.4(a)(ii) above, such Borrower shall be deemed to have elected to
convert such Borrowing into a Borrowing of Base Rate Loans effective as of the
expiration date of such current Interest Period.

          2.5  Increased Costs, Illegality, Etc.  (a)  In the event that any
               ---------------------------------                            
Bank (including the Agent and the Fronting Bank) shall have reasonably
determined (which
<PAGE>
 
                                                                              14

determination shall be final and conclusive and binding upon all parties but,
with respect to the following clauses (i), (ii) and (iii), shall be made only
after consultation with the applicable Borrower and the Agent on the date of
such determination) that:

          (i)   on any date for determining the Quoted Rate for any Interest
     Period, by reason of any change after the date hereof affecting the
     interbank Eurodollar market or affecting the position of such Bank (if a
     Reference Bank), in such market, adequate and fair means do not exist for
     ascertaining the applicable interest rate by reference to the Quoted Rate;
     or

          (ii)  at any time, by reason of (y) any change after the date hereof
     in any applicable law or governmental rule, regulation or order (or any
     interpretation thereof by a governmental authority or otherwise (provided
                                                                      --------
     that, in the case of an interpretation not by a governmental authority,
     such interpretation shall be made in good faith and shall have a reasonable
     basis) and including the introduction of any new law or governmental rule,
     regulation or order), to the extent not provided for in clause (iii) below,
     or (z) in the case of Eurodollar Loans, other circumstances affecting such
     Bank or the interbank Eurodollar market or the position of such Bank in
     such market, the Quoted Rate shall not represent the effective pricing to
     such Bank for funding or maintaining the affected Eurodollar Loan; or

          (iii) at any time, by reason of the requirements of Regulation D or
     other official reserve requirements, the Quoted Rate shall not represent
     the effective pricing to such Bank for  funding or maintaining the affected
     Eurodollar Loan; or

          (iv)  at any time, that the making or continuance of any Eurodollar
     Loan or the issuance of any Letter of Credit has become unlawful by
     compliance by such Bank or by the Fronting Bank in good faith with any law,
     governmental rule, regulation, guideline or order, or would cause severe
     hardship to such Bank or to the Fronting Bank as a result of a contingency
     occurring after the date hereof which materially and adversely affects the
     interbank Eurodollar market;

then, and in any such event, the Bank so affected shall on such date of
determination give notice (by telephone confirmed in writing) to each applicable
Borrower and to the 
<PAGE>
 
                                                                              15

Agent (who shall give similar notice to each Bank) of such determination.
Thereafter, (x) in the case of clause (i), (ii) or (iii) above, each applicable
Borrower shall pay to such Bank, upon written demand therefor, such additional
amounts deemed in good faith by such Bank to be material (in the form of an
increased rate of, or a different method of calculating, interest or otherwise
as such Bank in its discretion shall determine) as shall be required to cause
such Bank to receive interest with respect to its affected Eurodollar Loan at a
rate per annum equal to the then Applicable Eurodollar Margin in excess of the
effective pricing to such Bank to make or maintain such Eurodollar Loan and (y)
in the case of clause (iv), each applicable Borrower shall take one of the
actions specified in (S) 2.5(b) as promptly as possible and, in any event,
within the time period required by law. A certificate as to additional amounts
owed any such Bank, showing in reasonable detail the basis for the calculation
thereof, submitted to each applicable Borrower and the Agent by such Bank shall,
absent manifest error, be final, conclusive and binding upon all of the parties
hereto.

          (b)  At any time that any of its Loans are affected by the
circumstances described in (S) 2.5(a) each applicable Borrower may (i) if the
affected Eurodollar Loan is then being made pursuant to a Borrowing, cancel said
Borrowing by giving the Agent notice thereof by telephone (confirmed in writing)
on the same date that such Borrower was notified by the affected Bank pursuant
to (S) 2.5(a) or (ii) if the affected Eurodollar Loan is then outstanding, upon
at least 3 Business Days' written notice to the Bank, require the Bank to
convert such Eurodollar Loan into a Base Rate Loan; provided that if more than
one Bank is affected at any time, then all affected Banks must be treated in the
same manner pursuant to this (S) 2.5(b).

          (c)  In the event that a Borrower shall be paying additional amounts
to a Bank pursuant to (S) 2.5(a)(i), (ii) or (iii) or (S) 2.5(d) (and, in the
case of (S) 2.5(d), such Bank has not eliminated the increased costs by
designating a new Applicable Lending Office) or is unable to incur a Eurodollar
Loan from such Bank because of the existence of a condition described in (S)
2.5(a)(iv) (any such Bank, an "Affected Bank") covering a period of 90
consecutive days, the Borrowers, the Agent and the Affected Bank shall consult
with a view towards (but being under no obligation to) amending this Agreement,
with the consent of the Banks other than the Affected Bank (the "Unaffected
Banks") which, at such time, have outstanding two-thirds of the aggregate
principal amount of 
<PAGE>
 
                                                                              16

the Loans outstanding hereunder (exclusive of the aggregate principal amount of
the Loans outstanding of the Affected Bank), to provide for (i) the termination
of the Affected Bank's Commitment, provided that such termination is accompanied
                                   --------          
by payment in full of the outstanding amount of all Loans of the Affected Bank,
interest accrued on such amount to the date of payment and all other liabilities
and obligations of the Borrowers hereunder (including, without limitation,
amounts payable pursuant to (S) 1.8, (S) 2.5(a) or (S) 2.5(d)) with respect to
the Affected Bank, and (ii) the substitution of another bank for the Affected
Bank and/or the increase, pro rata or otherwise, of the Commitments of the
                          --- ----              
Unaffected Banks or otherwise, so that the Total Commitment remains the amount
which would be applicable in the absence of the occurrence of clause (i) of this
(S) 2.5(c); provided that no Commitment of any Unaffected Bank may be changed
without the consent of such Bank.

          (d)  If any Bank reasonably determines at any time that any applicable
law or governmental rule, regulation, order or request (whether or not having
the force of law) concerning capital adequacy, or any change in interpretation
or administration thereof by any governmental authority, central bank or
comparable agency, will have the effect of increasing the amount of capital
required or expected to be maintained by such Bank based on the existence of
such Bank's Commitment hereunder or its obligations hereunder or under any
Letter of Credit, then promptly upon receipt of a written demand from such Bank
meeting the requirements of this (S) 2.5(d), the applicable Borrowers agree to
pay such Bank such additional amounts as shall be required to compensate such
Bank for the increased cost to such Bank of making Loans to (or issuing Letters
of Credit for the account of) the Borrowers, as a result of such increase in
capital for the first Compensation Period (as defined below). After the initial
written demand for payment in respect of this (S) 2.5(d) is delivered to the
applicable Borrowers by such Bank, written demand for payment may be submitted
for each Compensation Period thereafter that this Agreement remains in effect as
to such Bank. Each such written demand shall (i) specify (a) the event pursuant
to which such Bank is entitled to claim the additional amount, (b) the date on
which the event occurred and became applicable to the Bank and (c) the
Compensation Period for which the amount is due and (ii) set out in reasonable
detail the basis and computation of such additional amount. Each period for
which the additional amounts may be claimed by such Bank (a "Compensation
Period") shall be the lesser of (x) the number of days actually elapsed since
the date the event occurred and became applicable to such Bank or (y) 90 days.
Payments made by the applicable Borrowers to any Bank in respect of
<PAGE>
 
                                                                              17

this (S) 2.5(d) shall be made on the last day of the Compensation Period
specified in each written demand with a final payment to be made on the date of
termination of this Agreement as to such Bank. Provided that each Bank acts
reasonably and in good faith and uses averaging and attribution methods which
are reasonable in determining any additional amounts due under this (S) 2.5(d),
such Bank's determination of compensation owing under this (S) 2.5(d) shall,
absent manifest error, be final and conclusive and binding on all the parties
hereto. No Bank shall be entitled to compensation under this (S) 2.5(d) for any
costs incurred with respect to any date unless it shall have notified the
applicable Borrowers that it will demand compensation for such costs not more
than 60 days after the later of (i) such date and (ii) the date on which it
shall have become aware of such costs.

          (e)  Each Bank agrees that, upon the occurrence of any event giving
rise to the operation of (S) 2.5(d) with respect to such Bank, such Bank shall,
if requested by the Borrowers, designate another Applicable Lending Office for
any Loans affected by such event with the objective of eliminating, avoiding or
mitigating the consequence of the event giving rise to the operation of such
section; provided that such Bank and its Applicable Lending Office shall not, in
the sole judgment of such Bank, suffer any economic, legal or regulatory
disadvantage.  Nothing in this (S) 2.5(e) shall affect or postpone any of the
obligations of a Borrower or the right of any Bank provided in (S) 2.5(d).

          2.6  Extension of Expiry Date.  (i)  The Borrowers may, by sending an
               ------------------------                                        
Extension Letter to the Agent (in which case the Agent shall promptly deliver a
copy to each of the Banks), not less than 30 days and not more than 45 days
prior to the Expiry Date then in effect (the "Current Expiry Date"), request
that the Banks extend the Expiry Date so that it will occur 364 days after the
Current Expiry Date.  Each Bank, acting in its sole discretion, shall, by notice
to the Agent given not less than 20 days and not more than 30 days prior to the
Current Expiry Date, advise the Agent in writing whether or not such Bank agrees
to such extension (each Bank that so advises the Agent that it will not extend
the Expiry Date being referred to herein as a "Non-extending Bank"); provided
                                                                     --------
that any Bank that does not advise the Agent by the 20th day prior to the
Current Expiry Date shall be deemed to be a Non-extending Bank.  The election of
any Bank to agree to such extension shall not obligate any other Bank to agree.
<PAGE>
 
                                                                              18

          (ii)  (A)  If Banks holding Commitments that aggregate at least 51% of
the Total Commitment on that 20th day prior to the Current Expiry Date shall not
have agreed to extend the Expiry Date, then the Current Expiry Date shall not be
so extended and the outstanding principal balance of all loans and other amounts
payable hereunder shall be payable on the Current Expiry Date.  (B)  If (and
only if) Banks holding Commitments that aggregate at least 51% of the Total
Commitment on the 20th day prior to the Current Expiry Date shall have agreed to
extend the Expiry Date, then the Expiry Date applicable to the Banks that are
not Non-extending Banks shall be the day that is 364 days after the Current
Expiry Date.  In the event of such extension, the Commitment of each Non-
extending Bank shall terminate on the Current Expiry Date, all Loans and other
amounts payable hereunder to such Non-extending Banks shall become due and
payable on the Current Expiry Date and the Total Commitment of the Banks
hereunder shall be reduced by the Commitments of Non-extending Banks so
terminated on and after such Current Expiry Date.

          (iii) In the event that the conditions of clause (B) of paragraph
(ii) above have been satisfied, the Borrowers shall have the right on or before
the Current Expiry Date, at their own expense, to require any Non-extending Bank
to transfer and assign without recourse (except as to title and the absence of
Liens created by it) (in accordance with and subject to the restrictions
contained in (S) 10.6) all its interests, rights and obligations under this
Agreement (including with respect to any L/C Exposure) to one or more other
banks or other financial institutions (which may include any Bank) (each, an
"Additional Commitment Bank"), provided that (x) such Additional Commitment
Bank, if not already a Bank hereunder, shall be subject to the approval of the
Agent (not to be unreasonably withheld), (y) such assignment shall become
effective as of the Current Expiry Date and (z) the Additional Commitment Bank,
shall pay to such Non-extending Bank in immediately available funds on the
effective date of such assignment the principal of and interest accrued to the
date of payment on the Loans made by such Non-extending Bank hereunder and all
other amounts accrued for such Non-extending Bank's account or owed to it
hereunder.  Notwithstanding the foregoing, no extension of the Expiry Date shall
become effective unless, on the Current Expiry Date the conditions set forth in
paragraphs (a), (b) and (d) of (S)(S) 4.2A and 4.2B shall be satisfied (with all
references in such paragraphs to the making of a Loan or issuance of a Letter of
Credit being deemed to be references to the extension of the Commitments on the
Current Expiry Date) and the Agent shall have received a 
<PAGE>
 
                                                                              19

certificate to that effect dated the Current Expiry Date and executed by a
responsible officer of each of the Borrowers and Resources.

          SECTION 3.  Payments.
                      -------- 

          3.1  Payments on Non-Business Days.  Whenever any  payment to be made
               -----------------------------                                   
hereunder shall be stated to be due on a day which is not a Business Day, the
due date thereof shall be extended to the next succeeding Business Day and, if a
payment of principal has been so extended, interest shall be payable on such
principal at the applicable rate during such extension.

          3.2  Voluntary Prepayments.  Each Borrower shall have the right to
               ---------------------                                        
prepay its Loans in whole or in part, without premium or penalty, from time to
time pursuant to this (S) 3.2 on the following terms and conditions:  (i) the
applicable Borrower shall give the Agent at the Payment Office at least 3
Business Days' prior written notice or telephonic notice (confirmed in writing)
of its intent to prepay such Loans, which notice shall specify the amount of
such prepayment and the specific Borrowing to be prepaid, which notice the Agent
shall promptly transmit to each of the Banks; (ii) each prepayment shall be in
an integral multiple of $1,000,000 and not less than $10,000,000 (or, if less,
the amount then remaining outstanding in respect of the Borrowing being
prepaid); (iii) each prepayment in respect of Loans made pursuant to one
Borrowing shall be applied pro rata among the Banks on the basis of such Loans,
                           --- ----                                            
except as otherwise provided in (S) 2.5; (iv) at the time of any prepayment, the
applicable Borrower shall pay all interest accrued on the principal amount of
said prepayment and, if the applicable Borrower prepays any Eurodollar Loan on
any day other than the last day of an Interest Period applicable thereto, the
applicable Borrower shall compensate the Banks for losses sustained as a result
of such prepayment to the extent and as provided in (S) 1.8.

          3.3  Method and Place of Payment, Etc.  Except as expressly provided
               ---------------------------------                              
herein, all payments under this Agreement shall be made to the Agent for the
ratable account of the Banks not later than Noon (New York time) on the date
when due and shall be made in freely transferable U.S. dollars and in
immediately available funds at the Payment Office (or, if such payment is made
in respect of principal of or interest on any Eurodollar Loan, for the account
of such non-U.S. office of the Agent as the Agent may from time to time direct).
Unless the Agent shall have been notified by the applicable Borrower prior to
the date on which any payment to be made by the applicable Borrower 
<PAGE>
 
                                                                              20

hereunder is due that the applicable Borrower does not intend to remit such
payment, the Agent may, at its discretion, assume that the applicable Borrower
has remitted such payment when so due and the Agent may, at its discretion and
in reliance upon such assumption, make available to each Bank (for the account
of its applicable lending office) on such payment date an amount equal to such
Bank's share of such assumed payment. If the applicable Borrower has not in fact
remitted such payment to the Agent, each Bank shall forthwith on demand repay to
the Agent the amount of such assumed payment made available to such Bank
together with interest thereon in respect of each day from and including the
date such amount was made available by the Agent to such Bank to the date such
amount is repaid to the Agent at a rate per annum equal to the Federal Funds
Rate. On the commencement date of each Interest Period and on each date
occurring two Business Days prior to an Interest Payment Date, the Agent shall
notify the applicable Borrower of the amount of interest and/or fees due at the
end of such Interest Period or on such Interest Payment Date (assuming, in the
case of Base Rate Loans, that there is no change in the rate of interest
applicable to the applicable Base Rate Loan); provided, however, that failure to
so notify the applicable Borrower shall not affect such Borrower's obligation to
make any such payments.

          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, other than
any tax (except such taxes referred to in clause (ii) below) 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 (collectively the "Taxes") and (ii) deduction of
an amount equal to 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.  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, 
<PAGE>
 
                                                                              21

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.  Conditions Precedent.
                      -------------------- 

          4.1  Conditions to Effectiveness.  On the Closing Date:
               ---------------------------                       

          (a)  The Agent shall have received from the general counsel or senior
     counsel of PPL a favorable opinion dated the Closing Date substantially in
     the form of Exhibit A hereto.

          (b)  The Agent shall have received an opinion of Reid & Priest LLP,
     counsel for PPL, Finance Co. and Resources, addressed to the Agent, the
     Fronting Bank and the Banks, dated the Closing Date, with respect to the
     enforceability of this Agreement against PPL and Finance Co., and with
     respect to the enforceability of the guarantee hereunder by Resources of
     the obligations of Finance Co. against Resources, substantially in the form
     of Exhibit B hereto.

          (c)  All corporate and legal proceedings and all instruments in
     connection with the transactions contemplated by this Agreement (including
     resolutions of the Board of Directors of PPL, Finance Co. and Resources and
     certificates as to the incumbency of the officers signing this Agreement or
     any certificate delivered in connection herewith) shall be satisfactory in
     form and substance to the Agent, and the Agent shall have received all
     information and copies of all documents that it has requested, such
     documents where appropriate to be certified by proper corporate or
     governmental authorities.

          (d)  The Agent shall have received from each of the Banks, the
     Fronting Bank, PPL, Finance Co. and Resources a duly executed and delivered
     counterpart hereof.

          (e)  The conditions set forth in (SS) 4.2A and 4.2B (other than (S)
     4.2A(c) and (S)4.2B(c)) shall have been satisfied.
<PAGE>
 
                                                                              22

          (f)  The Agent shall have received a certificate signed by appropriate
     officers of PPL stating that all regulatory approvals necessary to permit
     PPL to enter into this Agreement and to perform its obligations hereunder
     have been obtained and are in full force and effect and attaching evidence
     of all such regulatory approvals.

          4.2A  Conditions to Each Loan to PPL and Each Issuance of a Letter of
                ---------------------------------------------------------------
Credit for the account of PPL.  The obligation of each Bank to make each Loan to
- -----------------------------                                                   
PPL (excluding any conversions of one Type of Loan to another Type pursuant to
(S) 2.5(b)) and of the Fronting Bank to issue each Letter of Credit for the
account of PPL hereunder is subject, at the time of the making of each such Loan
and the issuance of each such Letter of Credit (except as hereinafter
indicated), to the satisfaction of the following conditions, with the making of
each such Loan and the issuance of each such Letter of Credit constituting a
representation and warranty by PPL that the conditions specified in (S)(S)
4.2A(a), (b), (d) and (e) below are then satisfied:

          (a)  No Default.  At the time of the making each such Loan to PPL, and
               ----------                                                       
     the issuance of each Letter of Credit for the account of PPL and after
     giving effect thereto, there shall exist no Default or Event of Default
     with respect to PPL.

          (b)  Representations and Warranties.  At the time of the making of
               ------------------------------                               
     each such Loan to PPL and the issuance of each such Letter of Credit for
     the account of PPL and after giving effect thereto, all representations and
     warranties contained in (S) 7A hereof shall be true and correct with the
     same force and effect as though such representations and warranties had
     been made as of such time.

          (c)  Notice of Borrowing.  The Agent shall have received Notice of
               -------------------                                          
     Borrowing from PPL as required by (S) 1.2 or, in the case of the issuance
     of a Letter of Credit, the Fronting Bank and the Agent shall have received
     a notice from PPL requesting the issuance of such Letter of Credit as
     required by (S) 1A(b).

          (d)  No Adverse Change.  Since December 31, 1997, there shall have
               ----------------- 
     been no change in the business, assets, financial condition or operations
     of PPL and its Subsidiaries taken as a whole which materially and
<PAGE>
 
                                                                              23

     adversely affects the ability of PPL to perform any of its obligations
     hereunder.

          (e)  Regulatory Approval.  The making of such Loan to PPL or the
               -------------------                                        
     issuance of such Letter of Credit for the account of PPL shall not cause
     the aggregate dollar amount of Loans and Letters of Credit outstanding for
     the account of PPL to exceed the amount of such obligations for which PPL
     has obtained the necessary regulatory approval.

               4.2B  Conditions to Each Loan to Finance Co. and Each Issuance of
                     -----------------------------------------------------------
     a Letter of Credit for the account of Finance Co.  The obligation of each
     -------------------------------------------------                        
     Bank to make each Loan to Finance Co. (excluding any conversions of one
     Type of Loan to another Type pursuant to (S) 2.5(b)) and of the Fronting
     Bank to issue each Letter of Credit for the account of Finance Co.
     hereunder is subject, at the time of the making of each such Loan and the
     issuance of each such Letter of Credit (except as hereinafter indicated),
     to the satisfaction of the following conditions, with the making of each
     such Loan and the issuance of each such Letter of Credit constituting a
     representation and warranty by Finance Co. that the conditions specified in
     (SS) 4.2B(a), (b) and (d) below are then satisfied:

          (a)  No Default.  At the time of the making of each such Loan to
               ----------                                                 
     Finance Co. and the issuance of each Letter of Credit for the account of
     Finance Co. and after giving effect thereto, there shall exist no Default
     or Event of Default with respect to Finance Co.

          (b)  Representations and Warranties.  At the time of the making of
               ------------------------------                               
     each such Loan to Finance Co. and the issuance of each such Letter of
     Credit for the account of Finance Co. and after giving effect thereto, all
     representations and warranties contained in (S) 7B hereof shall be true and
     correct with the same force and effect as though such representations and
     warranties had been made as of such time.

          (c)  Notice of Borrowing.  The Agent shall have received Notice of
               -------------------                                          
     Borrowing from Finance Co. as required by (S) 1.2 or, in the case of the
     issuance of a Letter of Credit, the Fronting Bank and the Agent shall have
     received a notice from Finance Co. requesting the issuance of such Letter
     of Credit as required by (S) 1A(b).
<PAGE>
 
                                                                              24

          (d)   No Adverse Change.  Since December 31, 1997, there shall have 
                ----------------- 
     been no change in the business, assets, financial condition or operations
     of Resources and its Subsidiaries taken as a whole which materially and
     adversely affects the ability of Resources to perform any of its
     obligations hereunder.

          SECTION 5.A  Covenants of PPL.
                       ---------------- 

          While this Agreement is in effect and until the Total Commitment has
been terminated with respect to PPL, all obligations of PPL hereunder shall have
been paid in full and all Letters of Credit issued for the account of PPL shall
have been canceled or have expired and all amounts drawn thereunder shall have
been reimbursed in full, PPL agrees that:

          5.1A  Financial Statements.  PPL will furnish to each Bank:
                --------------------                                 

          (a)   within 120 days after the end of each fiscal year an auditors'
     report, including a balance sheet as at the close of such fiscal year and
     statements of income, shareowners' common equity and cash flows for such
     year for PPL and its consolidated Subsidiaries prepared in conformity with
     GAAP, with an opinion expressed by Price Waterhouse LLP or other
     independent auditors of recognized standing selected by it;

          (b)   within 60 days after the end of each of the first three quarters
     in each fiscal year, a balance sheet as at the close of such quarterly
     period and statements of income, shareowners' common equity and cash flows
     for such quarterly period for itself and its consolidated Subsidiaries
     prepared in conformity with GAAP;

          (c)   within 120 days after the end of each fiscal year, a copy of its
     Form 10-K Report to the Securities and Exchange Commission ("SEC") and
     within 60 days after the end of each of the first three quarters in each
     fiscal year, a copy of its Form 10-Q Report to the SEC;


          (d)  from time to time, with reasonable promptness, such further
     information regarding its business, affairs and financial condition as any
     Bank and the Fronting Bank may reasonably request; and
<PAGE>
 
                                                                              25

          (e)   upon acquiring knowledge of the existence of a Default or Event
     of Default with respect to it a certificate of a financial officer
     specifying:  (i) the nature of such Default or Event of Default, (ii) the
     period of the existence thereof, and (iii) the actions that PPL proposes to
     take with respect thereto.

          The financial statements required to be furnished pursuant to clauses
(a) and (b) above shall be accompanied by a certificate of a principal financial
officer of PPL to the effect that no Default or Event of Default with respect to
it has occurred and is continuing.  The financial statements required to be
furnished pursuant to clause (a) above shall also be accompanied by a Compliance
Certificate in the form of Exhibit D-1 hereto ("PPL Compliance Certificate")
demonstrating compliance with (S) 5.4A.

          5.2A  Mergers.   PPL will not merge or consolidate with any Person if
                -------                                                        
PPL is not the survivor unless (a) the survivor assumes the obligations of PPL
hereunder, (b) the survivor is a utility whose business is not substantially
different in character or composition from that of PPL and (c) the senior
secured debt ratings of the survivor by Moody's and S&P as available (or if the
ratings of Moody's and S&P are not available, of such other rating agency as
shall be acceptable to the Agent), are at least equal to the ratings of PPL's
First Mortgage Bonds (or other senior secured debt) immediately prior to such
merger or consolidation.

          5.3A  Ratings.  PPL will use its best efforts to promptly notify the
                -------                                                       
Banks upon obtaining knowledge of any change in, or cessation of, ratings of
PPL's First Mortgage Bonds (or other senior secured debt) by Moody's or S&P.

          5.4A  Consolidated Indebtedness to Consolidated Capitalization.  The
                --------------------------------------------------------      
ratio of Consolidated Indebtedness of PPL to Consolidated Capitalization of PPL
shall not exceed 70% at any time.

          SECTION 5.B  Covenants of Finance Co. and Resources.
                       -------------------------------------- 
<PAGE>
 
                                                                              26

          While this Agreement is in effect and until the Total Commitment has
been terminated with respect to Finance Co., all obligations of Finance Co. and
Resources hereunder shall have been paid in full and all Letters of Credit
issued for the account of Finance Co. shall have been canceled or have expired
and all amounts drawn thereunder shall have been reimbursed in full, each of
Finance Co. and Resources agrees that:

          5.1B  Financial Statements.  Resources will furnish to each Bank:
                --------------------                                       

          (a)   within 120 days after the end of each fiscal year (i) an
     auditors' report, including a balance sheet as at the close of such fiscal
     year and statements of income, shareowners' common equity and cash flows
     for such year for Resources and its consolidated Subsidiaries prepared in
     conformity with GAAP, with an opinion expressed by Price Waterhouse LLP or
     other independent auditors of recognized standing selected by it and (ii)
     Resources' unconsolidated balance sheet as at the close of such fiscal year
     and statements of income, shareholders common equity and cash flows for
     such year;

          (b)   within 60 days after the end of each of the first three quarters
     in each fiscal year, a balance sheet as at the close of such quarterly
     period and statements of income, shareowners' common equity and cash flows
     for such quarterly period for (i) Resources and its consolidated
     Subsidiaries prepared in conformity with GAAP, and (ii) Resources'
     unconsolidated balance sheet as at the close of such quarterly period and
     statements of income, shareowners' common equity and cash flow for such
     quarterly period;

          (c)   within 120 days after the end of each fiscal year, a copy of
     Resources' Form 10-K Report to the Securities and Exchange Commission
     ("SEC") and within 60 days after the end of each of the first three
     quarters in each fiscal year, a copy of Resources' Form 10-Q Report to the
     SEC;

          (d)   from time to time, with reasonable promptness, such further
     information regarding Resources' business, affairs and financial condition
     as any Bank and the Fronting Bank may reasonably request; and
<PAGE>
 
                                                                              27

          (e)   upon acquiring knowledge of the existence of a Default or Event
     of Default with respect to Finance Co. a certificate of a financial officer
     of Resources and an officer of Finance Co. specifying:  (i) the nature of
     such Default or Event of Default, (ii) the period of the existence thereof,
     and (iii) the actions that Resources and Finance Co. propose to take with
     respect thereto.

          The financial statements required to be furnished pursuant to clauses
(a) and (b) above shall be accompanied by a certificate of a principal financial
officer of Resources to the effect that no Default or Event of Default with
respect to Finance Co. has occurred and is continuing.  The financial statements
required to be furnished pursuant to clause (a) above shall also be accompanied
by a Compliance Certificate in the form of Exhibit D-2 hereto ("Resources
Compliance Certificate") demonstrating compliance with (S) 5.5B.

          5.2B  Mergers.   (i) (1) Resources will not merge or consolidate with
                -------                                                        
any Person if Resources is not the survivor unless (a) the survivor assumes
Resources' obligations hereunder, (b) substantially all of the consolidated
assets and consolidated revenues of the survivor are anticipated to come from a
utility business or utility businesses and (c) the senior unsecured debt ratings
of the survivor by Moody's or S&P, as available (or if the ratings of Moody's
and S&P are not available, of such other rating agency as shall be acceptable to
the Required Banks), are at least equal to the ratings of Resource's senior
unsecured debt immediately prior to such merger or consolidation; (2) Resources
will not dispose of any common stock of either Borrower or any securities
convertible into common stock of either Borrower, except in connection with any
merger or consolidation permitted under this (S) 5.2B or under (S) 5.2A, and
except that Resources shall be allowed to sell, transfer or otherwise dispose of
PPL's common stock to PPL.

          (ii)  Finance Co. will not merge into or consolidate with any other
Person except (a) Resources or a successor of Resources permitted by this
Section or (b) any other Person which is a wholly owned subsidiary of Resources
or a successor of Resources permitted by this Section.

          5.3B  Ratings.  Finance Co. and Resources will each use their best
                -------                                                     
efforts to promptly notify the Banks upon obtaining knowledge of any change in,
or cessation of, 
<PAGE>
 
                                                                              28

ratings of Resources' senior unsecured debt by Moody's or S&P.

          5.4B  Liens.   Resources will not create, incur, or suffer to exist
                -----                                                        
any Lien in or on the common stock of PPL or Finance Co. or on securities
convertible into the common stock of PPL or Finance Co. (in either case, now or
hereafter acquired) other than Permitted Liens.

          5.5B  Consolidated Indebtedness to Consolidated Capitalization.  The
                --------------------------------------------------------      
ratio of Consolidated Indebtedness of Resources to Consolidated Capitalization
of Resources shall not exceed 70% at any time.

          SECTION 6.A  Events of Default with Respect to PPL.
                       ------------------------------------- 

          Each of the following events shall constitute an "Event of Default"
with respect to PPL:

          6.1A  Representations, Etc.  Any certificate furnished by PPL to the
                ---------------------                                         
Banks and the Fronting Bank pursuant hereto shall prove to have been incorrect
in any material respect or any of the representations and warranties made by PPL
herein or in connection herewith shall prove to have been incorrect in any
material respect when made; or

          6.2A  Principal and Interest.  PPL shall fail to make any payment of
                ----------------------                                        
principal on any of its Loans or any other payment payable by PPL hereunder
(including the reimbursement of any L/C Disbursement) when due or, in the case
of interest or fees, within 10 days of the due date thereof; or

          6.3A  Defaults by PPL Under Other Agreements.  PPL shall (i) fail to
                --------------------------------------                        
pay any principal or interest, regardless of amount, due in respect of any
Indebtedness in a principal amount in excess of $50,000,000 beyond any period of
grace provided with respect thereto, or (ii) fail to observe or perform any
other term, covenant, condition or agreement contained in any agreement or
instrument evidencing or governing any such Indebtedness in a principal amount
in excess of $50,000,000 beyond any period of grace provided with respect
thereto if the effect of any failure referred to in this clause (ii) is to
cause, or to permit the holder or holders of such Indebtedness or a trustee on
its or their behalf to cause, such Indebtedness to become due prior to its
stated maturity; or
<PAGE>
 
                                                                              29

          6.4A  Judgments.  PPL shall fail within 60 days to pay, bond or
                ---------                                                
otherwise discharge any judgment or order for the payment of money in excess of
$25,000,000 that is not stayed on appeal or otherwise being appropriately
contested in good faith; or

          6.5A  Bankruptcy, Etc.   PPL shall commence a voluntary case
                ----------------                                      
concerning itself under Title 11 of the United States Code entitled "Bankruptcy"
as now or hereafter in effect or any successor thereto (the "Bankruptcy Code");
or an involuntary case shall be commenced against PPL or such case shall be
controverted but shall not be dismissed within 60 days after the commencement of
the case; or PPL shall not generally be paying its debts as they become due; or
a custodian (as defined in the Bankruptcy Code) shall be appointed for, or shall
take charge of, all or substantially all of the property of PPL or PPL shall
commence any other proceeding under any  reorganization, arrangement,
readjustment of debt, relief of debtors, dissolution, insolvency or liquidation
or similar law of any jurisdiction whether now or hereafter in effect relating
to PPL or there shall be commenced against PPL any such proceeding which remains
undismissed for a period of 60 days or PPL shall be adjudicated insolvent or
bankrupt; or PPL shall fail to controvert in a timely manner any such case under
the Bankruptcy Code or any such proceeding, or any order of relief or other
order approving any such case or proceeding shall be entered; or PPL by any act
or failure to act shall indicate its consent to, approval of or acquiescence in
any such case or proceeding or in the appointment of any custodian or the like
for it or any substantial part of its property or shall suffer any such
appointment to continue undischarged or unstayed for a period of 60 days; or PPL
shall make a general assignment for the benefit of creditors; or any corporate
action shall be taken by PPL for the purpose of effecting any of the foregoing;
or

          6.6A  Other Covenants.   PPL shall fail to perform or observe any
                ---------------                                            
other term, covenant or agreement contained in this Agreement on its part to be
performed or observed and any such failure shall remain unremedied for a period
of 30 days after written notice thereof shall have been received by PPL from the
Agent or the Required Banks.


          SECTION 6.B  Events of Default with Respect to Finance Co.
                       -------------------------------------------- 

          Each of the following events shall constitute an "Event of Default"
with respect to Finance Co.:
<PAGE>
 
                                                                              30

          6.1B  Representations, Etc.  Any certificate furnished by Finance Co.
                ---------------------                                          
or Resources to the Banks and the Fronting Bank pursuant hereto shall prove to
have been incorrect in any material respect or any of the representations and
warranties made by Finance Co. or Resources herein or in connection herewith
shall prove to have been incorrect in any material respect when made; or

          6.2B  Principal and Interest.  Either Finance Co. or Resources shall
                ----------------------                                        
fail to make any payment of principal on any Loan to Finance Co. or any other
payment payable by Finance Co. or Resources hereunder (including the
reimbursement of any L/C Disbursement) when due or, in the case of interest or
fees, within 10 days of the due date thereof; or

          6.3B  Defaults by Finance Co. or Resources Under Other Agreements.
                -----------------------------------------------------------  
Finance Co. or Resources shall (i) fail to pay any principal or interest,
regardless of amount, due in respect of any Indebtedness in a principal amount
in excess of $40,000,000, in the case of Indebtedness of Resources or
Indebtedness of Finance Co. guaranteed by Resources or, in the case of
Indebtedness of Finance Co. not guaranteed by Resources, $10,000,000, if such
failure shall continue beyond any period of grace provided with respect thereto,
or (ii) fail to observe or perform any other term, covenant, condition or
agreement contained in any agreement or instrument (including any term,
covenant, condition or agreement herein) evidencing or governing any such
Indebtedness in a principal amount in excess of, in the case of Indebtedness of
Resources or Indebtedness of Finance Co. guaranteed by Resources, $40,000,000
or, in the case of Indebtedness of Finance Co. not guaranteed by Resources,
$10,000,000, if such failure shall continue beyond any period of grace provided
with respect thereto if the effect of any failure referred to in this clause
(ii) is to cause, or to permit the holder or holders of such Indebtedness or a
trustee on its or their behalf to cause, such Indebtedness to become due prior
to its stated maturity; or

          6.4B  Judgments.  Finance Co. or Resources shall fail within 60 days
                ---------                                                     
to pay, bond or otherwise discharge any judgment or order for the payment of
money in excess of $25,000,000 that is not stayed on appeal or otherwise being
appropriately contested in good faith; or

          6.5B  Bankruptcy, Etc.   Finance Co. or Resources shall commence a
                ----------------                                            
voluntary case concerning itself under Title 11 of the United States Code
entitled "Bankruptcy" as 
<PAGE>
 
                                                                              31

now or hereafter in effect or any successor thereto (the "Bankruptcy Code"); or
an involuntary case shall be commenced against Finance Co. or Resources or such
case shall be controverted but shall not be dismissed within 60 days after the
commencement of the case; or Finance Co. or Resources shall not generally be
paying its debts as they become due; or a custodian (as defined in the
Bankruptcy Code) shall be appointed for, or shall take charge of, all or
substantially all of the property of Finance Co. or Resources or Finance Co. or
Resources shall commence any other proceeding under any reorganization,
arrangement, readjustment of debt, relief of debtors, dissolution, insolvency or
liquidation or similar law of any jurisdiction whether now or hereafter in
effect relating to Finance Co. or Resources or there shall be commenced against
Finance Co. or Resources any such proceeding which remains undismissed for a
period of 60 days or Finance Co. or Resources shall be adjudicated insolvent or
bankrupt; or Finance Co. or Resources shall fail to controvert in a timely
manner any such case under the Bankruptcy Code or any such proceeding, or any
order of relief or other order approving any such case or proceeding shall be
entered; or Finance Co. or Resources by any act or failure to act shall indicate
its consent to, approval of or acquiescence in any such case or proceeding or in
the appointment of any custodian or the like for it or any substantial part of
its property or shall suffer any such appointment to continue undischarged or
unstayed for a period of 60 days; Finance Co. or Resources shall make a general
assignment for the benefit of creditors; or any corporate action shall be taken
by Finance Co. or Resources for the purpose of effecting any of the foregoing;
or

          6.6B  Other Covenants.   Finance Co. or Resources shall fail to
                ---------------                                          
perform or observe any other term, covenant or agreement contained in this
Agreement on its part to be performed or observed and any such failure shall
remain unremedied for a period of 30 days after written notice thereof shall
have been received by Finance Co. or Resources, as the case may be, from the
Agent or the Required Banks; or

          6.7B  Events of Default with Respect to PPL.  An Event of Default
                -------------------------------------                      
shall occur with respect to PPL.

If any Event of Default with respect to PPL as specified in Section 6A shall
then be continuing, then either or both of the following actions may be taken:
(i) the Agent, at the direction of the Required Banks, shall by written notice
to PPL, declare the principal of and accrued interest in respect of all of PPL's
outstanding Loans to be, whereupon the same and all other amounts due from PPL
hereunder shall 
<PAGE>
 
                                                                              32

become, forthwith due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby expressly waived by PPL, anything
contained herein to the contrary notwithstanding, and (ii) the Agent, at the
direction of the Required Banks, shall by written notice to PPL, declare the
Total Commitment as to PPL terminated, whereupon the Commitment of each Bank
(insofar as it is available to PPL) and the obligation of each Bank to make its
Loans hereunder to PPL and the obligation of the Fronting Back to issue Letters
of Credit for the account of PPL hereunder shall terminate immediately and any
accrued Commitment Fee owed by PPL shall forthwith become due and payable
without any other notice of any kind; provided that if an Event of Default
described in (S) 6.5A shall occur with respect to PPL, the results which would
otherwise occur only upon the giving of written notice by the Agent to PPL as
specified in clauses (i) and (ii) above shall occur automatically without the
giving of any such notice and without any instruction by the Required Banks to
give such notice.

If any Event of Default with respect to Finance Co. as specified in Section 6B
shall then be continuing, then either or both of the following actions may be
taken:  (i) the Agent, at the direction of the Required Banks, shall by written
notice to Resources and Finance Co., declare the principal of and accrued
interest in respect of all of Finance Co.'s outstanding Loans to be, whereupon
the same and all other amounts due from Resources or Finance Co. hereunder shall
become, forthwith due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby expressly waived by Resources and
Finance Co., anything contained herein to the contrary notwithstanding, and (ii)
the Agent, at the direction of the Required Banks, shall, by written notice to
Resources and Finance Co., declare the Total Commitment as to Finance Co.
terminated (insofar as it is available to Finance Co.), whereupon the Commitment
of each Bank and the obligation of each Bank to make its Loans to Finance Co.
hereunder and the obligations of the Fronting Bank to issue Letters of Credit
for the account of Finance Co. shall terminate immediately and any accrued
Commitment Fee owed by Finance Co. shall forthwith become due and payable
without any other notice of any kind; provided that if an Event of Default
described in (S) 6.5B shall occur with respect to Finance Co., the results which
would otherwise occur only upon the giving of written notice by the Agent to
Finance Co. as specified in clauses (i) and (ii) above shall occur automatically
without the giving of any such notice and without any instruction by the
Required Banks to give such notice.
<PAGE>
 
                                                                              33

          SECTION 7.A  Representations and Warranties of PPL.
                       ------------------------------------- 

          In order to induce the Banks and the Fronting Bank to enter into this
Agreement and to make the Loans to PPL and issue the Letters of Credit for the
account of PPL, in each case, as provided for herein, PPL makes the following
representations and warranties to the Banks and the Fronting Bank:

          7.1A  Corporate Status.  It is duly incorporated, validly existing and
                ----------------                                                
in good standing under the laws of the Commonwealth of Pennsylvania, and has the
corporate power to make and perform this Agreement and to borrow hereunder.

          7.2A  Authority; No Conflict.  The making and performance by it of
                ----------------------                                      
this Agreement have been duly authorized by all necessary corporate action and
do not and will not violate any provision of law or regulation, or any decree,
order, writ or judgment, or any provision of its charter or by-laws, or result
in the breach of or constitute a default under any indenture or other agreement
or instrument to which it is a party.

          7.3A  Legality, Etc.  This Agreement constitutes the legal, valid and
                --------------                                                 
binding obligation of PPL, enforceable in accordance with its terms except to
the extent limited by bankruptcy, insolvency or reorganization laws or by other
laws relating to or affecting the enforceability of creditors' rights generally
and by general equitable principles which may limit the right to obtain
equitable remedies.

          7.4A  Financial Statements.  The consolidated financial statements of
                --------------------                                           
PPL and its consolidated Subsidiaries for the year ended as at December 31,
1997, furnished to the Banks, fairly present its consolidated financial position
at December 31, 1997 and the results of its consolidated operations for the year
then ended and were prepared in accordance with GAAP.  Since that date there has
been no adverse change in the business, assets, financial condition or
operations of PPL that would materially and adversely affect the ability of PPL
to perform any of its obligations hereunder.

          7.5A  Litigation.  Except as disclosed in or contemplated by PPL's
                ----------                                                  
Form 10-K Report to the SEC for the year ended December 31, 1997 or in any
subsequent Form 10-Q Report or otherwise furnished in writing to the Banks, no
litigation, arbitration or administrative proceeding is
<PAGE>
 
                                                                              34

pending or, to its knowledge, threatened, which, if determined adversely to PPL,
would materially and adversely affect its ability to perform any of its
obligations under this Agreement. There is no litigation, arbitration or
administrative proceeding pending or, to the knowledge of PPL, threatened which
questions the validity of this Agreement.

          7.6A  No Violation.  No part of the proceeds of the borrowings by PPL
                ------------                                                   
under this Agreement or of any Letter of Credit issued for its account will be
used, directly or indirectly by PPL for the purpose of purchasing or carrying
any "margin stock" within the meaning of Regulation U of the Board of Governors
of the Federal Reserve System, or for any other purpose which violates, or which
conflicts with, the provisions of Regulations G, U or X of said Board of
Governors.  PPL is not engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of purchasing or
carrying any such "margin stock."

          7.7A  ERISA.  There have not been any "reportable events," as that
                -----                                                       
term is defined in Section 4043 of the Employee Retirement Income Security Act
of 1974, as amended, which would result in a material liability to PPL.

          7.8A  Consents.  No authorization, consent or approval from
                --------                                             
governmental bodies or regulatory authorities is required for the making and
performance by PPL of this Agreement, except such authorizations, consents and
approvals as have been obtained prior to the making of any Loans or the issuance
of any Letters of Credit and are in full force and effect at the time of the
making of each Loan and the issuance of each Letter of Credit.

          7.9A  Subsidiaries.  The assets of all Subsidiaries of PPL do not
                ------------                                               
comprise in the aggregate more than 20% of the total consolidated assets of PPL.

          7.10A  Investment Company Act.  PPL is not an "investment company"
                 ----------------------                                     
that is required to be registered under the Investment Company Act of 1940, as
amended, in order not to be subject to the prohibitions of Section 7 of such
Act.

          7.11A  Public Utility Holding Company Act.  PPL is a "holding company"
                 ----------------------------------                             
within the meaning of the Public Utility Holding Company Act of 1935, as
amended, but is exempt from such Act (except for the provisions of Section
9(a)(2) thereof) by virtue of an  order of the SEC pursuant to Section 3(a)(2)
thereof.
<PAGE>
 
                                                                              35

          7.12A  Tax Returns.  PPL has filed or caused to be filed all Federal,
                 -----------                                                   
state, local and foreign tax returns or materials required to have been filed by
it and has paid or caused to be paid all taxes due and payable by it and all
assessments received by it, except taxes that are being contested in good faith
by appropriate proceedings and for which PPL shall have set aside on its books
appropriate reserves with respect thereto in accordance with GAAP.

          7.13A  Compliance with Laws.  PPL is in compliance with all laws,
                 --------------------                                      
regulations and orders of any governmental authority except to the extent (A)
such compliance is being contested in good faith by appropriate proceedings or
(B) non-compliance would not reasonably be expected to materially and adversely
affect its ability to perform any of its obligations hereunder.

          7.14A  Year 2000.  PPL has planned and commenced reprogramming to
                 ----------                                                
permit the proper performance of date-sensitive functions in and following the
year 2000 by (i) PPL's computer systems and (ii) equipment containing embedded
microchips (including systems and equipment under PPL's control that are
supplied by others), and testing of all such systems and equipment, such that
PP&L expects that its computer and management information systems will be
sufficient to permit PPL to conduct its business without material adverse effect
on its ability to perform its obligations hereunder.  The cost to PPL of such
reprogramming and testing is not expected to have a material adverse effect on
its ability to perform its obligations hereunder.

          SECTION 7.B  Representations and Warranties of Finance Co. and
                       -------------------------------------------------
Resources.
- --------- 

          In order to induce the Banks and the Fronting Bank to enter into this
Agreement and to make the Loans to Finance Co. and issue the Letters of Credit
for the account of Finance Co., in each case as provided for herein, each of
Finance Co. and Resources makes the following representations and warranties to
the Banks and the Fronting Bank:

          7.1B  Corporate Status.  Resources is duly incorporated, validly
                ----------------                                          
existing and in good standing under the laws of the Commonwealth of
Pennsylvania, and has the corporate power to make and perform this Agreement,
and Finance Co. is duly incorporated, validly existing and in 
<PAGE>
 
                                                                              36

good standing under the laws of the State of Delaware, and has the corporate
power to make and perform this Agreement and to borrow hereunder.

          7.2B  Authority; No Conflict.  The making and performance by Resources
                ----------------------                                          
and Finance Co. of this Agreement have been duly authorized by all necessary
corporate action and do not and will not violate any provision of law or
regulation, or any decree, order, writ or judgment, or any provision of its
charter or by-laws, or result in the breach of or constitute a default under any
indenture or other agreement or instrument to which Resources or Finance Co., as
the case may be, is a party.

          7.3B  Legality, Etc.  This Agreement constitutes the legal, valid and
                --------------                                                 
binding obligation of each of Resources and Finance Co., enforceable against
Resources or Finance Co., as the case may be, in accordance with its terms
except to the extent limited by bankruptcy, insolvency or reorganization laws or
by other laws relating to or affecting the enforceability of creditors' rights
generally and by general equitable principles which may limit the right to
obtain equitable remedies.

          7.4B  Financial Statements.  The consolidated financial statements of
                --------------------                                           
Resources for the year ended as at December 31, 1997, furnished to the Banks,
fairly present Resources' consolidated financial position at December 31, 1997
and the results of its consolidated operations for the year then ended and were
prepared in accordance with GAAP.  Since that date there has been no adverse
change in the business, assets, financial condition or operations of Resources
that would materially and adversely affect its ability to perform any of its
obligations hereunder.

          7.5B  Litigation.  Except as disclosed in or contemplated by
                ----------                                            
Resources's Form 10-K Report to the SEC for the year ended December 31, 1997, or
in any subsequent Form 10-Q Report or otherwise furnished in writing to the
Banks, no litigation, arbitration or administrative proceeding against Resources
or Finance Co. is pending or, to Resources' knowledge, threatened, which, if
determined adversely, would materially and adversely affect the ability of
Resources to perform any of its obligations under this Agreement.  There is no
litigation, arbitration or administrative proceeding pending or, to the
knowledge of Resources, threatened which questions the validity of this
Agreement.

          7.6B  No Violation.  No part of the proceeds of the borrowings by
                ------------                                               
Finance Co. under this Agreement or of 
<PAGE>
 
                                                                              37

any Letter of Credit issued for its account will be used, directly or indirectly
by Finance Co. or any Subsidiary of Resources for the purpose of purchasing or
carrying any "margin stock" within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System, or for any other purpose which
violates, or which conflicts with, the provisions of Regulations U or X of said
Board of Governors. Neither Resources nor Finance Co. is engaged principally, or
as one of its important activities, in the business of extending credit for the
purpose of purchasing or carrying any such "margin stock."

          7.7B  ERISA.  There have not been any "reportable events," as that
                -----                                                       
term is defined in Section 4043 of the Employee Retirement Income Security Act
of 1974, as amended, which would result in a material liability to Resources.

          7.8B  Consents.  No authorization, consent or approval from
                --------                                             
governmental bodies or regulatory authorities is required for the making and
performance by Resource or Finance Co. of this Agreement, except such
authorizations, consents and approvals as have been obtained prior to the making
of any Loans or the issuance of any Letters of Credit and are in full force and
effect at the time of the making of each Loan and the issuance of each Letter of
Credit.

          7.9B  Investment Company Act.  Neither Resources nor Finance Co. is an
                ----------------------                                          
"investment company" that is required to be registered under the Investment
Company Act of 1940, as amended, in order not to be subject to the prohibitions
of Section 7 of such Act.

          7.10B  Public Utility Holding Company Act.  Resources is a "holding
                 ----------------------------------                          
company" within the meaning of the Public Utility Holding Company Act of 1935,
as amended, but is exempt from such Act (except for the provisions of Section
9(a)(2) thereof) by virtue of an  order of the SEC pursuant to Section 3(a)(1)
thereof.  Finance Co. is not a "holding company" within the meaning of the
Public Utility Holding Company Act of 1935, as amended.

          7.11B  Tax Returns.  Resources and Finance Co. have filed or caused to
                 -----------                                                    
be filed all Federal, state, local and foreign tax returns or materials required
to have been filed by it and has paid or caused to be paid all taxes due and
payable by it and all assessments received by it, except taxes that are being
contested in good faith by appropriate proceedings and for which Resources shall
have 
<PAGE>
 
                                                                              38

set aside on its books appropriate reserves with respect thereto in accordance
with GAAP.

          7.12B  Compliance with Laws.  Each of Resources and Finance Co. is in
                 --------------------                                          
compliance with all laws, regulations and orders of any governmental authority
except to the extent (A) such compliance is being contested in good faith by
appropriate proceedings or (B) non-compliance would not reasonably be expected
to materially and adversely affect its ability to perform any of its obligations
hereunder.

          7.13B  Year 2000.  Resources has planned and commenced reprogramming
                 ----------                                                   
to permit the proper performance of date-sensitive functions in and following
the year 2000 by (i) Resources' computer systems and (ii) equipment containing
embedded microchips (including systems and equipment under Resources' control
that are supplied by others), and testing of all such systems and equipment,
such that Resources expects that its computer and management information systems
will be sufficient to permit Resources to conduct its business without material
adverse effect on its ability to perform its obligations hereunder.  The cost to
Resources of such reprogramming and testing is not expected to have a material
adverse effect on its ability to perform its obligations hereunder.

          SECTION 8.  Agent.
                      ----- 

          8.1  Appointment.  The Banks hereby appoint The Chase Manhattan Bank
               -----------                                                    
as Agent (such term to include Agent acting as Agent) to act as herein
specified.  Each Bank and the Fronting Bank hereby irrevocably authorizes, and
each assignee of any Bank or the Fronting Bank shall be deemed irrevocably to
authorize, the Agent to take such action on their behalf under the provisions of
this Agreement and any instruments, documents  and agreements referred to herein
(such instruments, documents and agreements being herein referred to as the
"Loan Documents") and to exercise such powers hereunder and thereunder as are
specifically delegated to the Agent by the terms hereof and thereof and such
other powers as are reasonably incidental thereto.  The Agent may perform any of
its duties hereunder, or under the Loan Documents, by or through its agents or
employees.

          8.2  Nature of Duties.  The duties of the Agent shall be mechanical
               ----------------                                              
and administrative in nature.  The Agent shall not have by reason of this
Agreement a fiduciary relationship in respect of any Bank or of the Fronting
Bank.  Nothing in this Agreement or any of the 
<PAGE>
 
                                                                              39

Loan Documents, expressed or implied, is intended to or shall be so construed as
to impose upon the Agent any obligations in respect of this Agreement or any of
the Loan Documents except as expressly set forth herein. Each Bank and the
Fronting Bank shall make its own independent investigation of the financial
condition and affairs of PPL, Finance Co. and Resources and each of their
Subsidiaries in connection with the making and the continuance of the Loans and
the issuance of Letters of Credit hereunder and shall make its own appraisal of
the creditworthiness of PPL, Resources and Finance Co.; and the Agent shall have
no duty or responsibility, either initially or on a continuing basis, to provide
any Bank or the Fronting Bank with any credit or other information with respect
thereto, whether coming into its possession before the making of the Loans or
the issuance of Letters of Credit or at any time or times thereafter. The Agent
may execute any of its duties under this Agreement or any other Loan Document by
or through agents or attorneys-in-fact and shall be entitled to advice of
counsel concerning all matters pertaining to such duties. The Agent shall not be
responsible to any Bank or the Fronting Bank for the negligence or misconduct of
any agents or attorneys-in-fact selected by it with reasonable care except to
the extent otherwise required by (S) 8.3.

          8.3  Rights, Exculpation, Etc.  Neither the Agent nor any of its
               -------------------------                                  
officers, directors, employees, agents, attorneys-in-fact or affiliates shall be
liable to any Bank or to the Fronting Bank for any action taken or omitted by it
hereunder or under any of the Loan Documents, or in connection herewith or
therewith, unless caused by its or their gross negligence or willful misconduct.
The Agent shall not be responsible to any Bank or to the Fronting Bank for any
recitals, statements, representations or warranties herein or for the execution,
effectiveness, genuineness, validity, enforceability, collectibility, or
sufficiency of this Agreement or any of the Loan Documents or the financial
condition of PPL, Finance Co. or Resources.  The Agent shall not be required to
make any inquiry concerning either the performance or observance of any of the
terms, provisions or conditions of this Agreement or any of the Loan Documents
or the financial condition of PPL, Finance Co. or Resources, or the existence or
possible existence of any Default or Event of Default.  The Agent may at any
time request instructions from the Banks with respect to any actions or
approvals which by the terms of this Agreement or any of the Loan Documents the
Agent is permitted or required to take or to grant, and if such instructions are
requested,  the Agent shall be absolutely entitled to refrain from taking any
<PAGE>
 
                                                                              40

action or to withhold any approval and shall not be under any liability
whatsoever to any Person for refraining from any action or withholding any
approval under this Agreement or any of the Loan Documents until it shall have
received such instructions from the Required Banks or all Banks, as required.
Without limiting the foregoing, no Bank shall have any right of action
whatsoever against the Agent as a result of the Agent acting or refraining from
acting hereunder or under any of the Loan Documents in accordance with the
instructions of the Required Banks or all Banks, as required.

          8.4  Reliance.  The Agent shall be entitled to rely upon any written
               --------                                                       
notice, statement, certificate, order or other document or any telephone message
believed by it to be genuine and correct and to have been signed, sent or made
by the proper Person, and, with respect to all legal matters pertaining to this
Agreement or any of the Loan Documents and its duties hereunder or thereunder,
upon advice of counsel selected by it.

          8.5  Indemnification.  To the extent that the Agent is not reimbursed
               ---------------                                                 
and indemnified by PPL, Resources or Finance Co., the Banks will reimburse and
indemnify the Agent for and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever which may be imposed on, incurred
by, or asserted against the Agent, acting pursuant hereto, in any way relating
to or arising out of this Agreement or any of the Loan Documents or any action
taken or omitted by the Agent under this Agreement or any of the Loan Documents,
in proportion to their respective Commitments hereunder; provided, however, that
                                                         --------  -------      
no Bank shall be liable for any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements resulting from the Agent's gross negligence or wilful misconduct.
The obligations of the Banks under this (S) 8.5 shall survive the payment in
full of outstanding Loans, the expiration of any Letter of Credit  and the
termination of this Agreement.

          8.6  The Agent, Individually.  With respect to its Commitment
               -----------------------                                 
hereunder and the Loans made by it, the Agent shall have and may exercise the
same rights and powers hereunder and is subject to the same obligations and
liabilities as and to the extent set forth herein for any other Bank.  The terms
"Banks," "Required Banks" or any similar terms shall, unless the context clearly
otherwise indicates, include the Agent in its individual capacity as a Bank or
one of the Required Banks.  The Agent may accept 
<PAGE>
 
                                                                              41

deposits from, lend money to, and generally engage in any kind of banking, trust
or other business with PPL, Finance Co. or Resources as if it were not acting
pursuant hereto.

          8.7  Resignation by the Agent.  The Agent may resign from the
               ------------------------                                
performance of all its functions and duties hereunder at any time by giving 30
Business Days' prior written notice to each Borrower, Resources and the Banks.
Such resignation shall take effect upon the expiration of such 30 Business Day
period or upon the earlier appointment of a successor.  Upon any such
resignation, the Required Banks shall appoint a successor Agent who shall be
satisfactory to the Borrowers and Resources and shall be an incorporated bank or
trust company.  In the event no such successor shall have been so appointed,
then any notification, demand or other communication required or permitted to be
given by the Agent on behalf of the Banks to the Borrowers hereunder shall be
sufficiently given if given by the Required Banks, and any notification, demand,
other communication, document, statement, other paper or payment required to be
made, given or furnished by PPL, Finance Co. or Resources to the Agent for
distribution to the Banks shall be sufficiently made, given or furnished if
made, given or furnished by PPL, Finance Co. or Resources, as applicable,
directly to each Bank entitled thereto and, in the case of payments, in the
amount to which each such Bank is entitled from the applicable Borrower.  All
powers specifically delegated to the Agent by the terms hereof may be exercised
by the Required Banks.


          SECTION 9.  Resources Guarantee.
                      ------------------- 

          In order to induce the Banks to extend credit hereunder to Finance
Co., Resources hereby irrevocably and unconditionally guarantees, as primary
obligor and not merely as a surety, the Finance Co. Obligations.  Resources
further agrees that the due and punctual payment of the Finance Co. Obligations
may be extended or renewed, in whole or in part, without notice to or further
assent from it, and that it will remain bound upon its Guarantee hereunder
notwithstanding any such extension or renewal of any Finance Co. Obligation.

          Resources waives presentment to, demand of payment from and protest to
Finance Co. of any of the Finance Co. Obligations, and also waives notice of
acceptance of its obligations and notice of protest for nonpayment.  The
obligations of Resources hereunder shall not be affected by (a) the failure of
any Bank or the Agent to assert any claim or demand or to enforce any right or
<PAGE>
 
                                                                              42

remedy against Finance Co. under the provisions of this Agreement or otherwise,
(b) change or increase in the amount of any of the Finance Co. Obligations,
whether or not consented to by Resources, or (c) any rescission, waiver,
amendment or modification of any of the terms or provisions of this Agreement or
any other agreement.

          Resources further agrees that its agreement hereunder constitutes a
promise of payment when due (whether or not any bankruptcy or similar proceeding
shall have stayed the accrual or collection of any of the Finance Co.
Obligations or operated as a discharge thereof) and not merely of collection,
and waives any right to require that any resort be had by any Bank to any
balance of any deposit account or credit on the books of any Bank in favor of
any other person.

          The obligations of Resources hereunder shall not be subject to any
reduction, limitation, impairment or termination for any reason, and shall not
be subject to any defense or setoff, counterclaim, recoupment or termination
whatsoever, by reason of the invalidity, illegality or unenforceability  of the
Finance Co. Obligations, any impossibility in the performance of the Finance Co.
Obligations or otherwise.  Without limiting the generality of the foregoing, the
obligations of Resources hereunder shall not be discharged or impaired or
otherwise affected by the failure of the Agent or any Bank to assert any claim
or demand or to enforce any remedy under this Agreement or any other agreement,
by any waiver or modification in respect of any thereof, by any default, failure
or delay, willful or otherwise, in the performance of the Finance Co.
Obligations, or by any other act or omission which may or might in any manner or
to any extent vary the risk of Resources or otherwise operate as a discharge of
Resources or Finance Co. as a matter of law or equity.

          Resources further agrees that its obligations hereunder shall continue
to be effective or be reinstated, as the case may be, if at any time payment, or
any part thereof, of any Finance Co. Obligation is rescinded or must otherwise
be restored by the Agent or any Bank upon the bankruptcy or reorganization of
Finance Co or otherwise.

          In furtherance of the foregoing and not in limitation of any other
right which the Agent or any Bank may have at law or in equity against Resources
by virtue hereof, upon the failure of Finance Co. to pay any Finance Co.
Obligation when and as the same shall become due, whether at maturity, by
acceleration, after notice of prepayment or otherwise, Resources hereby promises
to and 
<PAGE>
 
                                                                              43

will, upon receipt of written demand by the Agent, forthwith pay, or cause to be
paid, in cash the amount of such unpaid Finance Co. Obligation.

          Upon payment by Resources of any Finance Co. Obligation, each Bank
shall, in a reasonable manner, assign the amount of such Finance Co. Obligation
owed to it and so paid to Resources, such assignment to be pro tanto to the
                                                           --- -----       
extent to which the Finance Co. Obligation in question was discharged by
Resources, or make such disposition thereof as Resources shall direct (all
without recourse to any Bank and without any representation or warranty by any
Bank).

          Upon payment by Resources of any sums as provided above, all rights of
Resources against Finance Co. arising as a result thereof by way of right of
subrogation or otherwise shall in all respects be subordinate and junior in
right of payment to the prior indefeasible payment in full of all the Finance
Co. Obligations owed by Finance Co. to the Banks.

          SECTION 10.  Miscellaneous.
                       ------------- 

          10.1  Definitions.  As used herein the following terms shall have the
                -----------                                                    
meanings herein specified and shall include in the singular number the plural
and in the plural number the singular:

          "5-Year Agreement" shall mean the $300,000,000 5-Year Revolving Credit
           ----------------                                                     
Agreement dated as of November 20, 1997, among PPL, Finance Co., Resources, as
guarantor of the obligations of Finance Co., the banks from time to time party
thereto and The Chase Manhattan Bank, as fronting bank, collateral agent and as
agent for the banks party thereto.

          "Affected Bank" shall have the meaning assigned that term in (S)
           -------------                                                  
2.5(c).

          "Agent" shall mean The Chase Manhattan Bank and shall include (i) any
           -----                                                               
successor corporation thereto by merger, consolidation or otherwise and (ii) any
successor to the Agent appointed pursuant to (S) 8.7.

          "Aggregate Credit Exposure" shall mean the aggregate amount of the
           -------------------------                                        
Banks' Credit Exposures.

          "Agreement" shall mean this Revolving Credit Agreement, as it may from
           ---------                                                            
time to time be amended, supplemented or otherwise modified.
<PAGE>
 
                                                                              44

          "Applicable Commitment Fee Percentage" shall mean for the Borrowers,
           ------------------------------------                               
the percentage specified as such in the table  in the definition of "Applicable
Rate" opposite the highest rating category in which PPL's First Mortgage Bonds
have been assigned a rating by either of Moody's or S&P.

          "Applicable Eurodollar Margin" shall mean (i) for PPL, the margin
           ----------------------------                                    
specified as such in the table in the definition of "Applicable Rate" opposite
the highest rating category in which PPL's First Mortgage Bonds have been
assigned ratings by either of Moody's or S&P or (ii) for Finance Co., the margin
specified as such in the table in the definition of "Applicable Rate" opposite
the highest rating category in which Resources' senior unsecured debt has been
assigned ratings by either of Moody's or S&P.

          "Applicable Lending Office" shall mean, with respect to each Bank, (i)
           -------------------------                                            
such Bank's Base Rate Lending Office in the case of a Base Rate Loan and (ii)
such Bank's Eurodollar Lending Office in the case of a Eurodollar Rate Loan.

          "Applicable Percentage" of any Bank at any time shall mean the
           ---------------------                                        
percentage of the Total Commitment represented by such Bank's Commitment.  In
the event the Commitments shall have expired or been terminated, the Applicable
Percentages shall be determined on the basis of the Commitments most recently in
effect, but giving effect to assignments pursuant to (S) 10.6.

          "Applicable Rate" shall mean and include the Applicable Commitment Fee
           ---------------                                                      
Percentage for undrawn Commitments or Applicable Eurodollar Margin for any Loans
or issued Letters of Credit and at any time will be determined based on the
highest applicable Category set forth below (the highest category being Category
A); provided, that on any day when the aggregate amount of outstanding Loans
    --------                                                                
exceeds 50% of the aggregate Commitments, the Applicable Eurodollar Margin shall
be increased by 0.05%.


<TABLE>
<CAPTION>
================================================================================
 
Criteria                                  Applicable            Applicable
                                        Commitment Fee          Eurodollar
                                          Percentage              Margin
==============================================================================
<S>                                     <C>                     <C> 
</TABLE> 
<PAGE>
 
                                                                              45

<TABLE> 
<S>                                <C>                  <C>
  Category A:
 
  A- or better/                    .080%                .400%
  A3 or better

  Category B:

  BBB+/Baa1                        .100%                .450%
 
  Category C:
 
  BBB/Baa2                         .125%                .500%

  Category D:
 
  BBB-/Baa3                        .150%                .600%
 
  Category E:
 
  BB+ or below/                    .200%                .750%
  Ba1 or below
</TABLE>

            "Bank" shall have the meaning assigned that term in the first
             ----                                                        
  paragraph in this Agreement.

            "Bankruptcy Code" shall have the meaning assigned that term in (S)
             ---------------                                                  
  6.5.

            "Base Rate" shall mean, for any day, a rate per annum equal to the
             ---------                                                        
  higher of (i) the Prime Rate and (ii) 1/2 of 1% plus the Federal Funds Rate,
  each as in effect from time to time.

            "Base Rate Lending Office" means, with respect to each Bank, the
             ------------------------                                       
office of such Bank specified as its "Base Rate Lending Office" on the signature
pages to the Agreement or such other office of such Bank as such Bank may from
time to time specify as such to the Borrowers and the Agent.

            "Base Rate Loan" shall mean any Loan during any period during which
             --------------                                                    
such Loan is bearing interest at the rates provided for in (S) 2.1(a).

            "Borrower" shall mean either PPL or Finance Co. and "Borrowers"
             --------                                            --------- 
shall mean PPL and Finance Co.
<PAGE>
 
                                                                              46

          "Borrowing" shall mean the incurrence of one Type of Loan to a
           ---------                                                    
Borrower from all the Banks on a given date, all of which Eurodollar Loans shall
have the same Interest Period, pursuant to (S) 1.2; provided, however, that
                                                    --------  -------      
Loans to a Borrower of a different Type extended by one or more Banks pursuant
to (S) 2.5(b) shall be considered a part of the related Borrowing.

          "Business Day" shall mean (i) for all purposes other than as covered
           ------------                                                       
by clause (ii) below, any day excluding Saturday, Sunday and any day on which
banks in New York City are authorized by law or other governmental actions to
close and (ii) with respect to all notices and determinations in connection
with, and payments of principal and interest on, Eurodollar Loans, any day which
is a Business Day described in clause (i) and which is also a day for trading by
and between banks in U.S. dollar deposits in the London interbank Eurodollar
market.

          "Capital Lease Obligations" of any person shall mean obligations of
           -------------------------                                         
such person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such person under GAAP,
and the amount of such obligations shall be the capitalized amount thereof
determined in accordance with GAAP.

          "Closing Date" shall mean November 19, 1998.
           ------------                               

          "Commitment", for each Bank, shall mean the amount specified opposite
           ----------                                                          
its name on Schedule I hereto, 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).

          "Commitment Fee" shall have the meaning assigned that term in (S)
           --------------                                                  
1.6(a).

          "Consolidated Capitalization of PPL" shall mean the sum of (A) the
           ----------------------------------                               
Consolidated Indebtedness of PPL and (B)(i) the consolidated shareowners' equity
(determined in accordance with GAAP) of the common, preference and preferred
stockholders of PPL and (ii) the aggregate amount of Hybrid Preferred Securities
of PPL, except that for purposes of calculating Consolidated Capitalization of
PPL, Consolidated Indebtedness of PPL shall exclude Non-Recourse Indebtedness of
PPL and Consolidated Capitalization of PPL shall exclude that portion of
shareholder equity attributable to assets securing Non-Recourse Indebtedness of
PPL.
<PAGE>
 
                                                                              47

          "Consolidated Capitalization of Resources" shall mean the sum of (A)
           ----------------------------------------                           
the Consolidated Indebtedness of Resources and (B)(i) the consolidated
shareowners' equity (determined in accordance with GAAP) of the common,
preference and preferred stockholders of Resources and (ii) the aggregate amount
of Hybrid Preferred Securities of Resources, except that for purposes of
calculating Consolidated Capitalization of Resources, Consolidated Indebtedness
of Resources shall exclude Non-Recourse Indebtedness of Resources and
Consolidated Capitalization of Resources shall exclude that portion of
shareholder equity attributable to assets securing Non-Recourse Indebtedness of
Resources.


          "Consolidated Indebtedness of PPL" shall mean the consolidated
           --------------------------------                             
Indebtedness of PPL (determined in accordance with GAAP), except that for
purposes of this definition (1) Consolidated Indebtedness of PPL shall exclude
Non-Recourse Indebtedness of PPL and (2) Consolidated Indebtedness of PPL shall
exclude any Hybrid Preferred Securities of PPL.

          "Consolidated Indebtedness of Resources" shall mean the consolidated
           --------------------------------------                             
Indebtedness of Resources (determined in accordance with GAAP), except that for
purposes of this definition (1) Consolidated Indebtedness of Resources shall
exclude Non-Recourse Indebtedness of Resources and (2) Consolidated Indebtedness
of Resources shall exclude any Hybrid Preferred Securities of Resources.

          "Credit Exposure", for each Bank at any time, shall mean the aggregate
           ---------------                                                      
principal amount at such time of all outstanding Loans of such Bank to the
Borrowers plus the aggregate amount at such time of such Bank's L/C Exposure.
          ----                                                               

          "Default" with respect to a Borrower, shall mean any event, act or
           -------                                                          
condition which with notice or lapse of time or both would constitute an Event
of Default with respect to that Borrower.


          "Eligible Transferee" shall mean and include a commercial bank,
           -------------------                                           
financial institution or other "accredited investor" (as defined in SEC
Regulation D).

          "Eurodollar Lending Office" shall mean, with respect to each Bank, the
           -------------------------                                            
office of such Bank specified as its "Eurodollar Lending Office" on the
signature pages to the Agreement or such other office of such Bank as such Bank
<PAGE>
 
                                                                              48

may from time to time specify as such to the Borrowers and the Agent.

          "Eurodollar Loan" shall mean any loan during any period during which
           ---------------                                                    
such Loan is bearing interest at the rates provided for in (S) 2.1(b).

          "Event of Default" shall mean with respect to PPL each of the Events
           ----------------                                                   
of Default specified in (S)6A and with respect to Finance Co., each of the
Events of Default specified in (S)6B.

          "Expiry Date" shall mean the date 364 days from the date hereof
           -----------                                                   
subject to extension pursuant to Section 2.6.

          "Extension Letter" shall mean a letter from the Borrowers requesting
           ----------------                                                   
an extension of the Expiry Date substantially in the form of Exhibit C hereto.

          "Federal Funds Rate" shall mean for any day, a fluctuating interest
           ------------------                                                
rate equal for each day during such period to the weighted average of the rates
on overnight Federal Funds transactions with members of the Federal Reserve
System arranged by Federal Funds brokers, as published for such day (or, if such
day is not a Business Day, for the next preceding Business Day) by the Federal
Reserve Bank of New York, or, if such rate is not so published for any day which
is a Business Day, the average of the quotations for such day on such
transactions received by the Agent from three Federal Funds brokers of
recognized standing selected by the Agent.

          "Finance Co." shall have the meaning assigned that term in the first
           -----------                                                        
paragraph of this Agreement.

          "Finance Co. Obligations" shall mean all obligations of Finance Co.
           -----------------------                                           
under this Agreement to pay (i) the principal of and interest on the Loans and
LC Disbursements when and as due, whether at maturity, by acceleration, upon one
or more dates set for prepayment or otherwise, and (ii) all other payment
obligations of Finance Co. hereunder.

          "First Mortgagee Bonds" shall mean the first mortgage bonds issued by
           ---------------------                                               
PPL pursuant to its Mortgage and Deed of Trust dated as of October 1, 1945, as
supplemented.

          "GAAP" shall mean United States generally accepted accounting
           ----                                                        
principles applied on a consistent basis.
<PAGE>
 
                                                                              49

          "Guarantee" of or by any person shall mean any obligation, contingent
           ---------                                                           
or otherwise, of such person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other person (the "primary obligor") in any
                                                        ---------------         
manner, whether directly or indirectly, and including any obligation of such
person, direct or indirect, (a) to purchase or pay (or advance or supply funds
for the purchase or payment of) such Indebtedness or to purchase (or to advance
or supply funds for the purchase of) any security for payment of such
Indebtedness, (b) to purchase or lease property, securities or services for the
purpose of assuring the owner of such Indebtedness of the payment of such
Indebtedness or (c) to maintain working capital, equity capital or any other
financial statement condition or liquidity of the primary obligor so as to
enable the primary obligor to pay such Indebtedness; provided, however, that the
                                                     --------  -------          
term Guarantee shall not include endorsements for collection or deposit in the
ordinary course of business.

          "Hybrid Preferred Securities of PPL" means (1) the preferred
           ----------------------------------                         
securities and subordinated debt described in the Prospectus dated as of April
3, 1997 of PP&L Capital Trust and PPL and the preferred securities and
subordinated debt described in the Prospectus dated as of June 9, 1997 of PP&L
Capital Trust II and PPL (collectively, the "Existing TOPrS") and (2) any
additional preferred securities and subordinated debt (with a maturity of at
least twenty years) similar to the Existing TOPrS and in an aggregate amount not
to exceed $100,000,000, issued by business trusts, limited liability companies,
limited partnerships (or similar entities) (i) all of the common equity, general
partner or similar interests of which are owned (either directly or indirectly
through one or more wholly-owned Subsidiaries) at all times by PPL, (ii) that
have been formed for the purpose of issuing hybrid preferred securities and
(iii) substantially all the assets of which consist of (A) subordinated debt of
PPL or a Subsidiary of PPL, as the case may be, and (B) payments made from time
to time on the subordinated debt.

          "Hybrid Preferred Securities of Resources" means (1) the preferred
           ----------------------------------------                         
securities and subordinated debt described in the Prospectus dated as of April
3, 1997 of PP&L Capital Trust and PPL and the preferred securities and
subordinated debt described in the Prospectus dated as of June 9, 1997 of PP&L
Capital Trust II and PPL (collectively, the "Existing TOPrS") and (2) any
additional preferred securities and subordinated debt (with a maturity of at
least twenty years) similar to the Existing TOPrS and in an aggregate amount not
to exceed $100,000,000, issued by business trusts, limited liability companies,
limited partnerships (or similar 
<PAGE>
 
                                                                              50

entities) (i) all of the common equity, general partner or similar interests of
which are owned (either directly or indirectly through one or more wholly-owned
Subsidiaries) at all times by Resources or PPL, (ii) that have been formed for
the purpose of issuing hybrid preferred securities and (iii) substantially all
the assets of which consist of (A) subordinated debt of Resources or a
Subsidiary of Resources, as the case may be, and (B) payments made from time to
time on the subordinated debt.

          "Indebtedness" of any person shall mean, without duplication, (a) all
           ------------                                                        
obligations of such person for borrowed money, (b) all obligations of such
person with respect to deposits or advances of any kind, (c) all obligations of
such person evidenced by bonds, debentures, notes or similar instruments, (d)
all obligations of such person under conditional sale or other title retention
agreements relating to property or assets purchased by such person, (e) all
obligations of such person issued or assumed as the deferred purchase price of
property or services (excluding trade accounts payable and accrued obligations
incurred in the ordinary course of business), (f) all Indebtedness of others
secured by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien or property owned or
acquired by such person, whether or not the obligations secured thereby have
been assumed but shall not include any obligations that are without recourse to
such person, (g) all Guarantees by such person of Indebtedness of others, (h)
all Capital Lease Obligations of such person, (i) all obligations of such person
in respect of Interest Rate Protection Agreements, foreign currency exchange
agreements or other interest or exchange rate hedging arrangements (the amount
of any such obligation to be the amount that would be payable upon the
acceleration, termination or liquidation thereof) and (j) all obligations of
such person as an account party in respect of letters of credit and bankers'
acceptances.

          "Interest Period"  shall mean (a) as to any Eurodollar Loan, the
           ---------------                                                
period commencing on the date of such Loan and ending on the numerically
corresponding day (or, if there is no numerically corresponding day, on the last
day) in the calendar month that is 1, 2, 3 or 6 months thereafter, as the
applicable Borrower may elect in a Notice of Borrowing or Notice of Conversion
and (b) as to any Base Rate Loan, the period commencing on the date of such Loan
and ending on the date 90 days thereafter or, if earlier, on the Expiry Date or
the date of prepayment of such Loan.  If any Interest Period would otherwise
expire on a day which is not a Business Day, such Interest Period shall expire
on the next succeeding Business Day, provided that if any Interest
                                     --------                            
<PAGE>
 
                                                                              51

Period applicable to a Borrowing of Eurodollar Loans would otherwise expire on a
day which is not a Business Day but is a day of the month after which no further
Business Day occurs in such month, such Interest Period shall expire on the next
preceding Business Day.

          "Interest Rate Protection Agreement" shall mean any agreement
           ----------------------------------                          
providing for an interest rate swap, cap or collar, or for any other financial
arrangement designed to protect against fluctuations in interest rates.

          "L/C Commitment" shall mean the commitment of the Fronting Bank to
           --------------                                                   
issue Letters of Credit pursuant to (S) 1A.

          "L/C Disbursement" shall mean a payment or disbursement made by the
           ----------------                                                  
Fronting Bank pursuant to a Letter of Credit.

          "L/C Exposure" shall mean at any time the sum of (a) the aggregate
           ------------                                                     
undrawn amount of all outstanding Letters of Credit at such time plus (b) the
                                                                 ----        
aggregate principal amount of all L/C Disbursements that have not yet been
reimbursed at such time.  The L/C Exposure of any Bank at any time shall mean
its Applicable Percentage of the aggregate L/C Exposure at such time.

          "L/C Participation Fee" shall have the meaning assigned to such term
           ---------------------                                              
in (S) 1.6(b).

          "Letter of Credit" shall mean any letter of credit issued pursuant to
           ----------------                                                    
(S) 1A.

          "Lien" shall mean, with respect to any asset, (a) any mortgage, deed
           ----                                                               
of trust, lien, pledge, encumbrance, charge or security interest in or on such
asset, (b) the interest of a vender or a lessor under any conditional sale
agreement, capital lease or title retention agreement (or any financing lease
having substantially the same economic effect as any of the foregoing) relating
to such asset and (c) in the case of securities, any purchase option, call or
similar right of a third party with respect to such securities.

          "Loan" shall have the meaning assigned that term in (S) 1.1.
           ----                                                       

          "Loan Documents" shall have the meaning assigned that term in (S) 8.1.
           --------------                                                       

          "Moody's" shall mean Moody's Investors Service, Inc. or any successor
           -------                                                             
thereto.
<PAGE>
 
                                                                              52

          "Non-Recourse Indebtedness of PPL" shall mean indebtedness that is
           --------------------------------                                 
nonrecourse to PPL or any of its Subsidiaries.

          "Non-Recourse Indebtedness of Resources" shall mean indebtedness that
           --------------------------------------                              
is nonrecourse to Resources, either Borrower or any of PPL's Subsidiaries.

          "Notice of Borrowing" shall have the meaning assigned that term in (S)
           -------------------                                                  
1.2.

          "Notice of Conversion" shall have the meaning assigned that term in
           --------------------                                              
(S) 2.4(a).

          "Payment Office" shall mean the office of the Agent located at 270
           --------------                                                   
Park Avenue, New York, New York 10017, or such other  office as the Agent may
hereafter designate in writing as such to the other parties hereto.

          "Permitted Liens" shall mean (a) Liens for taxes, assessments or
           ---------------                                                
governmental charges or levies to the extent not past due, or which are being
contested in good faith in appropriate proceedings for which Resources has
provided appropriate reserves for the payment thereof in accordance with GAAP;
(b) pledges or deposits in the ordinary course of business to secure obligations
under worker's compensation laws or similar legislation; (c) other pledges or
deposits in the ordinary course of business (other than for borrowed monies)
that, in the aggregate, are not material to Resources; (d) Liens imposed by law
such as materialmen's, mechanics', carriers', workers' and repairmen's Liens and
other similar Liens arising in the ordinary course of business for sums not yet
due or currently being contested in good faith by appropriate proceedings; (e)
attachment, judgment or other similar Liens arising in connection with court
proceedings, provided that such Liens, in the aggregate, shall not exceed
$50,000,000 at any one time outstanding, and (f) other Liens not otherwise
referred to in the foregoing clauses (a) through (e) above, provided that such
other Liens do not secure at any time obligations in an aggregate amount in
excess of $100,000,000 at any time outstanding.

          "Persons" shall mean and include any individual, firm, corporation,
           -------                                                           
association, trust or other enterprise or any governmental or political
subdivision or agency, department or instrument thereof.
<PAGE>
 
                                                                              53

          "PPL" shall have the meaning assigned that term in the first paragraph
           ---                                                                  
of this Agreement.

          "Prime Rate" shall mean the rate which The Chase Manhattan Bank
           ----------                                                    
announces from time to time as its prime lending rate, such Prime Rate to change
when and as such prime lending rate changes.  The Prime Rate is a reference rate
and does not necessarily represent the lowest or best rate actually charged to
any customer.  The Chase Manhattan Bank may make commercial loans or other loans
at rates of interest at, above or below the Prime Rate.

          "Quoted Rate" shall mean, with respect to any Eurodollar Loan for any
           -----------                                                         
Interest Period, the average rate (rounded upwards to the nearest 1/16 of 1%) at
which dollar deposits approximately equal in principal amount to the Agent's
portion of such Eurodollar Loan and for a maturity comparable to such Interest
Period are offered to the principal London office of the Reference Banks in
immediately available funds in the London interbank market at approximately
11:00 A.M. (London time) 2 Business Days prior to the commencement of such
Interest Period, without any addition to such offered quotation to give effect
to the reserve requirements established for Eurodollar transactions by
Regulation D.  Each Reference Bank shall use its best efforts to furnish rates
to the Agent as contemplated hereby.  If any one of the Reference Banks shall be
unable or otherwise fail to supply such rates to the Agent upon its request, the
applicable rate shall be determined on the basis of the rates submitted by the
remaining two Reference Banks.  If more than one Reference Bank shall be unable
or otherwise fail to supply such rates, there shall be no applicable rate.

          "Reference Banks" shall mean The Chase Manhattan Bank, Citibank, N.A.
           ---------------                                                     
and Morgan Guaranty Trust Company.

          "Register" shall have the meaning provided in 1.4(b).
           --------                                            

          "Regulation D" shall mean Regulation D of the Board of Governors of
           ------------                                                      
the Federal Reserve System as from time to time in effect or any successor to
all or a portion thereof establishing reserve requirements.

          "Required Banks" shall mean Banks having Loans the outstanding
           --------------                                               
principal amount of which aggregate (or, if no Loans are outstanding, Banks with
Commitments aggregating) at least the majority of the aggregate outstanding
principal amount of all Loans (or of the Total Commitment).
<PAGE>
 
                                                                              54

          "Resources" shall have the meaning assigned that term in the first
           ---------                                                        
paragraph of this Agreement.

          "SEC" shall have the meaning assigned that term in (S) 5.1(c).
           ---                                                          

          "SEC Regulation D" shall mean Regulation D as promulgated under the
           ----------------                                                  
Securities Act of 1933, as amended, as the same may be in effect from time to
time."

          "S&P" shall mean Standard & Poor's Ratings Group or any successor
           ---                                                             
thereto.

          "Subsidiary" shall mean any company, partnership, association or other
           ----------                                                           
business entity in which any Person and its Subsidiaries now have or may
hereafter acquire an aggregate of at least 50% of the voting stock or ownership
interests.

          "Taxes" shall have the meaning assigned that term in (S) 3.4.
           -----                                                       

          "Total Commitment" shall mean the aggregate of all the Commitments of
           ----------------                                                    
all the Banks.

          "Type" shall mean any type of Loan, i.e., whether a Loan is a Base
           ----                               ----                          
Rate Loan or a Eurodollar Loan.

          "Unaffected Bank" shall have the meaning assigned that term in (S)
           ---------------                                                  
2.5(c).

          "written" or "in writing" shall mean any form of written communication
           -------      ----------                                              
or a communication by means of telex, telecopier device, telegraph or cable.

          10.2  Accounting Principles.  All statements to be prepared and
                ---------------------                                    
determinations to be made under this Agreement, including (without limitation)
those pursuant to (S) 5, shall be prepared and made in accordance with generally
accepted accounting principles applied on a basis consistent with the accounting
principles reflected in the audited financial statements of PPL and Resources
for the fiscal year ended December 31, 1997, referred to in (S) 7.4, except for
changes in accounting principles consistent with GAAP.

          10.3  Exercise of Rights.  Neither the failure nor  delay on the part
                ------------------                                             
of any of the Banks or the Fronting Bank to exercise any right, power or
privilege under this Agreement shall operate as a waiver thereof, nor shall any
single or partial exercise of any right, power or privilege under this Agreement
preclude any other or further exercise there-
<PAGE>
 
                                                                              55

of, or the exercise of any other right, power or privilege. The rights and
remedies herein expressly provided are cumulative and not exclusive of any
rights or remedies which the Banks would otherwise have. No notice to or demand
on PPL, Finance Co. or Resources in any case shall entitle PPL, Finance Co. or
Resources, as applicable, to any other or further notice or demand in similar or
other circumstances or constitute a waiver of the right of the Banks or the
Fronting Bank to any other or further action in any circumstances without notice
or demand.

          10.4  Amendment and Waiver.  Neither this Agreement nor any other Loan
                --------------------                                            
Document nor any terms hereof or thereof may be changed, waived, discharged or
terminated unless such change, waiver, discharge or termination is in writing
signed by PPL, Finance Co. and Resources, and the Required Banks, provided that
                                                                  --------     
no such change, waiver, discharge or termination shall, without the consent of
each Bank directly affected thereby, (i) extend the final scheduled maturity of
any Loan (except as provided for in (S)2.6), or reduce the rate or extend the
time of payment of interest or Commitment Fees thereon (except in connection
with a waiver of the applicability of any post-default increase in interest
rates), or reduce the principal amount thereof (except to the extent repaid in
cash), (ii) amend, modify or waive any provision of this (S) 10.4, (iii) reduce
the percentage specified in the definition of Required Banks or (iv) consent to
the assignment or transfer by PPL, Finance Co. or Resources of any of its rights
and obligations under this Agreement or the release of Resources from its
guarantee hereunder; provided further, that no such change, waiver, discharge or
                     ----------------                                           
termination shall (x) increase the Commitments of any Bank over the amount
thereof then in effect without the consent of such Bank (it being understood
that waivers or modifications of conditions precedent, covenants, Defaults or
Events of Default shall not constitute an increase of the Commitment of any
Bank) or (y) without the consent of the Agent, amend, modify or waive any
provision of (S) 8 as such Section applies to such Agent or any other provision
as such Section relates to the rights or obligations of such Agent.

          10.5  Expenses; Indemnification.  (a)  The Borrowers agree to pay all
                -------------------------                                      
reasonable out-of-pocket expenses (i) of the Agent and the Fronting Bank
incurred in connection with the preparation, execution, delivery, enforcement
and administration (exclusive of any internal overhead expenses) of this
Agreement and any and all agreements supplementary hereto and the making and
repayment of the Loans, the issuance of the Letters of Credit and the payment of
interest, including, without limitation, the reasonable fees and expenses of
Cravath, Swaine & Moore, counsel for the 
<PAGE>
 
                                                                              56

Agent and (ii) of the Agent, the Fronting Bank and each Bank incurred in
connection with the enforcement of this Agreement, including, without
limitation, the reasonable fees and expenses of any counsel for any of the Banks
with respect to such enforcement; provided that none of the Borrowers or
                                  --------     
Resources shall be liable for any fees, charges or disbursements of any counsel
for the Banks or the Agent other than Cravath, Swaine & Moore associated with
the preparation, execution and delivery of this Agreement and the closing
documentation contemplated hereby.

          (b)  The Borrowers further agree to pay, and to save the Agent, the
Fronting Bank and the Banks harmless from all liability for, any stamp or other
documentary taxes which may be payable in connection with the Borrowers'
execution or delivery of this Agreement, their borrowings hereunder or Letters
of Credit, or the issuance of any notes or of any other instruments or documents
provided for herein or delivered or to be delivered by each of them hereunder or
in connection herewith.

          (c)  The Borrowers agree to indemnify the Agent, the Fronting Bank and
each Bank and each of their respective affiliates, directors, officers and
employees (each such person being called an "Indemnitee") against all losses,
claims, damages, penalties, judgments, liabilities and expenses (including,
without limitation, all expenses of litigation or preparation therefor whether
or not the Agent, the Fronting Bank or any Bank is a party thereto) which any of
them may pay or incur arising out of or relating to this Agreement, the other
Loan Documents, the transactions contemplated hereby, the direct or indirect
application or proposed application of the proceeds of any Loan hereunder or the
issuance of Letters of Credit; provided that such indemnification shall not
                               --------                                    
extend to disputes solely among the Agent, the Fronting Bank and the Banks; and
provided further that such indemnity shall not, as to any Indemnitee, be
- -------- -------                                                        
available to the extent that such losses, claims, damages, liabilities or
related expenses are determined by a court of competent jurisdiction by final
and nonappealable judgment to have resulted from the gross negligence or wilful
misconduct of such Indemnitee.

          (d)  All obligations provided for in this (S) 10.5 shall survive any
termination of this Agreement or the resignation, withdrawal or removal of any
Bank.

          10.6  Successors and Assigns.  (a)  This Agreement shall be binding
                ----------------------                                       
upon and inure to the benefit of and be enforceable by the respective successors
and assigns of the parties hereto, provided that none of PPL, Finance Co. or
                                   --------                                 
<PAGE>
 
                                                                              57

Resources may assign or transfer any of its interests hereunder, except to the
extent any such assignment results from the consummation of a transaction
permitted under (S) 5.2, without the prior written consent of the Banks and
provided further that the right of each Bank to transfer, assign or grant
- ----------------                                                         
participations in its rights and/or obligations hereunder shall be limited as
set forth below in this (S) 10.6, provided that nothing in this (S) 10.6 shall
                                  --------                                    
prevent or prohibit any Bank from pledging its rights under this Agreement
and/or its Loans hereunder to a Federal Reserve Bank in support of borrowings
made by such Bank from such Federal Reserve Bank.  In order to facilitate such
an assignment to a Federal Reserve Bank, the Borrowers shall, at the request of
the assigning Bank, duly execute and deliver to the assigning Bank a promissory
note evidencing its Commitment or Loans made by the assigning Bank hereunder.

          (b)  Each Bank shall have the right to transfer, assign or grant
participations in all or any part of its remaining rights and obligations
hereunder on the basis set forth below in this clause (b).

               (A)  Assignments.  Each Bank may assign all or a portion of its
                    -----------                                               
          rights and obligations hereunder pursuant to this clause (b)(A) to (x)
          one or more Banks or any affiliates of any Bank or (y) one or more
          other Eligible Transferees, provided that (i) any such assignment
                                      --------                             
          pursuant to clause (y) above shall be in the aggregate amount of at
          least $5,000,000, (ii) after giving effect to any such assignment
          pursuant to clause (x) or (y) above, no Bank shall have a Commitment
          of less than $5,000,000 unless such Bank's Commitment is reduced to
          zero pursuant to such assignment, (iii) unless the Borrowers and the
          Administrative Agent shall otherwise agree, the assigning Bank shall
          not assign any of its rights and obligations under this Agreement
          without assigning the same percentage of its rights and obligations
          under the 5-Year Agreement, provided that no Banks shall be required
                                      --------                                
          to make an assignment under the 5-Year Agreement with respect to
          assignments made pursuant to (S) 2.6 hereunder, (iv) any assignment
          pursuant to clause (y) shall require the consent of the Borrowers,
          which consent shall not be unreasonably withheld, and provided
                                                                --------
          further, that, so long as no Loans or interest thereon shall be
          -------
          outstanding and no Default or Event of Default shall have occurred
          with respect to PPL, Finance Co. or 
<PAGE>
 
                                                                              58

          Resources and then be continuing, the Borrowers may at their option
          terminate the portion of such assigning Bank's Commitment proposed to
          be assigned pursuant to clause (y) above in lieu of consenting to such
          assignment, and the Total Commitment shall be reduced in the amount of
          such termination. Assignments or terminations of all or any portion of
          any Bank's Commitment pursuant to this clause (b)(A) will only be
          effective if the Agent shall have received a written notice from the
          assigning Bank and the assignee, or, in the case of a termination, the
          Borrowers, and, in the case of an assignment, payment of a
          nonrefundable assignment fee of $2,500 to the Agent by either the
          assigning Bank or the assignee. No later than five Business Days after
          its receipt of any written notice of assignment or termination, the
          Agent will record such assignment or termination, and the resultant
          effects thereof on the Commitment of the assigning or terminating Bank
          and, in the case of an assignment, the assignee, in the Register, at
          which time such assignment or termination shall become effective,
          provided that the Agent shall not be required to, and shall not, so
          --------
          record any assignment or termination in the Register on or after the
          date on which any proposed amendment, modification or supplement in
          respect of this Agreement has been circulated to the Banks for
          approval until the earlier of (x) the effectiveness of such amendment,
          modification or supplement in accordance with (S) 10.4 or (y) 30 days
          following the date on which such proposed amendment, modification or
          supplement was circulated to the Banks. Upon the effectiveness of any
          assignment or termination pursuant to this clause (b)(A), (x) the
          assignee, in the case of an assignment, will become a "Bank" for all
          purposes of this Agreement and the other Loan Documents with a
          Commitment as so recorded by the Agent in the Register, and to the
          extent of such assignment or termination, the assigning or terminating
          Bank shall be relieved of its obligations hereunder with respect to
          the portion of its Commitment being assigned or terminated.

               (B)  Participations.  Each Bank may transfer, grant or assign
                    --------------                                          
          participations in all or any part of such Bank's interests and
          obligations hereunder pursuant to this clause (b)(B) to any Eligible
          Transferee, provided that (i) such Bank shall remain a "Bank" for all
                      --------                                                 
          purposes of this Agreement 
<PAGE>
 
                                                                              59

          and the transferee of such participation shall not constitute a Bank
          hereunder and (ii) no participant under any such participation shall
          have any rights under the Agreement or other Loan Document or any
          rights to approve any amendment to or waiver of this Agreement or any
          other Loan Document except to the extent such amendment or waiver
          would (x) extend the final scheduled maturity of any of the Loans or
          the Commitment in which such participant is participating, (y) reduce
          the interest rate (other than as a result of waiving the applicability
          of any post-default increases in interest rates) or Commitment Fee or
          other fees applicable to any of the Loans or Commitments in which such
          participant is participating or postpone the payment of any thereof or
          reduce the principal amount of any Loan (except to the extent repaid
          in cash) or (z) release Resources from its obligations as a guarantor
          hereunder. In the case of any such participation, the participant
          shall not have any rights under this Agreement or any of the other
          Loan Documents (the participant's rights against the granting Bank in
          respect of such participation to be those set forth in the agreement
          with such Bank creating such participation) and all amounts payable by
          each of the Borrowers hereunder shall be determined as if such Bank
          had not sold such participation, provided that such participant shall
                                           --------
          be entitled to receive additional amounts under (S)(S) 1.8 and 2.5 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.

     (c)  Each Bank hereby represents, and each Person that becomes a Bank
pursuant to an assignment permitted by the preceding clause (b)(A) will upon its
becoming party to this Agreement represent, that it is an Eligible Transferee
which makes loans in the ordinary course of its business and that it will make
or acquire Loans for its own account in the ordinary course of such business,
provided that, subject to the preceding clauses (a) and (b), the disposition of
- --------                                                                       
any promissory notes or other evidences of or interests in Loans held by such
Bank shall at all times be within its exclusive control.

          10.7  Notices, Requests, Demands.  All notices, requests, demands or
                --------------------------                                    
other communications to or upon the respective parties hereto shall be deemed to
have been given or made (i) in the case of notice by mail, when actually
received, and (ii) in the case of telecopier notice sent 
<PAGE>
 
                                                                              60

over a telecopier machine owned or operated by a party hereto, when sent, in
each case addressed to the party or parties to which such notice is given at
their respective addresses shown below their signatures hereto or at such other
address as such party may hereafter specify in writing to the others. No other
method of giving notice is hereby precluded.

          10.8  Survival of Representations and Warranties.  All representations
                ------------------------------------------                      
and warranties contained herein or otherwise made in writing by PPL, Finance Co.
or Resources in connection herewith shall survive the execution and delivery of
this Agreement.

          10.9  Governing Law.  This Agreement and the rights and obligations of
                -------------                                                   
the parties under this Agreement (other than as relates to Letters of Credit)
shall be governed by and construed and interpreted in accordance with the laws
of the State of New York.  Each Letter of Credit shall be governed by, and
construed and interpreted in accordance with the laws or rules designated in
such Letter of Credit, or if no such laws or rules are designated, the Uniform
Customs and Practice for Documentary Credits (1993 revision), International
Chamber of Commerce, publication no. 500 (the "Uniform Customs") and, as to
matters not governed by the Uniform Customs, the laws of the State of New York.

          10.10  Counterparts.  This Agreement may be executed in any number of
                 ------------                                                  
copies, and by the different parties hereto on the same or separate
counterparts, each of which shall be deemed to be an original instrument.
Complete counterparts of this Agreement shall be lodged with each Borrower,
Resources and the Agent.

          10.11  Effectiveness.  This Agreement shall become effective on the
                 -------------                                               
Closing Date.

          10.12  Transfer of Office.  (a)  Each Bank may transfer and carry its
                 ------------------                                            
Loans at, to or for the account of any branch office, subsidiary or affiliate of
such Bank; provided that such Bank shall continue to bear all of its obligations
           --------                                                             
under this Agreement; and provided further that the Borrowers shall not be
                          -------- -------                                
responsible for costs arising under (S) 1.8, 2.5 or 3.4 resulting from any such
transfer to the extent not otherwise applicable to such Bank prior to such
transfer.

          (b)  Upon a Bank becoming aware of any event which will entitle it to
any additional amount pursuant to (S) 2.5(a) or (S) 3.4, such Bank shall take
all reasonable steps 
<PAGE>
 
                                                                              61

(including but not limited to making, maintaining or funding the affected Loan
through another office of such Bank) to avoid or reduce the additional amount
payable by the applicable Borrower; provided that, such steps will not result in
any additional costs, liabilities or expenses (not reimbursable by the
applicable Borrower) to such Bank and are not otherwise inconsistent with the
interests of such Bank determined in good faith.

          10.13  Proration of Payments.  The Banks agree among themselves that,
                 ---------------------                                         
with respect to all amounts received by them which are applicable to the payment
of principal of or interest on the Loans, equitable adjustment will be made so
that, in effect, all such amounts will be shared ratably among the Banks on the
basis of the amounts then owed each of them in respect of such obligation,
whether received by voluntary payment, by realization upon security, by the
exercise of any right of set-off or bankers' lien, by counterclaim or cross
action, under or pursuant to this Agreement or otherwise.  Each of the Banks
agrees that if it should receive any payment on its Loans of a sum or sums in
excess of its pro rata portion (other than as expressly contemplated by (S)
              --- ----                                                     
2.6(ii)), then the Bank receiving such excess payment shall purchase for cash
from the other Banks an interest in the Loans of such Banks in such amount as
shall result in a ratable participation by each of the Banks in the aggregate
unpaid amount of all outstanding Loans then held by all of the Banks.  If all or
any portion of such excess payment is thereafter recovered from such Bank, such
purchase shall be rescinded and the purchase price restored to the extent of
such recovery, but without interest.  The Borrowers agree that any Bank so
purchasing a participation from another Bank pursuant to this (S) 10.13 may
exercise all its rights with respect to such participation as fully as if such
Bank were the direct creditor of the Borrowers in the amount of such
participation.


          10.14  Jurisdiction; Consent to Service of Process.  (a)  Each of PPL,
                 --------------------------------------------                   
Finance Co. and Resources hereby irrevocably and unconditionally submits, for
itself and its property, to the nonexclusive jurisdiction of the Supreme Court
of the State of New York sitting in New York County and of the United States
District Court of the Southern District of New York, and any appellate court
from any thereof, in any action or proceeding arising out of or relating to this
Agreement, or for recognition or enforcement of any judgment, and each of the
parties hereto hereby irrevocably and unconditionally agrees that all claims in
respect of any such action or proceeding may be heard and determined in such New
York State or, to the 
<PAGE>
 
                                                                              62

extent permitted by law, in such Federal court. Each of the parties hereto
agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law. Nothing in this Agreement shall affect any
right that the Agent, the Fronting Bank or any Bank may otherwise have to bring
any action or proceeding relating to this Agreement against any of PPL, Finance
Co., Resources or its properties in the courts of any jurisdiction.

          (b)  Each of PPL, Finance Co. and Resources hereby irrevocably and
unconditionally waives, to the fullest extent it may legally and effectively do
so, any objection which it may now or hereafter have to the laying of venue of
any suit, action or proceeding arising out of or relating to this Agreement in
any court referred to in paragraph (a) of this Section. Each of the parties
hereto hereby irrevocably waives, to the fullest extent permitted by law, the
defense of an inconvenient forum to the maintenance of such action or proceeding
in any such court.

          (c)  Each party to this Agreement irrevocably consents to service of
process in the manner provided for notices in Section 10.7. Nothing in this
Agreement will affect the right of any party to this Agreement to serve process
in any other manner permitted by law.

          10.15  WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE
                 ---------------------                                         
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING
TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON
CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK
TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER
PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

          10.16  Headings Descriptive. The headings of the various provisions of
                 --------------------                                         
this Agreement are inserted for convenience of reference only and shall not be
deemed to affect the meaning or construction of any of the provisions hereof.
<PAGE>

                                                                              63

          IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Agreement to be duly executed and delivered as of the date
first above written.

                                        PP&L, INC.,                           
                                                                              
                                        By  /s/   James E. Abel               
                                           -----------------------------------
                                           Name:  James E. Abel              
                                           Title: Treasurer                  
                                                                              
                                                                              
                                        PP&L CAPITAL FUNDING, INC.,           
                                                                              
                                        By  /s/   James E. Abel            
                                           -----------------------------------
                                           Name:  James E. Abel              
                                           Title: Treasurer                  
                                                                              
                                                                              
                                        PP&L RESOURCES, INC.,                 
                                                                              
                                        By  /s/   John R. Biggar              
                                           -----------------------------------
                                           Name:  John R. Biggar             
                                           Title: Senior Vice President and
                                                  Chief Financial Officer
                                                                              
                                        THE CHASE MANHATTAN BANK,             
                                        Individually and as Agent             
                                        and Fronting Bank                     
                                                                              
                                        By  /s/  Thomas H. Kozlark            
                                           -----------------------------------
                                           Name:  Thomas H. Kozlark          
                                           Title: Vice President             
                                                                              
                                                                              
                                        CITIBANK, N.A.,                       
                                        Individually and as Documentation Agent
                                                                              
                                        By  /s/   Anita J. Brickell           
                                           -----------------------------------
                                           Name:  Anita J. Brickell          
                                           Title: Managing Director           
<PAGE>
 
                                        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/   James P. Moran              
                                           -----------------------------------
                                           Name:  James P. Moran            
                                           Title: Director                   
                                                                             
                                        By  /s/   Douglas E. Maher           
                                           -----------------------------------
                                           Name:  Douglas E. Maher          
                                           Title: Vice President             
                                                                             
                                        DEUTSCHE BANK AG, NEW YORK           
                                        BRANCH and/or CAYMAN ISLANDS BRANCH, 
                                                                             
                                        By  /s/   Lydia Zaininger            
                                           -----------------------------------
                                           Name:  Lydia Zaininger           
                                           Title: Vice President             
                                                                             
                                        By  /s/   Michael A. Hamilton        
                                           -----------------------------------
                                           Name:  Michael A. Hamilton       
                                           Title: Associate                  
                                                                             
                                        THE FIRST NATIONAL BANK OF           
                                        CHICAGO,                             
                                                                             
                                        By  /s/   Madeleine N. Pember         
                                           ----------------------------------- 
                                           Name:  Madeleine N. Pember       
                                           Title: Assistant Vice President    
<PAGE>
 
                                        FIRST UNION NATIONAL BANK,            
                                                                             
                                        By  /s/   Michael J. Kolosowsky        
                                           -----------------------------------
                                           Name:  Michael J. Kolosowsky        
                                           Title: Vice President             
                                                                             
                                        MORGAN GUARANTY TRUST COMPANY,       
                                                                             
                                        By  /s/   Robert Bottamedi           
                                           -----------------------------------
                                           Name:  Robert Bottamedi          
                                           Title: Vice President             
                                                                             
                                        MELLON BANK, N.A.,                   
                                                                             
                                        By  /s/   Mark W. Rogers             
                                           -----------------------------------
                                           Name:  Mark W. Rogers            
                                           Title: Vice President             
                                                                             
                                                                             
                                        NATIONSBANK, N.A.,                   
                                                                             
                                        By  /s/   Paula Z. Kramp              
                                           -----------------------------------
                                           Name:  Paula Z. Kramp            
                                           Title: Vice President             
                                                                             
                                                                             
                                        TORONTO DOMINION (TEXAS),INC.,       
                                                                             
                                        By  /s/   Sonja R. Jordan            
                                           -----------------------------------
                                           Name:  Sonja R. Jordan           
                                           Title: Vice President              
<PAGE>
 
                             Bank Address Schedule
                             ---------------------

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
                                                   PHONE                       
     NAME OF BANK AND ADDRESS                                                 FAX NUMBER(S) 
                                                 NUMBER(S)
- ------------------------------------------------------------------------------------------------
<S>                                            <C>                           <C>                
The Chase Manhattan Bank
Attn: Jaimin Patel                            (212) 270-1354                 (212) 270-2101
270 Park Avenue
New York, NY 10017
- ------------------------------------------------------------------------------------------------    
THE BANK OF NEW YORK                                                                                
Attn: John Watt                               (212) 635-7533                 (212) 635-7923      
One Wall Street                                                                                     
New York, NY 10286                                                                                  
- ------------------------------------------------------------------------------------------------    
THE BANK OF NOVA SCOTIA                                                                             
Attn:  Phil Adsetts                           (212) 225-5010                 (212) 225-5090      
One Liberty Plaza                                                                                   
26th Floor                                                                                          
New York, NY 10006                                                                                  
- ------------------------------------------------------------------------------------------------    
CITIBANK, N.A.                                                                                      
Attn:  Anita Brickell                         (212) 559-1288                 (212) 583-7185       
       Robert Harrity                         (212) 559-6482                 (212) 793-6130                                        
       Cecelia Leyden                         (212) 559-4354                 (212) 793-6130       
399 Park Avenue                               
9th Floor                            
New York, NY 10043                                                                                  
- ------------------------------------------------------------------------------------------------    
CREDIT SUISSE FIRST BOSTON                                                                          
Attn:  James Moran                            (212) 325-9176                 (212) 325-8314      
11 Madison Avenue                                                                                   
20th Floor                                                                                          
New York, NY 10010                                                                                  
- ------------------------------------------------------------------------------------------------    
DEUTSCHE BANK AG                                                                                    
Attn: Lydia Zaininger                         (212) 469-8634                 (212) 429-8256      
31 West 52nd Street                                                                                 
24th Floor                                                                                          
- ------------------------------------------------------------------------------------------------    
</TABLE> 
<PAGE>
 
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
                                                   PHONE                       
     NAME OF BANK AND ADDRESS                                                 FAX NUMBER(S) 
                                                  NUMBER(S)
- ------------------------------------------------------------------------------------------------
<S>                                            <C>                           <C>                
New York, NY 10019
- ------------------------------------------------------------------------------------------------
THE FIRST NATIONAL BANK
OF CHICAGO
Attn:  Kenneth Bauer                           (312) 732-6282                (312) 732-3055
       Madeleine Pember                        (312) 732-9727
One First National Plaza
Suite 0360
Chicago, IL 60670
- ------------------------------------------------------------------------------------------------    
FIRST UNION NATIONAL BANK                                                                           
Attn:  Brian Tate                              (704) 383-0510                (704) 383-6670      
301 South College Street                                                                            
5th Floor                                                                                           
Charlotte, NC 28288-0735                                                                            
- ------------------------------------------------------------------------------------------------    
MORGAN GUARANTY TRUST COMPANY                                                                       
Attn: Jim Finch                                (212) 648-7141                (212) 648-5014      
      Clifford Potter                          (212) 648-8672                                    
J.P. Morgan                                                                                         
60 Wall Street                                                                                      
New York, NY 10005                                                                                  
- ------------------------------------------------------------------------------------------------    
MELLON BANK, N.A.                                                                                   
Attn:  Mary Ellen Usher                        (412) 236-1203                (412) 236-1840      
       Mark Rogers                             (412) 234-1888                                    
1 Mellon Bank Center                                                                                
Suite 4425                                                                                          
Pittsburgh, PA 15258-0001                                                                           
- ------------------------------------------------------------------------------------------------    
NATIONSBANK, N.A.                                                                                   
Attn: Paula Kramp                              (301) 571-0713                (301) 571-0719      
      Lawrence Saunders                        (301) 571-0704                                    
6610 Rockledge Drive, 6th Fl.                                                                       
Bethesda, MD 20817                                                                                 
- ------------------------------------------------------------------------------------------------    
TORONTO DOMINION (TEXAS), INC.                                                                      
Attn:  Katherine Lucey                         (212) 468-0785                (212) 262-1929      
31 West 52nd Street                                                                                 
New York, NY 10019-6101                                                                             
- ------------------------------------------------------------------------------------------------    
</TABLE>
 
<PAGE>
 
                                                                 SCHEDULE I
<TABLE>
<CAPTION>
BANK                                                             COMMITMENT
- ----                                                             ----------
<S>                                                              <C>
THE CHASE MANHATTAN BANK.....................................    $ 40,000,000
CITIBANK, N.A................................................    $ 40,000,000
THE BANK OF NEW YORK.........................................    $ 30,000,000
THE BANK OF NOVA SCOTIA......................................    $ 30,000,000
CREDIT SUISSE FIRST BOSTON...................................    $ 32,000,000
DEUTSCHE BANK AG.............................................    $ 10,000,000
THE FIRST NATIONAL BANK OF CHICAGO...........................    $ 32,000,000
FIRST UNION NATIONAL BANK....................................    $ 32,000,000
MORGAN GUARANTY TRUST COMPANY................................    $ 30,000,000
MELLON BANK, N.A.............................................    $ 32,000,000
NATIONSBANK, N.A.............................................    $ 32,000,000
TORONTO DOMINION (TEXAS), INC................................    $ 10,000,000

                    TOTAL COMMITMENT.........................    $350,000,000

</TABLE>
<PAGE>
 
                                                                       EXHIBIT C

                          [Form of Extension Letter]

[Date]/1/


The Chase Manhattan Bank 
270 Park Avenue 
New York, NY 10017

Attention:  The Chase Manhattan Bank, as Agent and as Fronting Bank, and the
Banks party to the Credit Agreement

Re:  Extension of Expiry Date

Ladies and Gentlemen:

     Reference is hereby made to that certain 364-Day Revolving Credit Agreement
dated as of November 20, 1997, as amended and restated as of November 19, 1998
(as amended, supplemented or otherwise modified from time to time, the "Credit
Agreement"), among PP&L, Inc. ("PPL"), PP&L Capital Funding, Inc. ("Finance
Co.") and PP&L Resources, Inc. ("Resources"), the banks party thereto (the
"Banks"), The Chase Manhattan Bank, as fronting bank and as agent for the Banks.
Terms used and not defined herein shall have the meaning assigned to such terms
in the Credit Agreement.

____________________
/1/ This Letter shall be delivered to the Agent not less than 30 and not more
than 45 days prior to the Current Expiry Date.
<PAGE>
 
     1.   Prior to giving effect to the extension referred to below, the Expiry
          Date is __________ (the "Current Expiry Date").

     2.   PPL and Finance Co. hereby request that the Expiry Date be extended to
          _________./2/

     3.   Pursuant to Section 2.6 of the Credit Agreement, such extension of the
          Current Expiry Date shall become effective on the 20th day prior to
          the Current Expiry Date if (and only if) Banks holding Commitments
          that aggregate at least 51% of the Total Commitment on such date shall
          have agreed to such extension as evidenced by their signatures below.

     This letter may be executed in two or more counterparts, each of which
shall constitute an original but all of which when taken together shall
constitute but one instrument. The delivery by telecopy of an executed
counterpart hereof shall be effective as delivery of an original manually
executed counterpart.

                                             Very truly yours,

PP&L, Inc.                                        PP&L Capital Funding, Inc.

By:                                          By:
   ______________________________                 ______________________________
   ______________________________                 ______________________________
   Name:                                          Name:
   Title:                                         Title:

___________________
/2/ Such date shall be 364 days after the Current Expiry Date.
<PAGE>
 
                                                                       EXHIBIT C
                                                                          Page 3

PP&L Resources, Inc.

By:
   ______________________________
   ______________________________
   Name:
   Title:


Acknowledged and agreed to
as of the date noted above:

THE CHASE MANHATTAN BANK,
individually and as                [BANK]
Agent, Collateral Agent
and Fronting Bank,

By:                                By:
   ______________________________     ______________________________
   ______________________________     ______________________________  
   Name:                              Name:
   Title:                             Title:

<PAGE>
 
                                                                   Exhibit 10(c)

 
                 James E. Abel                      PP&L, Inc.
                     Treasurer          Two North Ninth Street
                  610.774.5987        Allentown, PA 18101-1179
             Fax: 610.774.5106                    610.774.5151
       E-mail: [email protected]            http://www.papl.com/


                                                   July 8, 1998

Mr. Jaimin Patel
Vice President
Chase Securities, Inc.
270 Park Avenue
New York, NY  10017

Dear Jaimin:

          Pursuant to our conversations, The Chase Manhattan Bank (the "Bank")
is making available to PP&L Capital Funding, Inc. (the "Company") a line of
credit in the aggregate principal amount of $80,000,000.00 (the "Facility").
The Facility will commence on the date hereof and terminate on July 7, 1999 (the
"Termination Date"), unless sooner terminated in accordance herewith or with the
Note (as hereinafter defined); provided that the Termination Date may be
extended from the initial or any extended Termination Date upon written request
of the Company to the Bank not more than 45 days nor less than 30 days prior to
the Termination Date, and approval of such extension by the Bank.

          Approval of any such extension shall be in the sole discretion of the
Bank.  The Bank's approval of such extension shall be provided by written notice
to the Company specifying the date to which the Termination Date is extended.
Notwithstanding the foregoing, the Termination Date shall in no event be
extended to a date that is more than 364 days from the date of such notice.
Failure of the Bank to provide written notice of approval of such extension
shall be deemed to mean that the Facility is not so extended.

          Borrowings under this Facility shall become due and payable without
setoff, counterclaim or deduction whatsoever on the date selected by the Company
in the Request (as hereinafter defined) with respect to each advance, not later
than the Termination Date, and will be evidenced by a promissory note in the
form of Exhibit A attached hereto (the "Note").  Provided that the aggregate
principal amount outstanding at any one time does not exceed $80,000,000.00,
borrowings may be effected using either of the following alternatives:

   1. Domestic Dollar Loans maturing not later than the Termination Date,
      bearing an annual interest rate equal to the higher of

           (i)  the Bank's floating prime lending rate (calculated on the basis
                of a 365-day year) as announced from time to time; and
 
           (ii) .5% in excess of the Bank's overnight Federal Funds Rate
                (calculated on the basis of a 360-day year) which shall mean the
                per annum rate at which the Bank can acquire federal funds in
                the interbank overnight federal funds market;

      this rate (the "Base Rate") to be determined daily; or
<PAGE>
 
                                    Page 2

   2. Eurodollar Loans with maturities of one, two, or three months (but in no
      event shall a Eurodollar Loan mature later than the Termination Date),
      bearing an annual interest rate (calculated on the basis of a 360-day year
      for the actual number of days elapsed) equal to .30% over the London
      interbank Offered Rate, as quoted by the Bank, for periods and in amounts
      corresponding to the terms of such Eurodollar Loans two London business
      days prior to the date of the requested advance.

          Interest on each Domestic Dollar Loan and Eurodollar Loan
(individually a "Loan" and collectively the "Loans") is due and payable at the
maturity thereof and, if such maturity is longer than one month, at one month
intervals after the making of such Loan.  Domestic Dollar Loans shall be
prepayable at any time without premium or penalty.  In the event the Company
repays any Eurodollar Loan on any day other than the last day of an interest
period therefor (whether by acceleration or otherwise), the Company shall pay to
the Bank, on demand, any resulting loss or expense incurred by the Bank
including, without limitation, any loss or expense incurred in obtaining,
liquidating or employing deposits from third parties.  All amounts not paid when
due on any Loan (whether by acceleration or otherwise) will bear interest
payable on demand at a rate equal to 1% in excess of the Base Rate.

          The Bank expressly reserves the right to suspend offering Eurodollar
Loans if the Bank determines that making or maintaining any such Loan shall have
become impracticable or unlawful or if the effective cost thereof to the Bank
shall exceed the quoted rate of interest with respect thereto.

BORROWING NOTIFICATION AND FUNDING PROVISIONS

          Minimum drawdowns for all Loans made under this Facility shall be
$10,000,000.00.  Loans hereunder may be effected by telephone request
("Request") by those individuals authorized to request such Loans as designated
in writing to the Bank by the Company's Treasurer.  A request for any Loan is
deemed as confirmation by the Company that no event as described in paragraph 2
of the Note shall have occurred and be continuing and that all representations
and warranties contained in this letter agreement are true as of the date of the
borrowing as if made on such date.  Upon receipt of such Request, the Bank shall
transfer the amount of the Loan in immediately available funds to the Company's
Account Number 28065 with Mellon Bank, Delaware, ABA No. 031100047 or such other
bank account of the Company as may be directed in writing by the Company's
Treasurer.

          For Domestic Dollar Loans, the Company may initiate a Loan by
providing a Request prior to 11:00 A.M. on the date on which the funds are
required.  For Eurodollar Loans, the Company may initiate a Loan by providing a
Request prior to 11:00 A.M. at least three business days prior to the date on
which the funds are required.

LOAN DOCUMENTATION

          The Bank shall record all borrowings and repayments of principal and
interest and the dates of such transactions on its records.  The Company agrees
that the Bank's records, barring manifest evidence to the contrary, shall
conclusively evidence the Company's outstanding obligations under the terms of
this letter agreement and Note.

FACILITY FEE

          The Company agrees to pay to the Bank a facility fee (the "Fee") of
 .10% per annum on the aggregate amount of the Facility.  This Fee, which shall
be based on the actual number of days elapsed on a 360-day year, shall begin to
accrue on the date hereof and shall be 
<PAGE>
 
                                    Page 3

payable in arrears on the last business day of each calendar quarter and on any
date on which the Bank's commitment hereunder shall be terminated in full.

          All payments made by the Company under this letter agreement or the
Note will be made to the Bank at 270 Park Avenue, New York, New York 10017 or
such other address as the Bank may designate.

CANCELLATION

          The Company, in its sole discretion, may cancel the whole or any part
of the unused portion of the Facility in $10,000,000.00 increments by giving the
Bank not less than 10 business days prior notice to that effect, specifying the
date and amount of the proposed cancellation.

REPRESENTATIONS AND WARRANTIES

          The Company has full power and authority to enter into this letter
agreement, to execute and deliver the Note and to incur the obligations provided
for herein and therein, all of which have been duly authorized by all proper and
necessary corporate action.

          Except as provided by applicable laws of bankruptcy, insolvency,
liquidation, or other laws of general application: (i) this letter agreement
constitutes, and the Note, when issued and delivered pursuant hereto, will
constitute valid and legally binding obligations of the Company, enforceable in
accordance with their terms; and (ii) the Loans will rank pari passu in respect
of priority of payment with all other senior unsecured indebtedness of the
Company.

          The execution, delivery and performance of its obligations under this
Agreement and the Note will not violate in any material respect any provisions
of any agreement to which the Company is bound and will not be in conflict with,
result in a breach of, or constitute (with due notice and/or lapse of time) a
default under any such agreement or result in the creation or imposition of any
lien, charge or encumbrance of any nature whatsoever upon any of the properties
or assets of the Company.

          The audited balance sheet of PP&L Resources, Inc. ("Resources"),
parent corporation of the Company, on a consolidated basis as of December 31,
1997 together with audited statements of income and expense, retained earnings,
paid in capital and surplus and changes in financial position, together with
notes thereto, for the fiscal year then ended, heretofore delivered to the Bank,
fairly present the financial condition of Resources and the results of its
operations, as of the date and for the period referred to and have been prepared
in accordance with generally accepted accounting principles consistently
maintained throughout the period involved.  There has been no material adverse
change in the business, properties, condition (financial or other) or operations
of Resources since the date of such audited financial statements which would
adversely affect Resources' ability to meet its obligations under the terms of a
Guarantee by Resources of the Company's obligations hereunder of even date
("Guarantee").

          The Company has heretofore delivered to the Bank unaudited financial
statements, specifically an income statement, balance sheet, and statement of
cash flows, for the period ended December 31, 1997.  There has been no material
adverse change in the business, properties, condition (financial or other) or
operations of the Company since the date of the statements which would adversely
affect the Company's ability to meet its obligation hereunder.
<PAGE>
 
                                    Page 4

FINANCIAL STATEMENTS

          As long as the Facility is available to the Company, the Company shall
promptly provide the Bank with annual and quarterly financial statements of both
the Company and Resources on a consolidated basis.  Annual statements shall be
supplied within 120 days from the closing of the respective annual fiscal period
and Resources' statements shall be audited by a nationally recognized
independent accountant.  Quarterly financial statements, prepared in accordance
with generally accepted principles and practices of accounting, shall be
supplied within 60 days of the close of each of the first three quarters of
Resources' fiscal year.  The Company will provide the Bank with any other
information the Bank may reasonably request from time to time.

WAIVER OF JURY TRIAL

          Each party hereto hereby waives, to the fullest extent permitted by
applicable law, any right it may have to a trial by jury in any legal proceeding
directly or indirectly arising out of or relating to this agreement or the
transactions contemplated hereby (whether based on contract, tort or any other
theory).  Each party hereto (a) certifies that no representative, agent  or
attorney of any other party has represented, expressly or otherwise, that such
other party would not, in the event of litigation, seek to enforce the foregoing
waiver; and (b) acknowledges that it and the other parties hereto have been
induced to enter into this agreement by, among other things, the mutual waivers
and certifications in this section.

INDEMNIFICATION

          The Company agrees to indemnify the Bank and each of its respective
affiliates, directors, officers and employees (each an "Indemnitee") against all
losses, claims, damages, penalties, judgments, liabilities and expenses
(including, without limitation, all expenses of litigation or preparation
therefore whether or not the Bank is a party thereto) which any of them may pay
or incur arising out of or relating to the Note, this agreement, or any other
agreement executed in connection therewith, the transactions contemplated
hereby, or the direct or indirect application or proposed application of the
proceeds of any Loan hereunder; provided that such indemnity shall not, as to
any Indemnitee, be available to the extent that such losses, claims, damages,
liabilities or related expenses are determined by a court of competent
jurisdiction by final and nonappealable judgment to have resulted from the gross
negligence or willful misconduct of such Indemnitee.

DOCUMENTATION

          As a condition precedent to the first utilization of the Facility, the
Bank shall be in possession of the following:

       (i) a copy of this letter agreement duly executed by the Company;

      (ii) a Note of the Company, evidencing loans pursuant to both Domestic
           Dollar Loans and Eurodollar Loans, in the form of Exhibit A attached
           hereto and duly executed;

     (iii) corporate resolutions, articles, and bylaws, and an
           incumbency/signature certificate of the Company and Resources;

      (iv) the Guarantee of Resources of the Company's obligations hereunder in
           the form of Exhibit B attached hereto and duly executed;
<PAGE>
 
                                    Page 5

       (v) a Certificate, signed by an officer of the Company, stating that (a)
           no default or event of default as described in paragraph 2 of the
           Note has occurred and is continuing as of the date of this letter
           agreement and Note; and (b) all representations and warranties
           contained in the letter agreement are true and correct as of the date
           of this letter agreement and Note; and

      (vi) a legal opinion of counsel to the Company and the Guarantor in form
           and substance reasonably satisfactory to the Bank.

          Any and all obligations and liabilities incurred under this letter
agreement shall be due and payable without setoff, counterclaim or deduction
whatsoever on the Termination Date.

          This letter agreement and the Note shall be governed by and construed
in accordance with the laws of the State of New York.

          All letters, advices, confirmation, notices and other writing required
or permitted hereunder shall be sufficient if sent by first class mail, postage
prepaid, addressed to the Bank as follows:

                    The Chase Manhattan Bank
                    270 Park Avenue
                    New York, NY  10017

and to the Company as follows:

                    PP&L Capital Funding, Inc.
                    Two North Ninth Street
                    Allentown, PA  18101

                    Attention:  Mr. James E. Abel
                    ---------                    
                                Treasurer

          If the above stated terms and conditions are satisfactory, please sign
and return to the Company the enclosed copy of this letter agreement.

                                         Very truly yours,

                                         PP&L CAPITAL FUNDING, INC.
                                         By:


                                         ______________________________
                                                      James E. Abel
                                                      Treasurer

AGREED TO AND ACCEPTED BY:

THE CHASE MANHATTAN BANK


By:     _________________________


Title:  _________________________
<PAGE>
 
                       GUARANTEE OF PP&L RESOURCES, INC.
                       ---------------------------------
                                        

          In order to induce The Chase Manhattan Bank (the "Bank") to extend
credit to PP&L Capital Funding, Inc. (the "Company"), under the agreement
between the Bank and the Company dated July 8, 1998 (the "Agreement"), PP&L
Resources, Inc., (Resources) hereby irrevocably and unconditionally guarantees,
as primary obligor and not merely as a surety, the Company's obligations to the
Bank under the Agreement and the Note (as defined in the Agreement), whether for
principal, interest, fees or otherwise (collectively, the "Company
Obligations").  Resources further agrees that the due and punctual payment of
Company Obligations may be extended, in whole or in part, without notice to or
further assent from it, and that it will remain bound upon its Guarantee
hereunder notwithstanding any such extension or renewal of any Company
Obligation.

          Resources waives presentment to, demand of payment from and protest to
the Company of any of the Company Obligations, and also waives notice of
acceptance of its obligations and notice of protest for nonpayment.  The
obligations of Resources hereunder shall not be affected by (a) the failure of
the Bank to assert any claim or demand or to enforce any right or remedy against
the Company under the provisions of this Guarantee, the Agreement, the Note or
otherwise, (b) change or increase in the amount of any of the Company
Obligations, whether or not consented to by Resources, or (c) any rescission,
waiver, amendment or modification of any of the terms or provisions of this
Agreement or any other agreement.

          Resources further agrees that its agreement hereunder constitutes a
promise of payment when due (whether or not any bankruptcy or similar proceeding
shall have stayed the accrual or collection of any of the Company Obligations or
operated as a discharge thereof) and not merely of collection, and waives any
right to require that any resort be had by the Bank to any balance of any
deposit account or credit on the books of the Bank in favor of any other person.

          The obligations of Resources hereunder shall not be subject to any
reduction, limitation, impairment or termination for any reason, and shall not
be subject to any defense or setoff, counterclaim, recoupment or termination
whatsoever, by reason of the invalidity, illegality or unenforceability of the
Company Obligations, any impossibility in the performance of the Company
Obligations or otherwise.  Without limiting the generality of the foregoing, the
obligations of Resources hereunder shall not be discharged or impaired or
otherwise affected by the failure of the Bank to assert any claim or demand or
to enforce any remedy under the Agreement or any other agreement, by any waiver
or modification in respect of any thereof, by any default, failure or delay,
willful or otherwise, in the performance of Company Obligations, or by any other
act or omission which may or might in any manner or to any extent vary the risk
of Resources or otherwise operate as a discharge of Resources or the Company as
a matter of law or equity.

          Resources further agrees that its obligations hereunder shall continue
to be effective or be reinstated, as the case may be, if at any time payment, or
any part thereof, of any Company Obligation is rescinded or must otherwise be
restored by the Bank upon the bankruptcy or reorganization of the Company or
otherwise.

          In furtherance of the foregoing and not in limitation of any other
right which the Bank may have at law or in equity against Resources by virtue
hereof, upon the failure of the Company to pay any Company Obligation when and
as the same shall become due, whether at maturity, by acceleration, after notice
of prepayment or otherwise, Resources hereby promises to and will, upon receipt
of written demand by the Bank, forthwith pay, or cause to be paid, in cash the
amount of such unpaid Company Obligations.
<PAGE>
 
                                    Page 2

          Until such time as the Company Obligations shall have been paid in
full, Resources waives any right of subrogation which it may have in connection
with any payment hereunder; provided, however, that upon payment in full of the
Company Obligations the Bank shall, in reasonable manner, assign to Resources
the amount of such Company Obligations owed to it and so paid, such assignment
to be pro tanto to the extent to which the Company Obligations in question was
discharged by Resources, or make such disposition thereof as Resources shall
direct (all without recourse to the Bank and without any representation or
warranty by the Bank).

          IN WITNESS WHEREOF, PP&L Resources, Inc. has caused this Guaranty to
be executed this 8th day of July, 1998.


                                     PP&L RESOURCES, INC.
 
                                     By:


                                     ____________________________
                                     Senior Vice President-Financial


                                     ATTEST:

                                     By:



                                     ____________________________
                                                 Robert J. Grey
                                                   Secretary
 

ACCEPTED:

THE CHASE MANHATTAN BANK

By:



____________________________
     (Signature and Title)
<PAGE>
 
                                                                       EXHIBIT A


                                PROMISSORY NOTE
                                        

$80,000,000.00                           July 8, 1998
Commitment of Bank

          PP&L Capital Funding, Inc. (the "Company"), for value received, hereby
promises to pay to the order of The Chase Manhattan Bank (the "Bank"), for the
account of its appropriate lending office, at its office, 270 Park Avenue, New
York, New York 10017, in lawful money of the United States, the principal sum of
$80,000,000.00, or, if less, the aggregate unpaid principal amount of all loans
made by the Bank to the Company pursuant to the letter agreement dated July 8,
1998, between the Company and the Bank (the "Agreement"), on the dates specified
for the repayment of such loans as set forth on the Bank's records or, if not so
specified, as provided in the Agreement.  Each loan evidenced by this Note shall
bear interest, payable as provided in the Agreement.

          The Bank may, at its option, declare this Note immediately due and
payable and terminate its commitment under the Agreement without further
formality, if:

       (a) neither the Company nor Resources pays (x) within 5 business days of
           the due date thereof any interest or fees on this Note or under the
           Agreement, or (y) when due, the principal on any loan or any other
           amount payable hereunder or under the Agreement;

       (b) any representation or warranty by the Company to the Bank in any
           financial statement, certificate, or other agreement proves to have
           been misleading in any material respect when made or deemed to have
           been made;

       (c) the Company or Resources, shall (i) fail to pay any principal or
           interest, regardless of amount, due in respect of any indebtedness in
           a principal amount in excess of $40,000,000, in the case of
           indebtedness of Resources or indebtedness of the Company guaranteed
           by Resources or, in the case of indebtedness of the Company not
           guaranteed by Resources, $10,000,000, if such failure shall continue
           beyond any period of grace provided with respect thereto, or (ii)
           fail to observe or perform any other term, covenant, condition or
           agreement contained in any agreement or instrument (including any
           term, covenant, condition or agreement herein, or in the Agreement or
           in the Guarantee) evidencing or governing any such indebtedness in a
           principal amount in excess of, in the case of indebtedness of
           Resources or indebtedness of the Company guaranteed by Resources,
           $40,000,000 or, in the case of indebtedness of the Company not
           guaranteed by Resources, $10,000,000, if such failure shall continue
           beyond any period of grace provided with respect thereto if the
           effect of any failure referred to in this clause (ii) is to cause, or
           to permit the holder or holders of such indebtedness or a trustee on
           its or their
<PAGE>
 
                                    Page 2

           behalf to cause, such indebtedness to become due prior to its stated
           maturity; or

       (d) the Company or Resources ceases to pay its debts or makes an
           assignment for the benefit of creditors, or any proceeding relating
           to the Company or Resources under any bankruptcy, reorganization,
           arrangement, readjustment of debt, dissolution, or liquidation law or
           statute of any jurisdiction, whether now or hereafter in effect, is
           commenced by or against the Company or Resources or the Company or
           Resources becomes or is adjudicated insolvent or bankrupt, or
           petitions or applies to any tribunal for any receiver of or any
           trustee for the Company or Resources or any substantial part of the
           property of the Company or Resources;

       (e) the ratio of Consolidated Indebtedness of Resources to Consolidated
           Capitalization of Resources exceeds 70% at any time and Resources
           shall have failed to reduce such ratio to 70% or less within 30 days
           after written notice to Resources from the Bank. For this purpose,
           "Consolidated Indebtedness of Resources" shall mean the Consolidated
           Indebtedness of Resources (determined in accordance with United
           States generally accepted accounting principles (GAAP)), except that
           for purposes of this definition (1) Consolidated Indebtedness of
           Resources shall exclude Non-Recourse Indebtedness of Resources and
           (2) Consolidated Indebtedness of Resources shall exclude any Hybrid
           Preferred Securities of Resources. Also for this purpose,
           Consolidated Capitalization of Resources shall mean the sum of (A)
           the Consolidated Indebtedness of Resources and (B) (i) the
           consolidated shareowners' equity (determined in accordance with GAAP)
           of the common, preference and preferred stockholders of Resources and
           (ii) the aggregate amount of Hybrid Preferred Securities of
           Resources, except that for purposes of calculating Consolidated
           Capitalization of Resources, Consolidated Indebtedness of Resources
           shall exclude Non-Recourse Indebtedness of Resources and Consolidated
           Capitalization of Resources shall exclude that portion of
           shareowners' equity attributable to assets securing Non-Recourse
           Indebtedness of Resources. "Hybrid Preferred Securities" of Resources
           means (1) the preferred securities and subordinated debt described in
           the Prospectus dated as of April 3, 1997 of PP&L Capital Trust and
           PP&L, Inc. and the preferred securities and subordinated debt
           described in the Prospectus dated as of June 9, 1997 of PP&L Capital
           Trust II and PP&L, Inc. (collectively, the "Existing TOPrS") and (2)
           any additional preferred securities and subordinated debt (with a
           maturity of at least twenty years) similar to the Existing TOPrS and
           in an aggregate amount not to exceed $100,000,000, issued by business
           trusts, limited liability companies, limited partnerships (or similar
           entities) (i) all of the common equity, general partner or similar
           interests of which are owned (either directly or indirectly through
           one or more wholly-owned Subsidiaries) at all times by Resources or
           PP&L, Inc., (ii) that have been formed for the purpose of
<PAGE>
 
                                    Page 3

           issuing hybrid preferred securities and (iii) substantially all the
           assets of which consist of (A) subordinated debt of Resources or a
           Subsidiary of Resources, as the case may be, and (B) payments made
           from time to time on the subordinated debt. "Indebtedness" of any
           person shall mean, without duplication, (a) all obligations of such
           person for borrowed money, (b) all obligations of such person with
           respect to deposits or advances of any kind, (c) all obligations of
           such person evidenced by bonds, debentures, notes or similar
           instruments, (d) all obligations of such person under conditional
           sale or other title retention agreements relating to property or
           assets purchased by such person, (e) all obligations of such person
           issued or assumed as the deferred purchase price of property or
           services (excluding trade accounts payable and accrued obligations
           incurred in the ordinary course of business), (f) all Indebtedness of
           others secured by (or for which the holder of such Indebtedness has
           an existing right, contingent or otherwise, to be secured by) any
           Lien or property owned or acquired by such person, whether or not the
           obligations secured thereby have been assumed but shall not include
           any obligations that are without recourse to such person, (g) all
           Guarantees by such person of Indebtedness of others, (h) all Capital
           Lease Obligations of such person, (i) all obligations of such person
           in respect of Interest Rate Protection Agreements, foreign currency
           exchange agreements or other interest or exchange rate hedging
           arrangements (the amount of any such obligation to be the amount that
           would be payable upon the acceleration, termination or liquidation
           thereof) and (j) all obligations of such person as an account party
           in respect of letters of credit and bankers' acceptances. "Non-
           Recourse Indebtedness of Resources" shall mean indebtedness that is
           nonrecourse to Resources, the Company, PP&L, Inc. ("PP&L") or any of
           PP&L's Subsidiaries; or

       (f) the Guarantee of Resources shall, for any reason, cease to be in full
           force and effect;

provided, that upon the happening of any event specified in subparagraph (d)
above, this Note and any other obligations of the Company to the Bank shall
become immediately due and payable and the commitment under the Agreement shall
be terminated without declaration or other notice to the Company.

          If, for any reason (including acceleration), the principal of any
Eurodollar Loan as defined in the Agreement and evidenced by this Note, or any
portion thereof, is paid prior to the last day of an interest period therefor,
the Company shall reimburse the Bank on demand for any resulting loss or expense
incurred by it, including (without limitation) any loss or expense incurred in
obtaining, liquidating or employing deposits from third parties.

          If the Bank reasonably determines at any time that any applicable law,
governmental rule or regulation, or any change in interpretation or
administration thereof by any governmental authority, central bank or comparable
agency or compliance by the Bank with any regulatory directive subjects the Bank
to any tax with respect to this Note or payments by the Company of principal or
interest thereunder or hereunder (except for 
<PAGE>
 
                                    Page 4

taxes on or measured by the net income of the Bank), or will have the effect of
increasing the Bank's reserve requirements, deposit requirements, or the amount
of capital required or expected to be maintained by the Bank based on the
existence of the Facility or the Bank's obligations under the Agreement, then
promptly upon receipt of a written demand from the Bank, the Company shall pay
the Bank such additional amounts as shall be required to compensate the Bank for
the increased cost to the Bank as a result of these increases. Each such written
demand shall specify (a) the event pursuant to which the Bank is entitled to
claim the additional amount, (b) the date on which the event occurred and became
applicable to the Bank and (c) the compensation period for which the amount is
due. The period for which the additional amounts may be claimed by the Bank (the
"Compensation Period") shall be the number of days actually elapsed since the
date the event occurred and became applicable to the Bank. Payments made by the
Company to the Bank shall be made on the later of the last day of the
Compensation Period specified in each written demand or 30 days after any such
written demand. Provided that the Bank acts reasonably and in good faith in
determining any additional amounts due, the Bank's determination of compensation
owing shall, absent manifest error, be final, conclusive and binding on the
Company.

          If any loan evidenced by this Note becomes due and payable on a
Saturday, Sunday or public or other banking holiday under the laws of the State
of New York, the maturity thereof shall be extended to the next succeeding
business day, and interest shall be payable thereon at the rate herein specified
during such extension; provided, however, that if any such extension would
result in the interest period for a Eurodollar Loan being carried into another
calendar month, such interest period shall end on the preceding business day.

          If the Bank institutes any action for the enforcement or collection of
this Note, the Company shall pay on demand all costs and expenses of such action
including reasonable legal fees.

          If the unpaid principal amount of any Loan, interest accrued thereon
or any amount owing by the Company hereunder or under the Agreement shall have
become due and payable (by acceleration or otherwise), the Bank shall have the
right, in addition to all other rights and remedies available to it, without
notice to the Company, to set-off against and to appropriate and apply to such
due and payable amounts any debt owing to, and any other funds held in any
manner for the account of, the Company by the Bank including, without
limitation, all funds in all deposit accounts (whether time or demand, general
or special, provisionally credited or finally credited, or otherwise) now or
hereafter maintained by the Company with the Bank.  Such right shall exist
whether or not the Bank shall have given notice or made any demand hereunder,
and regardless of the existence or adequacy of any collateral, guarantee or any
other security, right or remedy available to the Bank.  Nothing herein or in the
Agreement shall be deemed a waiver or prohibition of or restriction on the
Bank's rights of banker's lien or set-off.

                                 PP&L CAPITAL FUNDING, INC.



                                 By:  ________________________

<PAGE>
 
                                                                   Exhibit 10(d)


           James E. Abel                             PP&L, Inc.
               Treasurer                 Two North Ninth Street
            610.774.5987               Allentown, PA 18101-1179
       Fax: 610.774.5106                           610.774.5151
 E-mail: [email protected]                   http://www.papl.com/


                                                   July 8, 1998


Mr. Robert J. Harrity
Managing Director
Citibank, N.A.
399 Park Avenue
4th Floor, Zone 20
New York, NY  10043

Dear Bob:

          Pursuant to our conversations, Citibank, N.A. (the "Bank") is making
available to PP&L Capital Funding, Inc. (the "Company") a line of credit in the
aggregate principal amount of $80,000,000.00 (the "Facility").  The Facility
will commence on the date hereof and terminate on July 7, 1999 (the "Termination
Date"), unless sooner terminated in accordance herewith or with the Note (as
hereinafter defined); provided that the Termination Date may be extended from
the initial or any extended Termination Date upon written request of the Company
to the Bank not more than 45 days nor less than 30 days prior to the Termination
Date, and approval of such extension by the Bank.

          Approval of any such extension shall be in the sole discretion of the
Bank.  The Bank's approval of such extension shall be provided by written notice
to the Company specifying the date to which the Termination Date is extended.
Notwithstanding the foregoing, the Termination Date shall in no event be
extended to a date that is more than 364 days from the date of such notice.
Failure of the Bank to provide written notice of approval of such extension
shall be deemed to mean that the Facility is not so extended.

          Borrowings under this Facility shall become due and payable without
setoff, counterclaim or deduction whatsoever on the date selected by the Company
in the Request (as hereinafter defined) with respect to each advance, not later
than the Termination Date, and will be evidenced by a promissory note in the
form of Exhibit A attached hereto (the "Note").  Provided that the aggregate
principal amount outstanding at any one time does not exceed $80,000,000.00,
borrowings may be effected using either of the following alternatives:

   1. Domestic Dollar Loans maturing not later than the Termination Date,
      bearing an annual interest rate equal to the higher of

           (i) the Bank's floating prime lending rate (calculated on the basis
               of a 365-day year) as announced from time to time; and

          (ii) .5% in excess of the Bank's overnight Federal Funds Rate
               (calculated on the basis of a 360-day year) which shall mean the
               per annum rate at which the Bank can acquire federal funds in the
               interbank overnight federal funds market;

      this rate (the "Base Rate") to be determined daily; or
<PAGE>
 
                                    Page 2

   2. Eurodollar Loans with maturities of one, two, or three months (but in no
      event shall a Eurodollar Loan mature later than the Termination Date),
      bearing an annual interest rate (calculated on the basis of a 360-day year
      for the actual number of days elapsed) equal to .30% over the London
      interbank Offered Rate, as quoted by the Bank, for periods and in amounts
      corresponding to the terms of such Eurodollar Loans two London business
      days prior to the date of the requested advance.

          Interest on each Domestic Dollar Loan and Eurodollar Loan
(individually a "Loan" and collectively the "Loans") is due and payable at the
maturity thereof or as set out in this Agreement or Note and, if such maturity
is longer than one month, at one month intervals after the making of such Loan.
Domestic Dollar Loans shall be prepayable at any time without premium or
penalty.  In the event the Company repays any Eurodollar Loan on any day other
than the last day of an interest period therefor (whether by acceleration or
otherwise), the Company shall pay to the Bank, on demand, any resulting loss or
expense incurred by the Bank including, without limitation, any loss or expense
incurred in obtaining, liquidating or employing deposits from third parties.
All amounts not paid when due on any Loan (whether by acceleration or otherwise)
will bear interest payable on demand at a rate equal to 1% in excess of the Base
Rate.

          The Bank expressly reserves the right to suspend offering Eurodollar
Loans if the Bank determines that making or maintaining any such Loan shall have
become impracticable or unlawful or if the effective cost thereof to the Bank
shall exceed the quoted rate of interest with respect thereto.

          The Loans will be used for general corporate purposes of the Company.
No proceeds will be used to purchase or carry margin stock.  No part of the
proceeds of any Loan will be used, whether directly or indirectly, for any
purpose that entails a violation of any of the Regulations of the Board of
Governors of the Federal Reserve System.

BORROWING NOTIFICATION AND FUNDING PROVISIONS

          Minimum drawdowns for all Loans made under this Facility shall be
$10,000,000.00.  Loans hereunder may be effected by telephone request
("Request") by those individuals authorized to request such Loans as designated
in writing to the Bank by the Company's Treasurer.  A request for any Loan is
deemed as confirmation by the Company that no event as described in paragraph 2
of the Note shall have occurred and be continuing and that all representations
and warranties contained in this letter agreement are true as of the date of the
borrowing as if made on such date.  Upon receipt of such Request, the Bank shall
transfer the amount of the Loan in immediately available funds to the Company's
Account Number 28065 with Mellon Bank, Delaware, ABA No. 031100047 or such other
bank account of the Company as may be directed in writing by the Company's
Treasurer.

          For Domestic Dollar Loans, the Company may initiate a Loan by
providing a Request prior to 11:00 A.M. on the date on which the funds are
required.  For Eurodollar Loans, the Company may initiate a Loan by providing a
Request prior to 11:00 A.M. at least three business days prior to the date on
which the funds are required.

LOAN DOCUMENTATION

          The Bank shall record all borrowings and repayments of principal and
interest and the dates of such transactions on its records.  The Company agrees
that the Bank's records, barring manifest evidence to the contrary, shall
conclusively evidence the Company's outstanding obligations under the terms of
this letter agreement and Note.
<PAGE>
 
                                    Page 3
 
FACILITY FEE

          The Company agrees to pay to the Bank a facility fee (the "Fee") of
 .10% per annum on the aggregate amount of the Facility.  This Fee, which shall
be based on the actual number of days elapsed on a 360-day year, shall begin to
accrue on the date hereof and shall be payable in arrears on the last business
day of each calendar quarter and on any date on which the Bank's commitment
hereunder shall be terminated in full.

          All payments made by the Company under this letter agreement or the
Note will be made to the Bank at Citibank Global Loan Support Center, 2 Penns
Way, Suite 200, New Castle, Delaware  19720 or such other address as the Bank
may designate.

CANCELLATION

          The Company, in its sole discretion, may cancel the whole or any part
of the unused portion of the Facility in $10,000,000.00 increments by giving the
Bank not less than 10 business days prior notice to that effect, specifying the
date and amount of the proposed cancellation.

ASSIGNABILITY

          The Bank shall have the right to transfer, assign or grant
participations in all or any part of its rights and obligations hereunder.  Any
assignment pursuant to this clause shall be in the aggregate amount of at least
$5,000,000 and shall require the consent of the Company, which consent shall not
be unreasonably withheld.  In addition to the assignments and participations
permitted under the foregoing provisions, the Bank may (without notice to or
consent of the Company and without payment of any fee) (i) assign and pledge all
or any portion of its Loans and its Notes to the Federal Reserve Bank and (ii)
assign all or any portion of its rights under this Agreement and its Loans and
its Notes to an affiliate.

REPRESENTATIONS AND WARRANTIES

          The Company is duly incorporated, validly existing and in good
standing under the laws of the State of Delaware and has the corporate power and
authority to enter into this letter agreement, to execute and deliver the Note
and to incur the obligations provided for herein and therein, all of which have
been duly authorized by all proper and necessary corporate action.  No
governmental approval is required in connection with the execution, delivery or
performance of this Agreement, Note, or Guarantee.

          Except as provided by applicable laws of bankruptcy, insolvency,
liquidation, or other laws of general application: (i) this letter agreement
constitutes, and the Note, when issued and delivered pursuant hereto, will
constitute valid and legally binding obligations of the Company, enforceable in
accordance with their terms; (ii) the guarantee constitutes a valid and legally
binding obligation of the guarantor enforceable in accordance with its terms;
and (iii) the Loans will rank pari passu in respect of priority of payment with
all other senior unsecured indebtedness of the Company.

          The execution, delivery and performance of its obligations under this
Agreement and the Note will not violate in any material respect any provisions
of any agreement to which the Company is bound and will not be in conflict with,
result in a breach of, or constitute (with due notice and/or lapse of time) a
default under any such agreement or result in the creation or imposition of any
lien, charge or encumbrance of any nature whatsoever upon any of the properties
or assets of the Company.
<PAGE>
 
                                    Page 4

          The audited balance sheet of PP&L Resources, Inc. (Resources), parent
corporation of the Company, on a consolidated basis as of December 31, 1997
together with audited statements of income and expense, retained earnings, paid
in capital and surplus and changes in financial position, together with notes
thereto, for the fiscal year then ended, heretofore delivered to the Bank,
fairly present the financial condition of Resources and the results of its
operations, as of the date and for the period referred to and have been prepared
in accordance with generally accepted accounting principles consistently
maintained throughout the period involved.  There has been no material adverse
change in the business, properties, condition (financial or other) or operations
of Resources since the date of such audited financial statements which would
adversely affect Resources' ability to meet its obligations under the terms of a
Guarantee by Resources of the Company's obligations hereunder of even date
("Guarantee").

          The Company has heretofore delivered to the Bank unaudited financial
statements, specifically an income statement, balance sheet, and statement of
cash flows, for the period ended December 31, 1997.  There has been no material
adverse change in the business, properties, condition (financial or other) or
operations of the Company since the date of the statements which would adversely
affect the Company's ability to meet its obligation hereunder.

FINANCIAL STATEMENTS

          As long as the Facility is available to the Company, the Company shall
promptly provide the Bank with annual and quarterly financial statements of both
the Company and Resources on a consolidated basis.  Annual statements shall be
supplied within 120 days from the closing of the respective annual fiscal period
and Resources' statements shall be audited by a nationally recognized
independent accountant.  Quarterly financial statements, prepared in accordance
with generally accepted principles and practices of accounting, shall be
supplied within 60 days of the close of each of the first three quarters of
Resources' fiscal year.  The Company will provide the Bank with any other
information the Bank may reasonably request from time to time.

WAIVER OF JURY TRIAL

          Each party hereto hereby waives, to the fullest extent permitted by
applicable law, any right it may have to a trial by jury in any legal proceeding
directly or indirectly arising out of or relating to this agreement or the
transactions contemplated hereby (whether based on contract, tort or any other
theory).  Each party hereto (a) certifies that no representative, agent  or
attorney of any other party has represented, expressly or otherwise, that such
other party would not, in the event of litigation, seek to enforce the foregoing
waiver; and (b) acknowledges that it and the other parties hereto have been
induced to enter into this agreement by, among other things, the mutual waivers
and certifications in this section.

INDEMNIFICATION

          The Company agrees to indemnify the Bank and each of its respective
affiliates, directors, officers, employees, agents and representatives (each an
"Indemnitee") from, and hold each of them harmless against any and all losses,
claims, damages, penalties, judgments, liabilities and expenses (including,
without limitation, all expenses of litigation or preparation therefore whether
or not the Bank is a party thereto) which any Indemnitee may pay or incur
arising out of or relating to this Note, the Agreement, or any other agreement
executed in connection therewith, the transactions contemplated hereby, or the
direct or indirect application or proposed application of the proceeds of any
Loan hereunder; provided that such indemnity shall not, as to any Indemnitee, be
available to the extent that such losses, claims, damages, liabilities or
related expenses are determined by a court of competent jurisdiction by final
and nonappealable judgment to have resulted from the gross negligence or willful
misconduct of such Indemnitee.
<PAGE>
 
                                    Page 5

DOCUMENTATION

          As a condition precedent to the first utilization of the Facility, the
Bank shall be in possession of the following:

       (i) a copy of this letter agreement duly executed by the Company;

      (ii) a Note of the Company, evidencing loans pursuant to both Domestic
           Dollar Loans and Eurodollar Loans, in the form of Exhibit A attached
           hereto and duly executed;

     (iii) corporate resolutions, articles, and bylaws, and an
           incumbency/signature certificate of the Company and Resources;

      (iv) the Guarantee of Resources of the Company's obligations hereunder in
           the form of Exhibit B attached hereto and duly executed;

       (v) a Certificate, signed by an officer of the Company, stating that (a)
           no default or event of default as described in paragraph 2 of the
           Note has occurred and is continuing as of the date of this letter
           agreement and Note; (b) all representations and warranties contained
           in the letter agreement are true and correct as of the date of this
           letter agreement and Note; and (c) no governmental consents or
           approvals are required; and

      (vi) a legal opinion of counsel to the Company and the Guarantor in form
           and substance reasonably satisfactory to the Bank.

          Any and all obligations and liabilities incurred under this letter
agreement shall be due and payable without setoff, counterclaim or deduction
whatsoever on the Termination Date.

          This letter agreement and the Note shall be governed by and construed
in accordance with the laws of the Commonwealth of Pennsylvania.

          All letters, advices, confirmation, notices and other writing required
or permitted hereunder shall be sufficient if sent by first class mail, postage
prepaid, addressed to the Bank as follows:

                    Citibank, N.A.
                    399 Park Avenue
                    4th Floor, Zone 20
                    New York, NY  10043

                    Attention:  Mr. Robert J. Harrity
                    ---------                        

and to the Company as follows:

                    PP&L Capital Funding, Inc.
                    Two North Ninth Street
                    Allentown, PA  18101

                    Attention:  Mr. James E. Abel
                    ---------                    
                            Treasurer
<PAGE>
 
                                    Page 6

          If the above stated terms and conditions are satisfactory, please sign
and return to the Company the enclosed copy of this letter agreement.

                                         Very truly yours,

                                         PP&L CAPITAL FUNDING, INC.

                                         By:



                                         ______________________________
                                                   James E. Abel
                                                      Treasurer

AGREED TO AND ACCEPTED BY:

CITIBANK, N.A.


By:     _________________________

Title:  _________________________
<PAGE>
 
                       GUARANTEE OF PP&L RESOURCES, INC.
                                        

          In order to induce Citibank, N.A. (the "Bank") to extend credit to
PP&L Capital Funding, Inc. (the "Company"), under the agreement between the Bank
and the Company dated July 8, 1998 (the "Agreement"), PP&L Resources, Inc.,
(Resources) hereby irrevocably and unconditionally guarantees, as primary
obligor and not merely as a surety, the Company's obligations to the Bank under
the Agreement and the Note (as defined in the Agreement), whether for principal,
interest, fees or otherwise (collectively, the "Company Obligations").
Resources further agrees that the due and punctual payment of Company
Obligations may be extended, in whole or in part, without notice to or further
assent from it, and that it will remain bound upon its Guarantee hereunder
notwithstanding any such extension or renewal of any Company Obligation.

          Each party hereto hereby waives, to the fullest extent permitted by
applicable law, any right it may have to a trial by jury in any legal proceeding
directly arising out of or relating to this agreement or the transactions
contemplated hereby (whether based on contract, tort or any other theory).  Each
party hereto (a) certifies that no representative, agent or attorney of any
other party has represented, expressly or otherwise, that such other party would
not, in the event of litigation, seek to enforce the foregoing waiver; and (b)
acknowledges that it and the other parties hereto have been induced to enter
into this agreement by, among other things, the mutual waivers and
certifications in this section.

          Resources waives presentment to, demand of payment from and protest to
the Company of any of the Company Obligations, and also waives notice of
acceptance of its obligations and notice of protest for nonpayment.  The
obligations of Resources hereunder shall not be affected by (a) the failure of
the Bank to assert any claim or demand or to enforce any right or remedy against
the Company under the provisions of this Guarantee, the Agreement, the Note or
otherwise, (b) change or increase in the amount of any of the Company
Obligations, whether or not consented to by Resources, or (c) any rescission,
waiver, amendment or modification of any of the terms or provisions of this
Agreement or any other agreement.

          Resources further agrees that its agreement hereunder constitutes a
promise of payment when due (whether or not any bankruptcy or similar proceeding
shall have stayed the accrual or collection of any of the Company Obligations or
operated as a discharge thereof) and not merely of collection, and waives any
right to require that any resort be had by the Bank to any balance of any
deposit account or credit on the books of the Bank in favor of any other person.

          The obligations of Resources hereunder shall not be subject to any
reduction, limitation, impairment or termination for any reason, and shall not
be subject to any defense or setoff, counterclaim, recoupment or termination
whatsoever, by reason of the invalidity, illegality or unenforceability of the
Company Obligations, any impossibility in the performance of the Company
Obligations or otherwise.  Without limiting the generality of the foregoing, the
obligations of Resources hereunder shall not be discharged or impaired or
otherwise affected by the failure of the Bank to assert any claim or demand or
to enforce any remedy under the Agreement or any other agreement, by any waiver
or modification in respect of any thereof, by any default, failure or delay,
willful or otherwise, in the performance of Company Obligations, or by any other
act or omission which may or might in any manner or to any extent vary the risk
of Resources or otherwise operate as a discharge of Resources or the Company as
a matter of law or equity.
<PAGE>
 
                                    Page 2

          Resources further agrees that its obligations hereunder shall continue
to be effective or be reinstated, as the case may be, if at any time payment, or
any part thereof, of any Company Obligation is rescinded or must otherwise be
restored by the Bank upon the bankruptcy or reorganization of the Company or
otherwise.

          In furtherance of the foregoing and not in limitation of any other
right which the Bank may have at law or in equity against Resources by virtue
hereof, upon the failure of the Company to pay any Company Obligation when and
as the same shall become due, whether at maturity, by acceleration, after notice
of prepayment or otherwise, Resources hereby promises to and will, upon receipt
of written demand by the Bank, forthwith pay, or cause to be paid, in cash the
amount of such unpaid Company Obligations.

          Until such time as the Company Obligations shall have been paid in
full, Resources waives any right of subrogation which it may have in connection
with any payment hereunder; provided, however, that upon payment in full of the
Company Obligations the Bank shall, in reasonable manner, assign to Resources
the amount of such Company Obligations owed to it and so paid, such assignment
to be pro tanto to the extent to which the Company Obligations in question was
      --- -----                                                               
discharged by Resources, or make such disposition thereof as Resources shall
direct (all without recourse to the Bank and without any representation or
warranty by the Bank).

          IN WITNESS WHEREOF, PP&L Resources, Inc. has caused this Guaranty to
be executed this 8th day of July, 1998.


                                     PP&L RESOURCES, INC.
 
                                     By:



                                     ____________________________
                                     Senior Vice President-Financial


                                     ATTEST:

                                     By:



                                     ____________________________
                                             Robert J. Grey
                                                Secretary


ACCEPTED:

CITIBANK, N.A.

By:



____________________________
     (Signature and Title)
<PAGE>
 
                                                                       EXHIBIT A


                                PROMISSORY NOTE
                                        

$80,000,000.00                           July 8, 1998
Commitment of Bank

          PP&L Capital Funding, Inc. (the "Company"), for value received, hereby
promises to pay to the order of Citibank, N.A. (the "Bank"), for the account of
its appropriate lending office, at its office, 399 Park Avenue, Fourth Floor,
New York, NY 10043, in lawful money of the United States, the principal sum of
$80,000,000.00, or, if less, the aggregate unpaid principal amount of all loans
made by the Bank to the Company pursuant to the letter agreement dated July 8,
1998, between the Company and the Bank (the "Agreement"), on the dates specified
for the repayment of such loans as set forth on the Bank's records or, if not so
specified, as provided in the Agreement.  Each loan evidenced by this Note shall
bear interest, payable as provided in the Agreement.

          The Bank may, at its option, declare this Note immediately due and
payable and terminate its commitment under the Agreement without further
formality, if:

       (a) neither the Company nor Resources pays (x) within 5 business days of
           the due date thereof any interest or fees on this Note or under the
           Agreement, or (y) when due, the principal on any loan or any other
           amount payable hereunder or under the Agreement;

       (b) any representation or warranty by the Company to the Bank in any
           financial statement, certificate, or other agreement proves to have
           been misleading in any material respect when made or deemed to have
           been made;

       (c) the Company or PP&L Resources, Inc. ("Resources"), as guarantor under
           a guarantee (the "Guarantee") dated the date hereof relating to this
           Note, shall (i) fail to pay any principal or interest, regardless of
           amount, due in respect of any indebtedness in a principal amount in
           excess of $40,000,000, in the case of indebtedness of Resources or
           indebtedness of the Company guaranteed by Resources or, in the case
           of indebtedness of the Company not guaranteed by Resources,
           $10,000,000, if such failure shall continue beyond any period of
           grace provided with respect thereto, or (ii) fail to observe or
           perform any other term, covenant, condition or agreement contained in
           any agreement or instrument (including any term, covenant, condition
           or agreement herein or in the Agreement) evidencing or governing any
           such indebtedness in a principal amount in excess of, in the case of
           indebtedness of Resources or indebtedness of the Company guaranteed
           by Resources, $40,000,000 or, in the case of indebtedness of the
           Company not guaranteed by Resources, $10,000,000, if such failure
           shall continue beyond any period of grace provided with respect
           thereto if the effect of any failure referred to in this clause (ii)
           is 
<PAGE>
 
                                    Page 2

           to cause, or to permit the holder or holders of such indebtedness or
           a trustee on its or their behalf to cause such indebtedness to become
           due prior to its stated maturity; or

       (d) the Company or Resources ceases to pay its debts or makes an
           assignment for the benefit of creditors, or any proceeding relating
           to the Company or Resources under any bankruptcy, reorganization,
           arrangement, readjustment of debt, dissolution, or liquidation law or
           statute of any jurisdiction, whether now or hereafter in effect, is
           commenced by or against the Company or Resources or the Company or
           Resources becomes or is adjudicated insolvent or bankrupt, or
           petitions or applies to any tribunal for any receiver of or any
           trustee for the Company or Resources or any substantial part of the
           property of the Company or Resources;

       (e) the ratio of Consolidated Indebtedness of Resources to Consolidated
           Capitalization of Resources exceeds 70% at any time and Resources
           shall have failed to reduce such ratio to 70% or less within 30 days
           after written notice to Resources from the Bank. For this purpose,
           "Consolidated Indebtedness of Resources" shall mean the Consolidated
           Indebtedness of Resources (determined in accordance with United
           States generally accepted accounting principles (GAAP)), except that
           for purposes of this definition (1) Consolidated Indebtedness of
           Resources shall exclude Non-Recourse Indebtedness of Resources and
           (2) Consolidated Indebtedness of Resources shall exclude any Hybrid
           Preferred Securities of Resources. Also for this purpose,
           Consolidated Capitalization of Resources shall mean the sum of (A)
           the Consolidated Indebtedness of Resources and (B) (i) the
           consolidated shareowners' equity (determined in accordance with GAAP)
           of the common, preference and preferred stockholders of Resources and
           (ii) the aggregate amount of Hybrid Preferred Securities of
           Resources, except that for purposes of calculating Consolidated
           Capitalization of Resources, Consolidated Indebtedness of Resources
           shall exclude Non-Recourse Indebtedness of Resources and Consolidated
           Capitalization of Resources shall exclude that portion of
           shareowners' equity attributable to assets securing Non-Recourse
           Indebtedness of Resources. "Hybrid Preferred Securities" of Resources
           means (1) the preferred securities and subordinated debt described in
           the Prospectus dated as of April 3, 1997 of PP&L Capital Trust and
           PP&L, Inc. and the preferred securities and subordinated debt
           described in the Prospectus dated as of June 9, 1997 of PP&L Capital
           Trust II and PP&L, Inc. (collectively, the "Existing TOPrS") and (2)
           any additional preferred securities and subordinated debt (with a
           maturity of at least twenty years) similar to the Existing TOPrS and
           in an aggregate amount not to exceed $100,000,000, issued by business
           trusts, limited liability companies, limited partnerships (or similar
           entities) (i) all of the common equity, general partner or similar
           interests of which are owned (either directly or indirectly through
           one or more wholly-owned Subsidiaries) at all times by Resources or
<PAGE>
 
                                    Page 3

           PP&L, Inc., (ii) that have been formed for the purpose of issuing
           hybrid preferred securities and (iii) substantially all the assets of
           which consist of (A) subordinated debt of Resources or a Subsidiary
           of Resources, as the case may be, and (B) payments made from time to
           time on the subordinated debt. "Indebtedness" of any person shall
           mean, without duplication, (a) all obligations of such person for
           borrowed money, (b) all obligations of such person with respect to
           deposits or advances of any kind, (c) all obligations of such person
           evidenced by bonds, debentures, notes or similar instruments, (d) all
           obligations of such person under conditional sale or other title
           retention agreements relating to property or assets purchased by such
           person, (e) all obligations of such person issued or assumed as the
           deferred purchase price of property or services (excluding trade
           accounts payable and accrued obligations incurred in the ordinary
           course of business), (f) all Indebtedness of others secured by (or
           for which the holder of such Indebtedness has an existing right,
           contingent or otherwise, to be secured by) any Lien or property owned
           or acquired by such person, whether or not the obligations secured
           thereby have been assumed but shall not include any obligations that
           are without recourse to such person, (g) all Guarantees by such
           person of Indebtedness of others, (h) all Capital Lease Obligations
           of such person, (i) all obligations of such person in respect of
           Interest Rate Protection Agreements, foreign currency exchange
           agreements or other interest or exchange rate hedging arrangements
           (the amount of any such obligation to be the amount that would be
           payable upon the acceleration, termination or liquidation thereof)
           and (j) all obligations of such person as an account party in respect
           of letters of credit and bankers' acceptances. "Non-Recourse
           Indebtedness of Resources" shall mean indebtedness that is
           nonrecourse to Resources, the Company, PP&L, Inc. ("PP&L") or any of
           PP&L's Subsidiaries; or

       (f) the Guarantee of Resources shall, for any reason, cease to be in full
           force and effect;

provided, that upon the happening of any event specified in subparagraph (d)
above, this Note and any other obligations of the Company to the Bank shall
become immediately due and payable and commitments under the Agreement shall be
terminated without declaration or other notice to the Company.

          Resources or the Company will furnish to the Bank within five days of
acquiring knowledge of the existence of a default with respect to the Company or
Resources a certificate of a financial officer of Resources and an officer of
the Company specifying:  (i) the nature of such default, (ii) the period of the
existence thereof, and (iii) the actions that Resources and the Company propose
to take with respect thereto.
<PAGE>
 
                                    Page 4

          If, for any reason (including acceleration), the principal of any
Eurodollar Loan as defined in the Agreement and evidenced by this Note, or any
portion thereof, is paid prior to the last day of an interest period therefor,
the Company shall reimburse the Bank on demand for any resulting loss or expense
incurred by it including (without limitation) any loss or expense incurred in
obtaining, liquidating or employing deposits from third parties.

          If the Bank reasonably determines at any time that any applicable law,
governmental rule or regulation, or any change in interpretation or
administration thereof by any governmental authority, central bank or comparable
agency or compliance by the Bank with any regulatory directive subjects the Bank
to any tax with respect to this Note or payments by the Company of principal or
interest thereunder or hereunder (except for taxes on or measured by the net
income of the Bank), or will have the effect of increasing the Bank's reserve
requirements, deposit requirements, or the amount of capital required or
expected to be maintained by the Bank based on the existence of the Facility or
the Bank's obligations under the Agreement, then promptly upon receipt of a
written demand from the Bank, the Company shall pay the Bank such additional
amounts as shall be required to compensate the Bank for the increased cost to
the Bank as a result of these increases.  Each such written demand shall specify
(a) the event pursuant to which the Bank is entitled to claim the additional
amount, (b) the date on which the event occurred and became applicable to the
Bank and (c) the compensation period for which the amount is due.  The period
for which the additional amounts may be claimed by the Bank (the "Compensation
Period") shall be the number of days actually elapsed since the date the event
occurred and became applicable to the Bank.  Payments made by the Company to the
Bank shall be made on the later of the last day of the Compensation Period
specified in each written demand or 30 days after any such written demand.
Provided that the Bank acts reasonably and in good faith in determining any
additional amounts due, the Bank's determination of compensation owing shall,
absent manifest error, be final, conclusive and binding on the Company.

          If any loan evidenced by this Note becomes due and payable on a
Saturday, Sunday or public or other banking holiday under the laws of the
Commonwealth of Pennsylvania, the maturity thereof shall be extended to the next
succeeding business day, and interest shall be payable thereon at the rate
herein specified during such extension; provided, however, that if any such
extension would result in the interest period for a Eurodollar Loan being
carried into another calendar month, such interest period shall end on the
preceding business day.

          If the Bank institutes any action for the enforcement or collection of
this Note, the Company shall pay on demand all costs and expenses of such action
including reasonable legal fees.

          If the unpaid principal amount of any Loan, interest accrued thereon
or any amount owing by the Company hereunder or under the Agreement shall have
become due and payable (by acceleration or otherwise), the Bank shall have the
right, in addition to all other rights and remedies available to it, without
notice to the Company, to set-off against and to appropriate and apply to such
due and payable amounts any debt owing to, and any other funds held in any
manner for the account of, the Company by the Bank including, without
limitation, all funds in all deposit accounts (whether time or demand, general
or special, provisionally credited or finally credited, or otherwise) now or
hereafter maintained by the Company with the Bank.  Such right shall exist
whether or not the Bank shall have given notice or made any demand hereunder,
and regardless of the existence or adequacy of any collateral, guarantee or any
other security, right or remedy available to 
<PAGE>
 
                                    Page 5

the Bank. Nothing herein or in the Agreement shall be deemed a waiver or
prohibition of or restriction on the Bank's rights of banker's lien or set-off.

                                 PP&L CAPITAL FUNDING, INC.



                                 By:  ________________________

<PAGE>
 
                James E. Abel                           PP&L, Inc.
                    Treasurer               Two North Ninth Street
                 610.774.5987             Allentown, PA 18101-1179
            Fax: 610.774.5106                         610.774.5151
      E-mail: [email protected]                 http://www.papl.com/


                                                      July 8, 1998


Mr. Michael J. Kolosowsky
First Union National Bank
One First Union Center
301 South College Street, TW-5
Charlotte, NC 28288-0735

Dear Michael:

          Pursuant to our conversations, First Union National Bank (the "Bank")
is making available to PP&L Capital Funding, Inc. (the "Company") a line of
credit in the aggregate principal amount of $80,000,000.00 (the "Facility").
The Facility will commence on the date hereof and terminate on July 7, 1999 (the
"Termination Date"), unless sooner terminated in accordance herewith or with the
Note (as hereinafter defined); provided that the Termination Date may be
extended from the initial or any extended Termination Date upon written request
of the Company to the Bank not more than 45 days nor less than 30 days prior to
the Termination Date, and approval of such extension by the Bank.

          Approval of any such extension shall be in the sole discretion of the
Bank.  The Bank's approval of such extension shall be provided by written notice
to the Company specifying the date to which the Termination Date is extended.
Notwithstanding the foregoing, the Termination Date shall in no event be
extended to a date that is more than 364 days from the date of such notice.
Failure of the Bank to provide written notice of approval of such extension
shall be deemed to mean that the Facility is not so extended.

          Borrowings under this Facility shall become due and payable without
setoff, counterclaim or deduction whatsoever on the date selected by the Company
in the Request (as hereinafter defined) with respect to each advance, not later
than the Termination Date, and will be evidenced by a promissory note in the
form of Exhibit A attached hereto (the "Note").  Provided that the aggregate
principal amount outstanding at any one time does not exceed $80,000,000.00,
borrowings may be effected using either of the following alternatives:

   1. Domestic Dollar Loans maturing not later than the Termination Date,
      bearing an annual interest rate equal to the higher of

          (i)  the Bank's floating prime lending rate (calculated on the basis
               of a 365-day year) as announced from time to time (which rate
               shall not necessarily be the lowest or best rate offered by the
               Bank at such time); and

          (ii) .5% in excess of the Bank's overnight Federal Funds Rate
               (calculated on the basis of a 360-day year) which shall mean the
               per annum rate at which the Bank can acquire federal funds in the
               interbank overnight federal funds market;

      this rate (the "Base Rate") to be determined daily; or
<PAGE>
 
                                    Page 2

   2. Eurodollar Loans with maturities of one, two, or three months (but in no
      event shall a Eurodollar Loan mature later than the Termination Date),
      bearing an annual interest rate (calculated on the basis of a 360-day year
      for the actual number of days elapsed) equal to .30% over the London
      interbank Offered Rate, as determined by the Bank, for periods and in
      amounts corresponding to the terms of such Eurodollar Loans two London
      business days prior to the date of the requested advance, such
      determination to be made by the Bank in its normal and customary manner.

          Interest on each Domestic Dollar Loan and Eurodollar Loan
(individually a "Loan" and collectively the "Loans") is due and payable at the
maturity thereof and, if such maturity is longer than one month, at one month
intervals after the making of such Loan.  Domestic Dollar Loans shall be
prepayable at any time without premium or penalty.  In the event the Company
repays any Eurodollar Loan on any day other than the last day of an interest
period therefor (whether by acceleration or otherwise), the Company shall pay to
the Bank, on demand, any resulting loss or expense incurred by the Bank
including, without limitation, any loss or expense incurred in obtaining,
liquidating or employing deposits from third parties.  All amounts not paid when
due on any Loan (whether by acceleration or otherwise) will bear interest
payable on demand at a rate equal to 1% in excess of the Base Rate.

          The Bank expressly reserves the right to suspend offering Eurodollar
Loans if the Bank determines that making or maintaining any such Loan shall have
become impracticable or unlawful or if the effective cost thereof to the Bank
shall exceed the quoted rate of interest with respect thereto.

BORROWING NOTIFICATION AND FUNDING PROVISIONS

          Minimum drawdowns for all Loans made under this Facility shall be
$10,000,000.00 or whole multiples of $1,000,000 in excess thereof.  Loans
hereunder may be effected by telephone request ("Request") by those individuals
authorized to request such Loans as designated in writing to the Bank by the
Company's Treasurer.  A request for any Loan is deemed as confirmation by the
Company that no event as described in paragraph 2 of the Note shall have
occurred and be continuing and that all representations and warranties contained
in this letter agreement are true as of the date of the borrowing as if made on
such date.  Upon receipt of such Request or as provided for in the following
paragraph, the Bank shall transfer the amount of the Loan in immediately
available funds to the Company's Account Number 28065 with Mellon Bank,
Delaware, ABA No. 031100047 or such other bank account of the Company as may be
directed in writing by the Company's Treasurer.

          For Domestic Dollar Loans, the Company may initiate a Loan by
providing a Request prior to 11:00 A.M. on the date on which the funds are
required.  For Eurodollar Loans, the Company may initiate a Loan by providing a
Request prior to 11:00 A.M. at least three business days prior to the date on
which the funds are required.

LOAN DOCUMENTATION

          The Bank shall record all borrowings and repayments of principal and
interest and the dates of such transactions on its records.  The Company agrees
that the Bank's records, barring manifest evidence to the contrary, shall
conclusively evidence the Company's outstanding obligations under the terms of
this letter agreement and Note.

FACILITY FEE

          The Company agrees to pay to the Bank a facility fee (the "Fee") of
 .10% per annum on the aggregate amount of the Facility.  This Fee, which shall
be based on the actual 
<PAGE>
 
                                    Page 3

number of days elapsed on a 360-day year, shall begin to accrue on the date
hereof and shall be payable in arrears on the last business day of each calendar
quarter and on any date on which the Bank's commitment hereunder shall be
terminated in full.

          All payments made by the Company under this letter agreement or the
Note will be made to the Bank at One First Union Center, 5th Floor, 301 South
College Street, Charlotte, North Carolina 28288 or such other address as the
Bank may designate.

CANCELLATION

          The Company, in its sole discretion, may cancel the whole or any part
of the unused portion of the Facility in $10,000,000.00 increments by giving the
Bank not less than 10 business days prior notice to that effect, specifying the
date and amount of the proposed cancellation.

REPRESENTATIONS AND WARRANTIES

          The Company has full power and authority to enter into this letter
agreement, to execute and deliver the Note and to incur the obligations provided
for herein and therein, all of which have been duly authorized by all proper and
necessary corporate action.

          Except as provided by applicable laws of bankruptcy, insolvency,
liquidation, or other laws of general application: (i) this letter agreement
constitutes, and the Note, when issued and delivered pursuant hereto, will
constitute valid and legally binding obligations of the Company, enforceable in
accordance with their terms; and (ii) the Loans will rank pari passu in respect
of priority of payment with all other senior unsecured indebtedness of the
Company.

          The execution, delivery and performance of its obligations under this
Agreement and the Note will not violate in any material respect any provisions
of any agreement to which the Company is bound and will not be in conflict with,
result in a breach of, or constitute (with due notice and/or lapse of time) a
default under any such agreement or result in the creation or imposition of any
lien, charge or encumbrance of any nature whatsoever upon any of the properties
or assets of the Company.

          The audited balance sheet of PP&L Resources, Inc. ("Resources"),
parent corporation of the Company, on a consolidated basis as of December 31,
1997 together with audited statements of income and expense, retained earnings,
paid in capital and surplus and changes in financial position, together with
notes thereto, for the fiscal year then ended, heretofore delivered to the Bank,
fairly present the financial condition of Resources and its consolidated
subsidiaries (including the Company) and the results of their operations, as of
the date and for the period referred to and have been prepared in accordance
with generally accepted accounting principles consistently maintained throughout
the period involved.  There has been no material adverse change in the business,
properties, condition (financial or other) or operations of Resources or any of
its subsidiaries since the date of such audited financial statements which would
adversely affect Resources' ability to meet its obligations under the terms of a
Guarantee of even date by Resources of the Company's obligations hereunder
("Guarantee").

          The Company has heretofore delivered to the Bank unaudited financial
statements, specifically an income statement, balance sheet, and statement of
cash flows, for the period ended December 31, 1997.  There has been no material
adverse change in the business, properties, condition (financial or other) or
operations of the Company since the date of the statements which would adversely
affect the Company's ability to meet its obligations hereunder and under the
Note.
<PAGE>
 
                                    Page 4

FINANCIAL STATEMENTS

          As long as the Facility is available to the Company or outstandings
exist, the Company shall promptly provide the Bank with annual and quarterly
financial statements of both the Company and Resources on a consolidated basis.
Annual statements shall be supplied within 120 days from the closing of the
respective annual fiscal period and Resources' statements shall be audited by a
nationally recognized independent accountant.  Quarterly financial statements,
prepared in accordance with generally accepted principles and practices of
accounting, shall be supplied within 60 days of the close of each of the first
three quarters of Resources' fiscal year.  The Company will provide the Bank
with any other information the Bank may reasonably request from time to time.

WAIVER OF JURY TRIAL

          Each party hereto hereby waives, to the fullest extent permitted by
applicable law, any right it may have to a trial by jury in any legal proceeding
directly or indirectly arising out of or relating to this agreement or the
transactions contemplated hereby (whether based on contract, tort or any other
theory).  Each party hereto (a) certifies that no representative, agent  or
attorney of any other party has represented, expressly or otherwise, that such
other party would not, in the event of litigation, seek to enforce the foregoing
waiver; and (b) acknowledges that it and the other parties hereto have been
induced to enter into this agreement by, among other things, the mutual waivers
and certifications in this section.

INDEMNIFICATION

          The Company agrees to indemnify the Bank and each of its respective
affiliates, directors, officers and employees (each an "Indemnitee") against all
losses, claims, damages, penalties, judgments, liabilities and expenses
(including, without limitation, all expenses of litigation or preparation
therefore whether or not the Bank is a party thereto) which any of them may pay
or incur arising out of or relating to the letter agreement, the Note, or any
other agreement executed in connection therewith, the transactions contemplated
hereby, or the direct or indirect application or proposed application of the
proceeds of any Loan hereunder; provided that such indemnity shall not, as to
any Indemnitee, be available to the extent that such losses, claims, damages,
liabilities or related expenses are determined by a court of competent
jurisdiction by final and nonappealable judgment to have resulted from the gross
negligence or willful misconduct of such Indemnitee.

DOCUMENTATION

          As a condition precedent to the first utilization of the Facility, the
Bank shall be in possession of the following:

       (i)    a copy of this letter agreement duly executed by the Company;

       (ii)   a Note of the Company, evidencing loans pursuant to both Domestic
              Dollar Loans and Eurodollar Loans, in the form of Exhibit A
              attached hereto and duly executed;

       (iii)  corporate resolutions, articles, and bylaws, and an
              incumbency/signature certificate of the Company and Resources;

       (iv)   the Guarantee of Resources of the Company's obligations hereunder
              in the form of Exhibit B attached hereto and duly executed;
<PAGE>
 
                                    Page 5

       (v)    a Certificate, signed by an officer of the Company, stating that
              (a) no default or event of default as described in paragraph 2 of
              the Note has occurred and is continuing as of the date of this
              letter agreement and Note; and (b) all representations and
              warranties contained in the letter agreement are true and correct
              as of the date of this letter agreement and Note; and

       (vi)   a legal opinion of counsel to the Company and the Guarantor in
              form and substance reasonably satisfactory to the Bank.

          Any and all obligations and liabilities incurred under this letter
agreement shall be due and payable without setoff, counterclaim or deduction
whatsoever on the Termination Date.

          This letter agreement and the Note shall be governed by and construed
in accordance with the laws of the State of North Carolina.

          All letters, advices, confirmation, notices and other writing required
or permitted hereunder shall be sufficient if sent by first class mail, postage
prepaid, addressed to the Bank as follows:

                    First Union National Bank
                    One First Union Center
                    301 South College Street
                    Charlotte, NC  28288-0735

                    Attention:  Mr. Michael J. Kolosowsky
                    ---------                            
                                Vice President

and to the Company as follows:

                    PP&L Capital Funding, Inc.
                    Two North Ninth Street
                    Allentown, PA  18101

                    Attention:  Mr. James E. Abel
                    ---------                    
                                Treasurer

          If the above stated terms and conditions are satisfactory, please sign
and return to the Company the enclosed copy of this letter agreement.

                                         Very truly yours,

                                         PP&L CAPITAL FUNDING, INC.

                                         By:



                                         ______________________________
                                                      James E. Abel
                                                      Treasurer
<PAGE>
 
                                    Page 6

AGREED TO AND ACCEPTED BY:

FIRST UNION NATIONAL BANK



By:     _________________________

Title:  _________________________
<PAGE>
 
                       GUARANTEE OF PP&L RESOURCES, INC.
                                        

          In order to induce First Union National Bank (the "Bank") to extend
credit to PP&L Capital Funding, Inc. (the "Company"), under the agreement
between the Bank and the Company dated July 8, 1998 (the "Agreement"), PP&L
Resources, Inc., (Resources) hereby irrevocably and unconditionally guarantees,
as primary obligor and not merely as a surety, the Company's obligations to the
Bank under the Agreement and the Note (as defined in the Agreement), whether for
principal, interest, fees or otherwise (collectively, the "Company
Obligations").  Resources further agrees that the due and punctual payment of
Company Obligations may be extended, in whole or in part, without notice to or
further assent from it, and that it will remain bound upon its Guarantee
hereunder notwithstanding any such extension or renewal of any Company
Obligation.

          Resources waives presentment to, demand of payment from and protest to
the Company of any of the Company Obligations, and also waives notice of
acceptance of its obligations and notice of protest for nonpayment.  The
obligations of Resources hereunder shall not be affected by (a) the failure of
the Bank to assert any claim or demand or to enforce any right or remedy against
the Company under the provisions of this Guarantee, the Agreement, the Note or
otherwise, (b) change or increase in the amount of any of the Company
Obligations, whether or not consented to by Resources, or (c) any rescission,
waiver, amendment or modification of any of the terms or provisions of this
Agreement or any other agreement.

          Resources expressly waives all rights it may now or in the future have
under any statute, or at law or in equity, or otherwise, to compel the Bank to
proceed in respect of the Company obligations against the Company or any other
party or against any security for other guaranty of payment and performance of
the Company obligations before proceeding against, or as a condition to
proceeding against Resources.

          Resources further agrees that its agreement hereunder constitutes a
promise of payment when due (whether or not any bankruptcy or similar proceeding
shall have stayed the accrual or collection of any of the Company Obligations or
operated as a discharge thereof) and not merely of collection, and waives any
right to require that any resort be had by the Bank to any balance of any
deposit account or credit on the books of the Bank in favor of any other person.

          The obligations of Resources hereunder shall not be subject to any
reduction, limitation, impairment or termination for any reason, and shall not
be subject to any defense or setoff, counterclaim, recoupment or termination
whatsoever, by reason of the invalidity, illegality or unenforceability of the
Company Obligations, any impossibility in the performance of the Company
Obligations or otherwise.  Without limiting the generality of the foregoing, the
obligations of Resources hereunder shall not be discharged or impaired or
otherwise affected by the failure of the Bank to assert any claim or demand or
to enforce any remedy under the Agreement or any other agreement, by any waiver
or modification in respect of any thereof, by any default, failure or delay,
willful or otherwise, in the performance of Company Obligations, or by any other
act or omission which may or might in any manner or to any extent vary the risk
of Resources or otherwise operate as a discharge of Resources or the Company as
a matter of law or equity.

          Resources further agrees that its obligations hereunder shall continue
to be effective or be reinstated, as the case may be, if at any time payment, or
any part thereof, of any Company Obligation is rescinded or must otherwise be
restored by the Bank upon the bankruptcy or reorganization of the Company or
otherwise.

          In furtherance of the foregoing and not in limitation of any other
right which the Bank may have at law or in equity against Resources by virtue
hereof, upon the 
<PAGE>
 
                                    Page 2

failure of the Company to pay any Company Obligation when and as the same shall
become due, whether at maturity, by acceleration, after notice of prepayment or
otherwise, Resources hereby promises to and will, upon receipt of written demand
by the Bank, forthwith pay, or cause to be paid, in cash the amount of such
unpaid Company Obligations.

          Until such time as the Company Obligations shall have been paid in
full, Resources waives any right of subrogation which it may have in connection
with any payment hereunder; provided, however, that upon payment in full of the
Company Obligations the Bank shall, in reasonable manner, assign to Resources
the amount of such Company Obligations owed to it and so paid, such assignment
to be pro tanto to the extent to which the Company Obligations in question was
      --- -----                                                               
discharged by Resources, or make such disposition thereof as Resources shall
direct (all without recourse to the Bank and without any representation or
warranty by the Bank).

          IN WITNESS WHEREOF, PP&L Resources, Inc. has caused this Guaranty to
be executed this 8th day of July, 1998.


                                     PP&L RESOURCES, INC.
 
                                     By:



                                     ____________________________
                                     Senior Vice President-Financial


                                     ATTEST:

                                     By:



                                     ____________________________
                                             Robert J. Grey
                                               Secretary


ACCEPTED:

FIRST UNION NATIONAL BANK

By:



____________________________
     (Signature and Title)
<PAGE>
 
                                PROMISSORY NOTE
                                        

$80,000,000.00                                   July 8, 1998
Commitment of Bank

          PP&L Capital Funding, Inc. (the "Company"), for value received, hereby
promises to pay to the order of First Union National Bank (the "Bank"), for the
account of its appropriate lending office, at its office, One First Union
Center, 5th Floor, 301 South College Street, Charlotte, North Carolina 28288, in
lawful money of the United States, the principal sum of $80,000,000.00, or, if
less, the aggregate unpaid principal amount of all loans made by the Bank to the
Company pursuant to the letter agreement dated July 8, 1998, between the Company
and the Bank (the "Agreement"), on the dates specified for the repayment of such
loans as set forth on the Bank's records or, if not so specified, as provided in
the Agreement.  Each loan evidenced by this Note shall bear interest, payable as
provided in the Agreement.

          The Bank may, at its option, declare this Note immediately due and
payable and terminate its commitment under the Agreement without further
formality, if:

      (a) neither the Company nor PP&L Resources, Inc. ("Resources") pays (x)
          within 5 business days of the due date thereof any interest or fees on
          this Note or under the Agreement, or (y) when due, the principal on
          any loan or any other amount payable hereunder or under the Agreement;

      (b) any representation or warranty by the Company or Resources to the
          Bank in any financial statement, certificate, or other agreement
          proves to have been false or misleading in any material respect when
          made or deemed to have been made;

      (c) the Company or Resources,  as guarantor under a guarantee (the
          "Guarantee") dated the date hereof relating to this Note, shall (i)
          fail to pay any principal or interest, regardless of amount, due in
          respect of any indebtedness in a principal amount in excess of
          $40,000,000, in the case of indebtedness of  Resources or indebtedness
          of the Company guaranteed by Resources or, in the case of indebtedness
          of the Company not guaranteed by Resources, $10,000,000, if such
          failure shall continue beyond any period of grace provided with
          respect thereto, or (ii) fail to observe or perform any other term,
          covenant, condition or agreement contained in any agreement or
          instrument (including any term, covenant, condition or agreement
          herein or in the Agreement) evidencing or governing any such
          indebtedness in a principal amount in excess of, in the case of
          indebtedness of Resources or indebtedness of the Company guaranteed by
          Resources, $40,000,000 or, in the case of indebtedness of the Company
          not guaranteed by Resources, $10,000,000, if such failure shall
          continue beyond any period of grace provided with respect thereto if
          the effect of any failure referred to in this clause (ii) is to cause,
          or to permit the holder or holders of such indebtedness or a trustee
          on its or their 
<PAGE>
 
                                    Page 2

          behalf to cause, such indebtedness to become due prior to its stated
          maturity; or

      (d) the Company or Resources ceases to pay its debts or makes an
          assignment for the benefit of creditors, or any proceeding relating to
          the Company or Resources under any bankruptcy, reorganization,
          arrangement, readjustment of debt, dissolution, or liquidation law or
          statute of any jurisdiction, whether now or hereafter in effect, is
          commenced by or against the Company or Resources or the Company or
          Resources becomes or is adjudicated insolvent or bankrupt, or
          petitions or applies to any tribunal for any receiver of or any
          trustee for the Company or Resources or any substantial part of the
          property of the Company or Resources;

      (e) the ratio of Consolidated Indebtedness of Resources to Consolidated
          Capitalization of Resources exceeds 70% at any time and Resources
          shall have failed to reduce such ratio to 70% or less within 30 days
          after written notice to Resources from the Bank.  For this purpose,
          "Consolidated Indebtedness of Resources" shall mean the Consolidated
          Indebtedness of Resources (determined in accordance with United States
          generally accepted accounting principles (GAAP)), except that for
          purposes of this definition (1) Consolidated Indebtedness of Resources
          shall exclude Non-Recourse Indebtedness of Resources and (2)
          Consolidated Indebtedness of Resources shall exclude any Hybrid
          Preferred Securities of Resources.  Also for this purpose,
          Consolidated Capitalization of Resources shall mean the sum of (A) the
          Consolidated Indebtedness of Resources and (B) (i) the consolidated
          shareowners' equity (determined in accordance with GAAP) of the
          common, preference and preferred stockholders of Resources and (ii)
          the aggregate amount of Hybrid Preferred Securities of Resources,
          except that for purposes of calculating Consolidated Capitalization of
          Resources, Consolidated Indebtedness of Resources shall exclude Non-
          Recourse Indebtedness of Resources and Consolidated Capitalization of
          Resources shall exclude that portion of shareowners' equity
          attributable to assets securing Non-Recourse Indebtedness of
          Resources.  "Hybrid Preferred Securities" of Resources means (1) the
          preferred securities and subordinated debt described in the Prospectus
          dated as of April 3, 1997 of PP&L Capital Trust and PP&L, Inc. and the
          preferred securities and subordinated debt described in the Prospectus
          dated as of June 9, 1997 of PP&L Capital Trust II and PP&L, Inc.
          (collectively, the "Existing TOPrS") and (2) any additional preferred
          securities and subordinated debt (with a maturity of at least twenty
          years) similar to the Existing TOPrS and in an aggregate amount not to
          exceed $100,000,000, issued by business trusts, limited liability
          companies, limited partnerships (or similar entities) (i) all of the
          common equity, general partner or similar interests of which are owned
          (either directly or indirectly through one or more wholly-owned
          Subsidiaries) at all times by Resources or PP&L, Inc., (ii) that have
          been formed for the purpose of 
<PAGE>
 
                                    Page 3

          issuing hybrid preferred securities and (iii) substantially all the
          assets of which consist of (A) subordinated debt of Resources or a
          Subsidiary of Resources, as the case may be, and (B) payments made
          from time to time on the subordinated debt. "Indebtedness" of any
          person shall mean, without duplication, (a) all obligations of such
          person for borrowed money, (b) all obligations of such person with
          respect to deposits or advances of any kind, (c) all obligations of
          such person evidenced by bonds, debentures, notes or similar
          instruments, (d) all obligations of such person under conditional sale
          or other title retention agreements relating to property or assets
          purchased by such person, (e) all obligations of such person issued or
          assumed as the deferred purchase price of property or services
          (excluding trade accounts payable and accrued obligations incurred in
          the ordinary course of business), (f) all Indebtedness of others
          secured by (or for which the holder of such Indebtedness has an
          existing right, contingent or otherwise, to be secured by) any Lien or
          property owned or acquired by such person, whether or not the
          obligations secured thereby have been assumed but shall not include
          any obligations that are without recourse to such person, (g) all
          Guarantees by such person of Indebtedness of others, (h) all capital
          lease obligations of such person, (i) all obligations of such person
          in respect of interest rate protection agreements, foreign currency
          exchange agreements or other interest or exchange rate hedging
          arrangements (the amount of any such obligation to be the amount that
          would be payable upon the acceleration, termination or liquidation
          thereof) and (j) all obligations of such person as an account party in
          respect of letters of credit and bankers' acceptances. "Non-Recourse
          Indebtedness of Resources" shall mean indebtedness that is nonrecourse
          to Resources, the Company, PP&L, Inc. ("PP&L") or any of PP&L's
          Subsidiaries; or

      (f) the Guarantee of Resources shall, for any reason, cease to be in full
          force and effect;

provided, that upon the happening of any event specified in subparagraph (d)
above, this Note and any other obligations of the Company to the Bank shall
become immediately due and payable and commitments under the Agreement shall be
terminated without declaration or other notice to the Company.

          If, for any reason (including acceleration), the principal of any
Eurodollar Loan as defined in the Agreement and evidenced by this Note, or any
portion thereof, is paid prior to the last day of an interest period therefore,
the Company shall reimburse the Bank on demand for any resulting loss or expense
incurred by it, including (without limitation) any loss or expense incurred in
obtaining, liquidating or employing deposits from third parties.

          If the Bank reasonably determines at any time that any applicable law,
governmental rule or regulation, or any change in interpretation or
administration thereof by any governmental authority, central bank or comparable
agency or compliance by the Bank with any regulatory directive subjects the Bank
to any tax with respect to this Note or payments by the Company of principal or
interest thereunder or hereunder (except for 
<PAGE>
 
                                    Page 4

taxes on or measured by the net income of the Bank), or will have the effect of
increasing the Bank's reserve requirements, deposit requirements, or the amount
of capital required or expected to be maintained by the Bank based on the
existence of the Facility or the Bank's obligations under the Agreement, then
promptly upon receipt of a written demand from the Bank, the Company shall pay
the Bank such additional amounts as shall be required to compensate the Bank for
the increased cost to the Bank as a result of these increases. Each such written
demand shall specify (a) the event pursuant to which the Bank is entitled to
claim the additional amount, (b) the date on which the event occurred and became
applicable to the Bank and (c) the compensation period for which the amount is
due. The period for which the additional amounts may be claimed by the Bank (the
"Compensation Period") shall be the number of days actually elapsed since the
date the event occurred and became applicable to the Bank. Payments made by the
Company to the Bank shall be made on the later of the last day of the
Compensation Period specified in each written demand or 30 days after any such
written demand. Provided that the Bank acts reasonably and in good faith in
determining any additional amounts due, the Bank's determination of compensation
owing shall, absent manifest error, be final, conclusive and binding on the
Company.

          If any loan evidenced by this Note becomes due and payable on a
Saturday, Sunday or public or other banking holiday under the laws of the State
of North Carolina, the maturity thereof shall be extended to the next succeeding
business day, and interest shall be payable thereon at the rate herein specified
during such extension; provided, however, that if any such extension would
result in the interest period for a Eurodollar Loan being carried into another
calendar month, such interest period shall end on the preceding business day.

          If the Bank institutes any action for the enforcement or collection of
this Note, the Company shall pay on demand all costs and expenses of such action
including reasonable legal fees.

          If the unpaid principal amount of any Loan, interest accrued thereon
or any amount owing by the Company hereunder or under the Agreement shall have
become due and payable (by acceleration or otherwise), the Bank shall have the
right, in addition to all other rights and remedies available to it, without
notice to the Company, to set-off against and to appropriate and apply to such
due and payable amounts any debt owing to, and any other funds held in any
manner for the account of, the Company by the Bank including, without
limitation, all funds in all deposit accounts (whether time or demand, general
or special, provisionally credited or finally credited, or otherwise) now or
hereafter maintained by the Company with the Bank.  Such right shall exist
whether or not the Bank shall have given notice or made any demand hereunder,
and regardless of the existence or adequacy of any collateral, guarantee or any
other security, right or remedy available to the Bank.  Nothing herein or in the
Agreement shall be deemed a waiver or prohibition of or restriction on the
Bank's rights of banker's lien or set-off.  Presentment for payment, notice of
dishonor, protest and notice of protest are hereby waived.

                                 PP&L CAPITAL FUNDING, INC.



                                 By:  ________________________

<PAGE>
 
                                                                   Exhibit 10(f)
        

              James E. Abel                           PP&L, Inc.
                  Treasurer               Two North Ninth Street
               610.774.5987             Allentown, PA 18101-1179
          Fax: 610.774.5106                         610.774.5151
    E-mail: [email protected]                 http://www.papl.com/


                                                   July 8, 1998


Ms. Mary Ellen Usher
Vice President
Mellon Bank, N.A.
One Mellon Bank Center
Suite 4425
Pittsburgh, PA  15259-0001

Dear Mary Ellen:

          Pursuant to our conversations, Mellon Bank, N.A. (the "Bank") is
making available to PP&L Capital Funding, Inc. (the "Company") a line of credit
in the aggregate principal amount of $80,000,000.00 (the "Facility").  The
Facility will commence on the date hereof and terminate on July 7, 1999 (the
"Termination Date"), unless sooner terminated in accordance herewith or with the
Note (as hereinafter defined); provided that the Termination Date may be
extended from the initial or any extended Termination Date upon written request
of the Company to the Bank not more than 45 days nor less than 30 days prior to
the Termination Date, and approval of such extension by the Bank.

          Approval of any such extension shall be in the sole discretion of the
Bank.  The Bank's approval of such extension shall be provided by written notice
to the Company specifying the date to which the Termination Date is extended.
Notwithstanding the foregoing, the Termination Date shall in no event be
extended to a date that is more than 364 days from the date of such notice.
Failure of the Bank to provide written notice of approval of such extension
shall be deemed to mean that the Facility is not so extended.

          Borrowings under this Facility shall become due and payable without
setoff, counterclaim or deduction whatsoever on the date selected by the Company
in the Request (as hereinafter defined) with respect to each advance, not later
than the Termination Date, and will be evidenced by a promissory note in the
form of Exhibit A attached hereto (the "Note").  Provided that the aggregate
principal amount outstanding at any one time does not exceed $80,000,000.00,
borrowings may be effected using either of the following alternatives:

   1. Domestic Dollar Loans maturing not later than the Termination Date,
      bearing an annual interest rate equal to the higher of

           (i) the Bank's floating prime lending rate (calculated on the basis
               of a 365-day year) as announced from time to time; and
  
          (ii) .5% in excess of the Bank's overnight Federal Funds Rate
               (calculated on the basis of a 360-day year) which shall mean the
               per annum rate at which the Bank can acquire federal funds in the
               interbank overnight federal funds market;

      this rate (the "Base Rate") to be determined daily; or
<PAGE>
 
                                    Page 2

   2. Eurodollar Loans with maturities of one, two, or three months (but in no
      event shall a Eurodollar Loan mature later than the Termination Date),
      bearing an annual interest rate (calculated on the basis of a 360-day year
      for the actual number of days elapsed) equal to .30% over the London
      interbank Offered Rate, as quoted by the Bank, for periods and in amounts
      corresponding to the terms of such Eurodollar Loans two London business
      days prior to the date of the requested advance.

          Interest on each Domestic Dollar Loan and Eurodollar Loan
(individually a "Loan" and collectively the "Loans") is due and payable at the
maturity thereof and, if such maturity is longer than one month, at one month
intervals after the making of such Loan.  Domestic Dollar Loans shall be
prepayable at any time without premium or penalty.  In the event the Company
repays any Eurodollar Loan on any day other than the last day of an interest
period therefor (whether by acceleration or otherwise), the Company shall pay to
the Bank, on demand, any resulting loss or expense incurred by the Bank
including, without limitation, any loss or expense incurred in obtaining,
liquidating or employing deposits from third parties.  All amounts not paid when
due on any Loan (whether by acceleration or otherwise) will bear interest
payable on demand at a rate equal to 1% in excess of the Base Rate.

          The Bank expressly reserves the right to suspend offering Eurodollar
Loans if the Bank determines that making or maintaining any such Loan shall have
become impracticable or unlawful or if the effective cost thereof to the Bank
shall exceed the quoted rate of interest with respect thereto.

BORROWING NOTIFICATION AND FUNDING PROVISIONS

          Minimum drawdowns for all Loans made under this Facility shall be
$10,000,000.00.  Loans hereunder may be effected by telephone request
("Request") by those individuals authorized to request such Loans as designated
in writing to the Bank by the Company's Treasurer.  A request for any Loan is
deemed as confirmation by the Company that no event as described in paragraph 2
of the Note shall have occurred and be continuing and that all representations
and warranties contained in this letter agreement are true as of the date of the
borrowing as if made on such date.  Upon receipt of such Request, the Bank shall
transfer the amount of the Loan in immediately available funds to the Company's
Account Number 28065 with Mellon Bank, Delaware, ABA No. 031100047 or such other
bank account of the Company as may be directed in writing by the Company's
Treasurer.

          For Domestic Dollar Loans, the Company may initiate a Loan by
providing a Request prior to 11:00 A.M. on the date on which the funds are
required.  For Eurodollar Loans, the Company may initiate a Loan by providing a
Request prior to 11:00 A.M. at least three business days prior to the date on
which the funds are required.

LOAN DOCUMENTATION

          The Bank shall record all borrowings and repayments of principal and
interest and the dates of such transactions on its records.  The Company agrees
that the Bank's records, barring manifest evidence to the contrary, shall
conclusively evidence the Company's outstanding obligations under the terms of
this letter agreement and Note.

FACILITY FEE

          The Company agrees to pay to the Bank a facility fee (the "Fee") of
 .10% per annum on the aggregate amount of the Facility.  This Fee, which shall
be based on the actual number of days elapsed on a 360-day year, shall begin to
accrue on the date hereof and shall be 
<PAGE>
 
                                    Page 3

payable in arrears on the last business day of each calendar quarter and on any
date on which the Bank's commitment hereunder shall be terminated in full.

          All payments made by the Company under this letter agreement or the
Note will be made to the Bank at One Mellon Bank Center, Pittsburgh, PA 15258 or
such other address as the Bank may designate.

CANCELLATION

          The Company, in its sole discretion, may cancel the whole or any part
of the unused portion of the Facility in $10,000,000.00 increments by giving the
Bank not less than 10 business days prior notice to that effect, specifying the
date and amount of the proposed cancellation.

REPRESENTATIONS AND WARRANTIES

          The Company has full power and authority to enter into this letter
agreement, to execute and deliver the Note and to incur the obligations provided
for herein and therein, all of which have been duly authorized by all proper and
necessary corporate action.

          Except as provided by applicable laws of bankruptcy, insolvency,
liquidation, or other laws of general application: (i) this letter agreement
constitutes, and the Note, when issued and delivered pursuant hereto, will
constitute valid and legally binding obligations of the Company, enforceable in
accordance with their terms; and (ii) the Loans will rank pari passu in respect
of priority of payment with all other senior unsecured indebtedness of the
Company.

          The execution, delivery and performance of its obligations under this
Agreement and the Note will not violate in any material respect any provisions
of any agreement to which the Company is bound and will not be in conflict with,
result in a breach of, or constitute (with due notice and/or lapse of time) a
default under any such agreement or result in the creation or imposition of any
lien, charge or encumbrance of any nature whatsoever upon any of the properties
or assets of the Company.

          The audited balance sheet of PP&L Resources, Inc. ("Resources"),
parent corporation of the Company, on a consolidated basis as of December 31,
1997 together with audited statements of income and expense, retained earnings,
paid in capital and surplus and changes in financial position, together with
notes thereto, for the fiscal year then ended, heretofore delivered to the Bank,
fairly present the financial condition of Resources and the results of its
operations, as of the date and for the period referred to and have been prepared
in accordance with generally accepted accounting principles consistently
maintained throughout the period involved.  There has been no material adverse
change in the business, properties, condition (financial or other) or operations
of Resources since the date of such audited financial statements which would
adversely affect Resources' ability to meet its obligations under the terms of a
Guarantee by Resources of the Company's obligations hereunder of even date
("Guarantee").

          The Company has heretofore delivered to the Bank unaudited financial
statements, specifically an income statement, balance sheet, and statement of
cash flows, for the period ended December 31, 1997.  There has been no material
adverse change in the business, properties, condition (financial or other) or
operations of the Company since the date of the statements which would adversely
affect the Company's ability to meet its obligation hereunder.
<PAGE>
 
                                    Page 4

FINANCIAL STATEMENTS

          As long as the Facility is available to the Company, the Company shall
promptly provide the Bank with annual and quarterly financial statements of both
the Company and Resources on a consolidated basis.  Annual statements shall be
supplied within 120 days from the closing of the respective annual fiscal period
and Resources' statements shall be audited by a nationally recognized
independent accountant.  Quarterly financial statements, prepared in accordance
with generally accepted principles and practices of accounting, shall be
supplied within 60 days of the close of each of the first three quarters of
Resources' fiscal year.  The Company will provide the Bank with any other
information the Bank may reasonably request from time to time.

WAIVER OF JURY TRIAL

          Each party hereto hereby waives, to the fullest extent permitted by
applicable law, any right it may have to a trial by jury in any legal proceeding
directly or indirectly arising out of or relating to this agreement or the
transactions contemplated hereby (whether based on contract, tort or any other
theory).  Each party hereto (a) certifies that no representative, agent  or
attorney of any other party has represented, expressly or otherwise, that such
other party would not, in the event of litigation, seek to enforce the foregoing
waiver; and (b) acknowledges that it and the other parties hereto have been
induced to enter into this agreement by, among other things, the mutual waivers
and certifications in this section.

INDEMNIFICATION

          The Company agrees to indemnify the Bank and each of its respective
affiliates, directors, officers and employees (each an "Indemnitee") against all
losses, claims, damages, penalties, judgments, liabilities and expenses
(including, without limitation, all expenses of litigation or preparation
therefore whether or not the Bank is a party thereto) which any of them may pay
or incur arising out of or relating to the Note, this agreement, or any other
agreement executed in connection therewith, the transactions contemplated
hereby, or the direct or indirect application or proposed application of the
proceeds of any Loan hereunder; provided that such indemnity shall not, as to
any Indemnitee, be available to the extent that such losses, claims, damages,
liabilities or related expenses are determined by a court of competent
jurisdiction by final and nonappealable judgment to have resulted from the gross
negligence or willful misconduct of such Indemnitee.

DOCUMENTATION

          As a condition precedent to the first utilization of the Facility, the
Bank shall be in possession of the following:

       (i) a copy of this letter agreement duly executed by the Company;

      (ii) a Note of the Company, evidencing loans pursuant to both Domestic
           Dollar Loans and Eurodollar Loans, in the form of Exhibit A attached
           hereto and duly executed;

     (iii) corporate resolutions, articles, and bylaws, and an
           incumbency/signature certificate of the Company and Resources;

      (iv) the Guarantee of Resources of the Company's obligations hereunder in
           the form of Exhibit B attached hereto and duly executed;
<PAGE>
 
                                    Page 3
 
       (v) a Certificate, signed by an officer of the Company, stating that (a)
           no default or event of default as described in paragraph 2 of the
           Note has occurred and is continuing as of the date of this letter
           agreement and Note; and (b) all representations and warranties
           contained in the letter agreement are true and correct as of the date
           of this letter agreement and Note; and

      (vi) a legal opinion of counsel to the Company and the Guarantor in form
           and substance reasonably satisfactory to the Bank.

          Any and all obligations and liabilities incurred under this letter
agreement shall be due and payable without setoff, counterclaim or deduction
whatsoever on the Termination Date.

          This letter agreement and the Note shall be governed by and construed
in accordance with the laws of the Commonwealth of Pennsylvania.

          All letters, advices, confirmation, notices and other writing required
or permitted hereunder shall be sufficient if sent by first class mail, postage
prepaid, addressed to the Bank as follows:

                    Mellon Bank, N.A.
                    One Mellon Bank Center
                    Pittsburgh, PA  15258

and to the Company as follows:

                    PP&L Capital Funding, Inc.
                    Two North Ninth Street
                    Allentown, PA  18101

                    Attention:  Mr. James E. Abel
                    ---------                    
                            Treasurer

          If the above stated terms and conditions are satisfactory, please sign
and return to the Company the enclosed copy of this letter agreement.

                                         Very truly yours,

                                         PP&L CAPITAL FUNDING, INC.
                                         By:



                                         ______________________________
                                                      James E. Abel
                                                      Treasurer

AGREED TO AND ACCEPTED BY:

MELLON BANK, N.A.


By: _________________________

Title:  _________________________
<PAGE>
 
                       GUARANTEE OF PP&L RESOURCES, INC.
                                        

          In order to induce Mellon Bank, N.A. (the "Bank") to extend credit to
PP&L Capital Funding, Inc. (the "Company"), under the agreement between the Bank
and the Company dated July 8, 1998 (the "Agreement"), PP&L Resources, Inc.,
(Resources) hereby irrevocably and unconditionally guarantees, as primary
obligor and not merely as a surety, the Company's obligations to the Bank under
the Agreement and the Note (as defined in the Agreement), whether for principal,
interest, fees or otherwise (collectively, the "Company Obligations").
Resources further agrees that the due and punctual payment of Company
Obligations may be extended, in whole or in part, without notice to or further
assent from it, and that it will remain bound upon its Guarantee hereunder
notwithstanding any such extension or renewal of any Company Obligation.

          Resources waives presentment to, demand of payment from and protest to
the Company of any of the Company Obligations, and also waives notice of
acceptance of its obligations and notice of protest for nonpayment.  The
obligations of Resources hereunder shall not be affected by (a) the failure of
the Bank to assert any claim or demand or to enforce any right or remedy against
the Company under the provisions of this Guarantee, the Agreement, the Note or
otherwise, (b) change or increase in the amount of any of the Company
Obligations, whether or not consented to by Resources, or (c) any rescission,
waiver, amendment or modification of any of the terms or provisions of this
Agreement or any other agreement.

          Resources further agrees that its agreement hereunder constitutes a
promise of payment when due (whether or not any bankruptcy or similar proceeding
shall have stayed the accrual or collection of any of the Company Obligations or
operated as a discharge thereof) and not merely of collection, and waives any
right to require that any resort be had by the Bank to any balance of any
deposit account or credit on the books of the Bank in favor of any other person.

          The obligations of Resources hereunder shall not be subject to any
reduction, limitation, impairment or termination for any reason, and shall not
be subject to any defense or setoff, counterclaim, recoupment or termination
whatsoever, by reason of the invalidity, illegality or unenforceability of the
Company Obligations, any impossibility in the performance of the Company
Obligations or otherwise.  Without limiting the generality of the foregoing, the
obligations of Resources hereunder shall not be discharged or impaired or
otherwise affected by the failure of the Bank to assert any claim or demand or
to enforce any remedy under the Agreement or any other agreement, by any waiver
or modification in respect of any thereof, by any default, failure or delay,
willful or otherwise, in the performance of Company Obligations, or by any other
act or omission which may or might in any manner or to any extent vary the risk
of Resources or otherwise operate as a discharge of Resources or the Company as
a matter of law or equity.

          Resources further agrees that its obligations hereunder shall continue
to be effective or be reinstated, as the case may be, if at any time payment, or
any part thereof, of any Company Obligation is rescinded or must otherwise be
restored by the Bank upon the bankruptcy or reorganization of the Company or
otherwise.

          In furtherance of the foregoing and not in limitation of any other
right which the Bank may have at law or in equity against Resources by virtue
hereof, upon the failure of the Company to pay any Company Obligation when and
as the same shall become due, whether at maturity, by acceleration, after notice
of prepayment or otherwise, Resources hereby promises to and will, upon receipt
of written demand by the Bank, forthwith pay, or cause to be paid, in cash the
amount of such unpaid Company Obligation.
<PAGE>
 
                                    Page 2

          Until such time as the Company Obligations shall have been paid in
full, Resources waives any right of subrogation which it may have in connection
with any payment hereunder; provided, however, that upon payment in full of the
Company Obligations the Bank shall, in reasonable manner, assign to Resources
the amount of such Company Obligations owed to it and so paid, such assignment
to be pro tanto to the extent to which the Company Obligations in question was
      --- -----                                                               
discharged by Resources, or make such disposition thereof as Resources shall
direct (all without recourse to the Bank and without any representation or
warranty by the Bank).

          IN WITNESS WHEREOF, PP&L Resources, Inc. has caused this Guaranty to
be executed this 8th day of July, 1998.


                                     PP&L RESOURCES, INC.
 
                                     By:



                                     ____________________________
                                     Senior Vice President-Financial


                                     ATTEST:

                                     By:



                                     ____________________________
                                                 Robert J. Grey
                                                 Secretary


ACCEPTED:

MELLON BANK, N.A.

By:



____________________________
     (Signature and Title)
<PAGE>
 
                                                                       EXHIBIT A


                                PROMISSORY NOTE
                                        

$80,000,000.00                           July 8, 1998
Commitment of Bank

          PP&L Capital Funding, Inc. (the "Company"), for value received, hereby
promises to pay to the order of Mellon Bank, N.A. (the "Bank"), for the account
of its appropriate lending office, at its office, One Mellon Bank Center,
Pittsburgh, PA 15258, in lawful money of the United States, the principal sum of
$80,000,000.00, or, if less, the aggregate unpaid principal amount of all loans
made by the Bank to the Company pursuant to the letter agreement dated July 8,
1998, between the Company and the Bank (the "Agreement"), on the dates specified
for the repayment of such loans as set forth on the Bank's records or, if not so
specified, as provided in the Agreement.  Each loan evidenced by this Note shall
bear interest, payable as provided in the Agreement.

          The Bank may, at its option, declare this Note immediately due and
payable and terminate its commitment under the Agreement without further
formality, if:

       (a) neither the Company nor Resources pays (x) within 5 business days of
           the due date thereof any interest or fees on this Note or under the
           Agreement, or (y) when due, the principal on any loan or any other
           amount payable hereunder or under the Agreement;

       (b) any representation or warranty by the Company to the Bank in any
           financial statement, certificate, or other agreement proves to have
           been misleading in any material respect when made or deemed to have
           been made;

       (c) the Company or PP&L Resources, Inc. ("Resources"), as guarantor under
           a guarantee (the "Guarantee") dated the date hereof relating to this
           Note, shall (i) fail to pay any principal or interest, regardless of
           amount, due in respect of any indebtedness in a principal amount in
           excess of $40,000,000, in the case of indebtedness of Resources or
           indebtedness of the Company guaranteed by Resources or, in the case
           of indebtedness of the Company not guaranteed by Resources,
           $10,000,000, if such failure shall continue beyond any period of
           grace provided with respect thereto, or (ii) fail to observe or
           perform any other term, covenant, condition or agreement contained in
           any agreement or instrument (including any term, covenant, condition
           or agreement herein or in the Agreement) evidencing or governing any
           such indebtedness in a principal amount in excess of, in the case of
           indebtedness of Resources or indebtedness of the Company guaranteed
           by Resources, $40,000,000 or, in the case of indebtedness of the
           Company not guaranteed by Resources, $10,000,000, if such failure
           shall continue beyond any period of grace provided with respect
           thereto if the effect of any failure referred to in this clause (ii)
           is to cause, or to permit the holder or holders of such 
<PAGE>
 
                                    Page 2

           indebtedness or a trustee on its or their behalf to cause such
           indebtedness to become due prior to its stated maturity; or

       (d) the Company or Resources ceases to pay its debts or makes an
           assignment for the benefit of creditors, or any proceeding relating
           to the Company or Resources under any bankruptcy, reorganization,
           arrangement, readjustment of debt, dissolution, or liquidation law or
           statute of any jurisdiction, whether now or hereafter in effect, is
           commenced by or against the Company or Resources or the Company or
           Resources becomes or is adjudicated insolvent or bankrupt, or
           petitions or applies to any tribunal for any receiver of or any
           trustee for the Company or Resources or any substantial part of the
           property of the Company or Resources;

       (e) the ratio of Consolidated Indebtedness of Resources to Consolidated
           Capitalization of Resources exceeds 70% at any time and Resources
           shall have failed to reduce such ratio to 70% or less within 30 days
           after written notice to Resources from the Bank. For this purpose,
           "Consolidated Indebtedness of Resources" shall mean the Consolidated
           Indebtedness of Resources (determined in accordance with United
           States generally accepted accounting principles (GAAP)), except that
           for purposes of this definition (1) Consolidated Indebtedness of
           Resources shall exclude Non-Recourse Indebtedness of Resources and
           (2) Consolidated Indebtedness of Resources shall exclude any Hybrid
           Preferred Securities of Resources. Also for this purpose,
           Consolidated Capitalization of Resources shall mean the sum of (A)
           the Consolidated Indebtedness of Resources and (B) (i) the
           consolidated shareowners' equity (determined in accordance with GAAP)
           of the common, preference and preferred stockholders of Resources and
           (ii) the aggregate amount of Hybrid Preferred Securities of
           Resources, except that for purposes of calculating Consolidated
           Capitalization of Resources, Consolidated Indebtedness of Resources
           shall exclude Non-Recourse Indebtedness of Resources and Consolidated
           Capitalization of Resources shall exclude that portion of
           shareowners' equity attributable to assets securing Non-Recourse
           Indebtedness of Resources. "Hybrid Preferred Securities" of Resources
           means (1) the preferred securities and subordinated debt described in
           the Prospectus dated as of April 3, 1997 of PP&L Capital Trust and
           PP&L, Inc. and the preferred securities and subordinated debt
           described in the Prospectus dated as of June 9, 1997 of PP&L Capital
           Trust II and PP&L, Inc. (collectively, the "Existing TOPrS") and (2)
           any additional preferred securities and subordinated debt (with a
           maturity of at least twenty years) similar to the Existing TOPrS and
           in an aggregate amount not to exceed $100,000,000, issued by business
           trusts, limited liability companies, limited partnerships (or similar
           entities) (i) all of the common equity, general partner or similar
           interests of which are owned (either directly or indirectly through
           one or more wholly-owned Subsidiaries) at all times by Resources or
           PP&L, Inc., (ii) that have been formed for the purpose of 
<PAGE>
 
                                    Page 3

           issuing hybrid preferred securities and (iii) substantially all the
           assets of which consist of (A) subordinated debt of Resources or a
           Subsidiary of Resources, as the case may be, and (B) payments made
           from time to time on the subordinated debt. "Indebtedness" of any
           person shall mean, without duplication, (a) all obligations of such
           person for borrowed money, (b) all obligations of such person with
           respect to deposits or advances of any kind, (c) all obligations of
           such person evidenced by bonds, debentures, notes or similar
           instruments, (d) all obligations of such person under conditional
           sale or other title retention agreements relating to property or
           assets purchased by such person, (e) all obligations of such person
           issued or assumed as the deferred purchase price of property or
           services (excluding trade accounts payable and accrued obligations
           incurred in the ordinary course of business), (f) all Indebtedness of
           others secured by (or for which the holder of such Indebtedness has
           an existing right, contingent or otherwise, to be secured by) any
           Lien or property owned or acquired by such person, whether or not the
           obligations secured thereby have been assumed but shall not include
           any obligations that are without recourse to such person, (g) all
           Guarantees by such person of Indebtedness of others, (h) all Capital
           Lease Obligations of such person, (i) all obligations of such person
           in respect of Interest Rate Protection Agreements, foreign currency
           exchange agreements or other interest or exchange rate hedging
           arrangements (the amount of any such obligation to be the amount that
           would be payable upon the acceleration, termination or liquidation
           thereof) and (j) all obligations of such person as an account party
           in respect of letters of credit and bankers' acceptances. "Non-
           Recourse Indebtedness of Resources" shall mean indebtedness that is
           nonrecourse to Resources, the Company, PP&L, Inc. ("PP&L") or any of
           PP&L's Subsidiaries; or

       (f) the Guarantee of Resources shall, for any reason, cease to be in full
           force and effect;

provided, that upon the happening of any event specified in subparagraph (d)
above, this Note and any other obligations of the Company to the Bank shall
become immediately due and payable and commitments under the Agreement shall be
terminated without declaration or other notice to the Company.

          If, for any reason (including acceleration), the principal of any
Eurodollar Loan as defined in the Agreement and evidenced by this Note, or any
portion thereof, is paid prior to the last day of an interest period therefor,
the Company shall reimburse the Bank on demand for any resulting loss or expense
incurred by it including (without limitation) any loss or expense incurred in
obtaining, liquidating or employing deposits from third parties.

          If the Bank reasonably determines at any time that any applicable law,
governmental rule or regulation, or any change in interpretation or
administration thereof by any governmental authority, central bank or comparable
agency or compliance by the Bank with any regulatory directive subjects the Bank
to any tax with respect to this Note or payments by the Company of principal or
interest thereunder or hereunder (except for 
<PAGE>
 
                                    Page 4

taxes on or measured by the net income of the Bank), or will have the effect of
increasing the Bank's reserve requirements, deposit requirements, or the amount
of capital required or expected to be maintained by the Bank based on the
existence of the Facility or the Bank's obligations under the Agreement, then
promptly upon receipt of a written demand from the Bank, the Company shall pay
the Bank such additional amounts as shall be required to compensate the Bank for
the increased cost to the Bank as a result of these increases. Each such written
demand shall specify (a) the event pursuant to which the Bank is entitled to
claim the additional amount, (b) the date on which the event occurred and became
applicable to the Bank and (c) the compensation period for which the amount is
due. The period for which the additional amounts may be claimed by the Bank (the
"Compensation Period") shall be the number of days actually elapsed since the
date the event occurred and became applicable to the Bank. Payments made by the
Company to the Bank shall be made on the later of the last day of the
Compensation Period specified in each written demand or 30 days after any such
written demand. Provided that the Bank acts reasonably and in good faith in
determining any additional amounts due, the Bank's determination of compensation
owing shall, absent manifest error, be final, conclusive and binding on the
Company.

          If any loan evidenced by this Note becomes due and payable on a
Saturday, Sunday or public or other banking holiday under the laws of the
Commonwealth of Pennsylvania, the maturity thereof shall be extended to the next
succeeding business day, and interest shall be payable thereon at the rate
herein specified during such extension; provided, however, that if any such
extension would result in the interest period for a Eurodollar Loan being
carried into another calendar month, such interest period shall end on the
preceding business day.

          If the Bank institutes any action for the enforcement or collection of
this Note, the Company shall pay on demand all costs and expenses of such action
including reasonable legal fees.

          If the unpaid principal amount of any Loan, interest accrued thereon
or any amount owing by the Company hereunder or under the Agreement shall have
become due and payable (by acceleration or otherwise), the Bank shall have the
right, in addition to all other rights and remedies available to it, without
notice to the Company, to set-off against and to appropriate and apply to such
due and payable amounts any debt owing to, and any other funds held in any
manner for the account of, the Company by the Bank including, without
limitation, all funds in all deposit accounts (whether time or demand, general
or special, provisionally credited or finally credited, or otherwise) now or
hereafter maintained by the Company with the Bank.  Such right shall exist
whether or not the Bank shall have given notice or made any demand hereunder,
and regardless of the existence or adequacy of any collateral, guarantee or any
other security, right or remedy available to the Bank.  Nothing herein or in the
Agreement shall be deemed a waiver or prohibition of or restriction on the
Bank's rights of banker's lien or set-off.

                                 PP&L CAPITAL FUNDING, INC.



                                 By:  ________________________

<PAGE>
 
                                                                   EXHIBIT 10(g)

            James E. Abel                           PP&L, Inc.
                Treasurer               Two North Ninth Street
             610.774.5987             Allentown, PA 18101-1179
        Fax: 610.774.5106                         610.774.5151
  E-mail: [email protected]                 http://www.papl.com/


                                                   July 8, 1998



Ms. Paula Z. Kramp
Vice President
NationsBank, N.A.
6610 Rockledge Drive
6th Floor
Bethesda, MD  20817-1876

Dear Paula:

          Pursuant to our conversations, NationsBank, (the "Bank") is making
available to PP&L Capital Funding, Inc. (the "Company") a line of credit in the
aggregate principal amount of $80,000,000.00 (the "Facility").  The Facility
will commence on the date hereof and terminate on July 7, 1999 (the "Termination
Date"), unless sooner terminated in accordance herewith or with the Note (as
hereinafter defined); provided that the Termination Date may be extended from
the initial or any extended Termination Date upon written request of the Company
to the Bank not more than 45 days nor less than 30 days prior to the Termination
Date, and approval of such extension by the Bank.

          Approval of any such extension shall be in the sole discretion of the
Bank.  The Bank's approval of such extension shall be provided by written notice
to the Company specifying the date to which the Termination Date is extended.
Notwithstanding the foregoing, the Termination Date shall in no event be
extended to a date that is more than 364 days from the date of such notice.
Failure of the Bank to provide written notice of approval of such extension
shall be deemed to mean that the Facility is not so extended.

          Borrowings under this Facility shall become due and payable without
setoff, counterclaim or deduction whatsoever on the date selected by the Company
in the Request (as hereinafter defined) with respect to each advance, not later
than the Termination Date, and will be evidenced by a promissory note in the
form of Exhibit A attached hereto (the "Note").  Provided that the aggregate
principal amount outstanding at any one time does not exceed $80,000,000.00,
borrowings may be effected using either of the following alternatives:

   1. Domestic Dollar Loans maturing not later than the Termination Date,
      bearing an annual interest rate equal to the higher of

           (i) the Bank's floating prime lending rate (calculated on the basis
               of a 365-day year) as announced from time to time; and

          (ii) .5% in excess of the Bank's overnight Federal Funds Rate
               (calculated on the basis of a 360-day year) which shall mean the
               per annum rate at which the Bank can acquire federal funds in the
               interbank overnight federal funds market;

      this rate (the "Base Rate") to be determined daily; or
<PAGE>
 
                                    Page 2


   2. Eurodollar Loans with maturities of one, two, or three months (but in no
      event shall a Eurodollar Loan mature later than the Termination Date),
      bearing an annual interest rate (calculated on the basis of a 360-day year
      for the actual number of days elapsed) equal to .30% over the London
      interbank Offered Rate, as quoted by the Bank, for periods and in amounts
      corresponding to the terms of such Eurodollar Loans two London business
      days prior to the date of the requested advance.

          Interest on each Domestic Dollar Loan and Eurodollar Loan
(individually a "Loan" and collectively the "Loans") is due and payable at the
maturity thereof and, if such maturity is longer than one month, at one month
intervals after the making of such Loan.  Domestic Dollar Loans shall be
prepayable at any time without premium or penalty.  In the event the Company
repays any Eurodollar Loan on any day other than the last day of an interest
period therefor (whether by acceleration or otherwise), the Company shall pay to
the Bank, on demand, any resulting loss or expense incurred by the Bank
including, without limitation, any loss or expense incurred in obtaining,
liquidating or employing deposits from third parties.  All amounts not paid when
due on any Loan (whether by acceleration or otherwise) will bear interest
payable on demand at a rate equal to 1% in excess of the Base Rate.

          The Bank expressly reserves the right to suspend offering Eurodollar
Loans if the Bank determines that making or maintaining any such Loan shall have
become impracticable or unlawful or if the effective cost thereof to the Bank
shall exceed the quoted rate of interest with respect thereto.

BORROWING NOTIFICATION AND FUNDING PROVISIONS

          Minimum drawdowns for all Loans made under this Facility shall be
$10,000,000.00.  Loans hereunder may be effected by telephone request
("Request") by those individuals authorized to request such Loans as designated
in writing to the Bank by the Company's Treasurer.  A request for any Loan is
deemed as confirmation by the Company that no event as described in paragraph 2
of the Note shall have occurred and be continuing and that all representations
and warranties contained in this letter agreement are true as of the date of the
borrowing as if made on such date.  Upon receipt of such Request, the Bank shall
transfer the amount of the Loan in immediately available funds to the Company's
Account Number 28065 with Mellon Bank, Delaware, ABA No. 031100047 or such other
bank account of the Company as may be directed in writing by the Company's
Treasurer.

          For Domestic Dollar Loans, the Company may initiate a Loan by
providing a Request prior to 11:00 A.M. on the date on which the funds are
required.  For Eurodollar Loans, the Company may initiate a Loan by providing a
Request prior to 11:00 A.M. at least three business days prior to the date on
which the funds are required.

LOAN DOCUMENTATION

          The Bank shall record all borrowings and repayments of principal and
interest and the dates of such transactions on its records.  The Company agrees
that the Bank's records, barring manifest evidence to the contrary, shall
conclusively evidence the Company's outstanding obligations under the terms of
this letter agreement and Note.
<PAGE>
 
                                    Page 3


FACILITY FEE

          The Company agrees to pay to the Bank a facility fee (the "Fee") of
 .10% per annum on the aggregate amount of the Facility.  This Fee, which shall
be based on the actual number of days elapsed on a 360-day year, shall begin to
accrue on the date hereof and shall be payable in arrears on the last business
day of each calendar quarter and on any date on which the Bank's commitment
hereunder shall be terminated in full.

          All payments made by the Company under this letter agreement or the
Note will be made to the Bank at 6610 Rockledge Drive, 6th Floor, Bethesda,
Maryland 20817-1876 or such other address as the Bank may designate.

CANCELLATION

          The Company, in its sole discretion, may cancel the whole or any part
of the unused portion of the Facility in $10,000,000.00 increments by giving the
Bank not less than 10 business days prior notice to that effect, specifying the
date and amount of the proposed cancellation.

REPRESENTATIONS AND WARRANTIES

          The Company has full power and authority to enter into this letter
agreement, to execute and deliver the Note and to incur the obligations provided
for herein and therein, all of which have been duly authorized by all proper and
necessary corporate action.

          Except as provided by applicable laws of bankruptcy, insolvency,
liquidation, or other laws of general application: (i) this letter agreement
constitutes, and the Note, when issued and delivered pursuant hereto, will
constitute valid and legally binding obligations of the Company, enforceable in
accordance with their terms; and (ii) the Loans will rank pari passu in respect
of priority of payment with all other senior unsecured indebtedness of the
Company.

          The execution, delivery and performance of its obligations under this
Agreement and the Note will not violate in any material respect any provisions
of any agreement to which the Company is bound and will not be in conflict with,
result in a breach of, or constitute (with due notice and/or lapse of time) a
default under any such agreement or result in the creation or imposition of any
lien, charge or encumbrance of any nature whatsoever upon any of the properties
or assets of the Company.

          The audited balance sheet of PP&L Resources, Inc. ("Resources"),
parent corporation of the Company, on a consolidated basis as of December 31,
1997 together with audited statements of income and expense, retained earnings,
paid in capital and surplus and changes in financial position, together with
notes thereto, for the fiscal year then ended, heretofore delivered to the Bank,
fairly present the financial condition of Resources and the results of its
operations, as of the date and for the period referred to and have been prepared
in accordance with generally accepted accounting principles consistently
maintained throughout the period involved.  There has been no material adverse
change in the business, properties, condition (financial or other) or operations
of Resources since the date of such audited financial statements which would
adversely affect Resources' ability to meet its obligations under the terms of a
Guarantee by Resources of the Company's obligations hereunder of even date
("Guarantee").
<PAGE>
 
          The Company has heretofore delivered to the Bank unaudited financial
statements, specifically an income statement, balance sheet, and statement of
cash flows, for the period ended December 31, 1997.  There has been no material
adverse change in the business, properties, condition (financial or other) or
operations of the Company since the date of the statements which would adversely
affect the Company's ability to meet its obligation hereunder.

FINANCIAL STATEMENTS

          As long as the Facility is available to the Company, the Company shall
promptly provide the Bank with annual and quarterly financial statements of both
the Company and Resources on a consolidated basis.  Annual statements shall be
supplied within 120 days from the closing of the respective annual fiscal period
and Resources' statements shall be audited by a nationally recognized
independent accountant.  Quarterly financial statements, prepared in accordance
with generally accepted principles and practices of accounting, shall be
supplied within 60 days of the close of each of the first three quarters of
Resources' fiscal year.  The Company will provide the Bank with any other
information the Bank may reasonably request from time to time.

WAIVER OF JURY TRIAL

          Each party hereto hereby waives, to the fullest extent permitted by
applicable law, any right it may have to a trial by jury in any legal proceeding
directly or indirectly arising out of or relating to this agreement or the
transactions contemplated hereby (whether based on contract, tort or any other
theory).  Each party hereto (a) certifies that no representative, agent  or
attorney of any other party has represented, expressly or otherwise, that such
other party would not, in the event of litigation, seek to enforce the foregoing
waiver; and (b) acknowledges that it and the other parties hereto have been
induced to enter into this agreement by, among other things, the mutual waivers
and certifications in this section.

INDEMNIFICATION

          The Company agrees to indemnify the Bank and each of its respective
affiliates, directors, officers and employees (each an "Indemnitee") against all
losses, claims, damages, penalties, judgments, liabilities and expenses
(including, without limitation, all expenses of litigation or preparation
therefore whether or not the Bank is a party thereto) which any of them may pay
or incur arising out of or relating to the Note, this agreement, or any other
agreement executed in connection therewith, the transactions contemplated
hereby, or the direct or indirect application or proposed application of the
proceeds of any Loan hereunder; provided that such indemnity shall not, as to
any Indemnitee, be available to the extent that such losses, claims, damages,
liabilities or related expenses are determined by a court of competent
jurisdiction by final and nonappealable judgment to have resulted from the gross
negligence or willful misconduct of such Indemnitee.

DOCUMENTATION

          As a condition precedent to the first utilization of the Facility, the
Bank shall be in possession of the following:

       (i) a copy of this letter agreement duly executed by the Company;

      (ii) a Note of the Company, evidencing loans pursuant to both Domestic
           Dollar Loans and Eurodollar Loans, in the form of Exhibit A attached
           hereto and duly executed;
<PAGE>
 
                                    Page 5


     (iii) corporate resolutions, articles, and bylaws, and an
           incumbency/signature certificate of the Company and Resources;

      (iv) the Guarantee of Resources of the Company's obligations hereunder in
           the form of Exhibit B attached hereto and duly executed;

       (v) a Certificate, signed by an officer of the Company, stating that (a)
           no default or event of default as described in paragraph 2 of the
           Note has occurred and is continuing as of the date of this letter
           agreement and Note; and (b) all representations and warranties
           contained in the letter agreement are true and correct as of the date
           of this letter agreement and Note; and

      (vi) a legal opinion of counsel to the Company and the Guarantor in form
           and substance reasonably satisfactory to the Bank.

          Any and all obligations and liabilities incurred under this letter
agreement shall be due and payable without setoff, counterclaim or deduction
whatsoever on the Termination Date.

          This letter agreement and the Note shall be governed by and construed
in accordance with the laws of the Commonwealth of Pennsylvania.

          All letters, advices, confirmation, notices and other writing required
or permitted hereunder shall be sufficient if sent by first class mail, postage
prepaid, addressed to the Bank as follows:

                    NationsBank, N.A.
                    6610 Rockledge Drive
                    6th Floor
                    Bethesda, MD  20817-1876

and to the Company as follows:

                    PP&L Capital Funding, Inc.
                    Two North Ninth Street
                    Allentown, PA  18101

                    Attention:  Mr. James E. Abel
                    ---------   Treasurer         


          If the above stated terms and conditions are satisfactory, please sign
and return to the Company the enclosed copy of this letter agreement.

                                         Very truly yours,

                                         PP&L CAPITAL FUNDING, INC.

                                         By:



                                         ______________________________
                                                 James E. Abel
                                                   Treasurer
<PAGE>
 
                                    Page 6


AGREED TO AND ACCEPTED BY:

NATIONSBANK, N.A.



By: _________________________

Title:  _________________________
<PAGE>
 
                       GUARANTEE OF PP&L RESOURCES, INC.
                                        

          In order to induce NationsBank (the "Bank") to extend credit to PP&L
Capital Funding, Inc. (the "Company"), under the agreement between the Bank and
the Company dated July 8, 1998 (the "Agreement"), PP&L Resources, Inc.,
(Resources) hereby irrevocably and unconditionally guarantees, as primary
obligor and not merely as a surety, the Company's obligations to the Bank under
the Agreement and the Note (as defined in the Agreement), whether for principal,
interest, fees or otherwise (collectively, the "Company Obligations").
Resources further agrees that the due and punctual payment of Company
Obligations may be extended, in whole or in part, without notice to or further
assent from it, and that it will remain bound upon its Guarantee hereunder
notwithstanding any such extension or renewal of any Company Obligation.

          Resources waives presentment to, demand of payment from and protest to
the Company of any of the Company Obligations, and also waives notice of
acceptance of its obligations and notice of protest for nonpayment.  The
obligations of Resources hereunder shall not be affected by (a) the failure of
the Bank to assert any claim or demand or to enforce any right or remedy against
the Company under the provisions of this Guarantee, the Agreement, the Note or
otherwise, (b) change or increase in the amount of any of the Company
Obligations, whether or not consented to by Resources, or (c) any rescission,
waiver, amendment or modification of any of the terms or provisions of this
Agreement or any other agreement.

          Resources further agrees that its agreement hereunder constitutes a
promise of payment when due (whether or not any bankruptcy or similar proceeding
shall have stayed the accrual or collection of any of the Company Obligations or
operated as a discharge thereof) and not merely of collection, and waives any
right to require that any resort be had by the Bank to any balance of any
deposit account or credit on the books of the Bank in favor of any other person.

          The obligations of Resources hereunder shall not be subject to any
reduction, limitation, impairment or termination for any reason, and shall not
be subject to any defense or setoff, counterclaim, recoupment or termination
whatsoever, by reason of the invalidity, illegality or unenforceability of the
Company Obligations, any impossibility in the performance of the Company
Obligations, any transfer of the Company obligations or otherwise.  Without
limiting the generality of the foregoing, the obligations of Resources hereunder
shall not be discharged or impaired or otherwise affected by the failure of the
Bank to assert any claim or demand or to enforce any remedy under the Agreement
or any other agreement, by any waiver or modification in respect of any thereof,
by any default, failure or delay, willful or otherwise, in the performance of
Company Obligations, or by any other act or omission which may or might in any
manner or to any extent vary the risk of Resources or otherwise operate as a
discharge of Resources or the Company as a matter of law or equity.

          Resources further agrees that its obligations hereunder shall continue
to be effective or be reinstated, as the case may be, if at any time payment, or
any part thereof, of any Company Obligation is rescinded or must otherwise be
restored by the Bank upon the bankruptcy or reorganization of the Company or
otherwise.

          In furtherance of the foregoing and not in limitation of any other
right which the Bank may have at law or in equity against Resources by virtue
hereof, upon the failure of the Company to pay any Company Obligation when and
as the same shall become due, whether at maturity, by acceleration, after notice
of prepayment or otherwise, Resources hereby promises to and will, upon receipt
of written demand by the Bank, forthwith pay, or cause to be paid, in cash the
amount of such unpaid Company Obligation.
<PAGE>
 
                                    Page 2

          Until such time as the Company Obligations shall have been paid in
full and the commitment of the Bank with respect thereto terminated, Resources
waives any right of subrogation which it may have in connection with any payment
hereunder; provided, however, that upon payment in full of the Company
Obligations and the termination of the Bank's commitment with respect thereto,
the Bank shall, in reasonable manner, assign to Resources the amount of such
Company Obligations owed to it and so paid, such assignment to be pro tanto to
                                                                  --- -----   
the extent to which the Company Obligations in question was discharged by
Resources, or make such disposition thereof as Resources shall direct (all
without recourse to the Bank and without any representation or warranty by the
Bank).

          IN WITNESS WHEREOF, PP&L Resources, Inc. has caused this Guaranty to
be executed this 8th day of July, 1998.


                                     PP&L RESOURCES, INC.
 
                                     By:



                                     ---------------------------------
                                      Senior Vice President-Financial


                                     ATTEST:

                                     By:



                                     ----------------------------
                                            Robert J. Grey
                                               Secretary


ACCEPTED:

NATIONSBANK, N.A.

By:



- ----------------------------
     (Signature and Title)
<PAGE>
 
                                                                       EXHIBIT A


                                PROMISSORY NOTE
                                        

$80,000,000.00                                         July 8, 1998
Commitment of Bank

          PP&L Capital Funding, Inc. (the "Company"), for value received, hereby
promises to pay to the order of NationsBank (the "Bank"), for the account of its
appropriate lending office, at its office, 6610 Rockledge Drive, 6th Floor,
Bethesda, Maryland 20817-1876, in lawful money of the United States, the
principal sum of $80,000,000.00, or, if less, the aggregate unpaid principal
amount of all loans made by the Bank to the Company pursuant to the letter
agreement dated July 8, 1998, between the Company and the Bank (the
"Agreement"), on the dates specified for the repayment of such loans as set
forth on the Bank's records or, if not so specified, as provided in the
Agreement.  Each loan evidenced by this Note shall bear interest, payable as
provided in the Agreement.

          The Bank may, at its option, declare this Note immediately due and
payable and terminate its commitment under the Agreement without further
formality, if:

       (a) neither the Company nor Resources pays (x) within 5 business days of
           the due date thereof any interest or fees on this Note or under the
           Agreement, or (y) when due, the principal on any loan or any other
           amount payable hereunder or under the Agreement;

       (b) any representation or warranty by the Company to the Bank in any
           financial statement, certificate, or other agreement proves to have
           been misleading in any material respect when made or deemed to have
           been made;

       (c) the Company or PP&L Resources, Inc. ("Resources"), as guarantor under
           a guarantee (the "Guarantee") dated the date hereof relating to this
           Note, shall (i) fail to pay any principal or interest, regardless of
           amount, due in respect of any indebtedness in a principal amount in
           excess of $40,000,000, in the case of indebtedness of Resources or
           indebtedness of the Company guaranteed by Resources or, in the case
           of indebtedness of the Company not guaranteed by Resources,
           $10,000,000, if such failure shall continue beyond any period of
           grace provided with respect thereto, or (ii) fail to observe or
           perform any other term, covenant, condition or agreement contained in
           any agreement or instrument (including any term, covenant, condition
           or agreement herein or in the Agreement) evidencing or governing any
           such indebtedness in a principal amount in excess of, in the case of
           indebtedness of Resources or indebtedness of the Company guaranteed
           by Resources, $40,000,000 or, in the case of indebtedness of the
           Company not guaranteed by Resources, $10,000,000, if such failure
           shall continue beyond any period of grace provided with respect
           thereto if the effect of any failure referred to in this clause (ii)
<PAGE>
 
           is to cause, or to permit the holder or holders of such indebtedness
           or a trustee on its or their behalf to cause, such indebtedness to
           become due prior to its stated maturity; or

       (d) the Company or Resources ceases to pay its debts or makes an
           assignment for the benefit of creditors, or any proceeding relating
           to the Company or Resources under any bankruptcy, reorganization,
           arrangement, readjustment of debt, dissolution, or liquidation law or
           statute of any jurisdiction, whether now or hereafter in effect, is
           commenced by or against the Company or Resources or the Company or
           Resources becomes or is adjudicated insolvent or bankrupt, or
           petitions or applies to any tribunal for any receiver of or any
           trustee for the Company or Resources or any substantial part of the
           property of the Company or Resources;

       (e) the ratio of Consolidated Indebtedness of Resources to Consolidated
           Capitalization of Resources exceeds 70% at any time and Resources
           shall have failed to reduce such ratio to 70% or less within 30 days
           after written notice to Resources from the Bank. For this purpose,
           "Consolidated Indebtedness of Resources" shall mean the Consolidated
           Indebtedness of Resources (determined in accordance with United
           States generally accepted accounting principles (GAAP)), except that
           for purposes of this definition (1) Consolidated Indebtedness of
           Resources shall exclude Non-Recourse Indebtedness of Resources and
           (2) Consolidated Indebtedness of Resources shall exclude any Hybrid
           Preferred Securities of Resources. Also for this purpose,
           Consolidated Capitalization of Resources shall mean the sum of (A)
           the Consolidated Indebtedness of Resources and (B) (i) the
           consolidated shareowners' equity (determined in accordance with GAAP)
           of the common, preference and preferred stockholders of Resources and
           (ii) the aggregate amount of Hybrid Preferred Securities of
           Resources, except that for purposes of calculating Consolidated
           Capitalization of Resources, Consolidated Indebtedness of Resources
           shall exclude Non-Recourse Indebtedness of Resources and Consolidated
           Capitalization of Resources shall exclude that portion of
           shareowners' equity attributable to assets securing Non-Recourse
           Indebtedness of Resources. "Hybrid Preferred Securities" of Resources
           means (1) the preferred securities and subordinated debt described in
           the Prospectus dated as of April 3, 1997 of PP&L Capital Trust and
           PP&L, Inc. and the preferred securities and subordinated debt
           described in the Prospectus dated as of June 9, 1997 of PP&L Capital
           Trust II and PP&L, Inc. (collectively, the "Existing TOPrS") and (2)
           any additional preferred securities and subordinated debt (with a
           maturity of at least twenty years) similar to the Existing TOPrS and
           in an aggregate amount not to exceed $100,000,000, issued by business
           trusts, limited liability companies, limited partnerships (or similar
           entities) (i) all of the common equity, general partner or similar
           interests of which are owned (either directly or indirectly through
           one or more wholly-owned Subsidiaries) at all times by Resources or
<PAGE>
 
                                    Page 3

           PP&L, Inc., (ii) that have been formed for the purpose of issuing
           hybrid preferred securities and (iii) substantially all the assets of
           which consist of (A) subordinated debt of Resources or a Subsidiary
           of Resources, as the case may be, and (B) payments made from time to
           time on the subordinated debt. "Indebtedness" of any person shall
           mean, without duplication, (a) all obligations of such person for
           borrowed money, (b) all obligations of such person with respect to
           deposits or advances of any kind, (c) all obligations of such person
           evidenced by bonds, debentures, notes or similar instruments, (d) all
           obligations of such person under conditional sale or other title
           retention agreements relating to property or assets purchased by such
           person, (e) all obligations of such person issued or assumed as the
           deferred purchase price of property or services (excluding trade
           accounts payable and accrued obligations incurred in the ordinary
           course of business), (f) all Indebtedness of others secured by (or
           for which the holder of such Indebtedness has an existing right,
           contingent or otherwise, to be secured by) any Lien or property owned
           or acquired by such person, whether or not the obligations secured
           thereby have been assumed but shall not include any obligations that
           are without recourse to such person, (g) all Guarantees by such
           person of Indebtedness of others, (h) all Capital Lease Obligations
           of such person, (i) all obligations of such person in respect of
           Interest Rate Protection Agreements, foreign currency exchange
           agreements or other interest or exchange rate hedging arrangements
           (the amount of any such obligation to be the amount that would be
           payable upon the acceleration, termination or liquidation thereof)
           and (j) all obligations of such person as an account party in respect
           of letters of credit and bankers' acceptances. "Non-Recourse
           Indebtedness of Resources" shall mean indebtedness that is
           nonrecourse to Resources, the Company, PP&L, Inc. ("PP&L") or any of
           PP&L's Subsidiaries; or

       (f) the Guarantee of Resources shall, for any reason, cease to be in full
           force and effect;

provided, that upon the happening of any event specified in subparagraph (d)
above, this Note and any other obligations of the Company to the Bank shall
become immediately due and payable and commitments under the Agreement shall be
terminated without declaration or other notice to the Company.

          If, for any reason (including acceleration), the principal of any
Eurodollar Loan as defined in the Agreement and evidenced by this Note, or any
portion thereof, is paid prior to the last day of an interest period therefor,
the Company shall reimburse the Bank on demand for any resulting loss or expense
incurred by it, including (without limitation) any loss or expense incurred in
obtaining, liquidating or employing deposits from third parties.

          If the Bank reasonably determines at any time that any applicable law,
governmental rule or regulation, or any change in interpretation or
administration thereof by any governmental authority, central bank or comparable
agency or compliance by the Bank with any regulatory directive subjects the Bank
to any tax with respect to this Note 
<PAGE>
 
or payments by the Company of principal or interest thereunder or hereunder
(except for taxes on or measured by the net income of the Bank), or will have
the effect of increasing the Bank's reserve requirements, deposit requirements,
or the amount of capital required or expected to be maintained by the Bank based
on the existence of the Facility or the Bank's obligations under the Agreement,
then promptly upon receipt of a written demand from the Bank, the Company shall
pay the Bank such additional amounts as shall be required to compensate the Bank
for the increased cost to the Bank as a result of these increases. Each such
written demand shall specify (a) the event pursuant to which the Bank is
entitled to claim the additional amount, (b) the date on which the event
occurred and became applicable to the Bank and (c) the compensation period for
which the amount is due. The period for which the additional amounts may be
claimed by the Bank (the "Compensation Period") shall be the number of days
actually elapsed since the date the event occurred and became applicable to the
Bank. Payments made by the Company to the Bank shall be made on the later of the
last day of the Compensation Period specified in each written demand or 30 days
after any such written demand. Provided that the Bank acts reasonably and in
good faith in determining any additional amounts due, the Bank's determination
of compensation owing shall, absent manifest error, be final, conclusive and
binding on the Company.

          If any loan evidenced by this Note becomes due and payable on a
Saturday, Sunday or public or other banking holiday under the laws of the
Commonwealth of Pennsylvania, the maturity thereof shall be extended to the next
succeeding business day, and interest shall be payable thereon at the rate
herein specified during such extension; provided, however, that if any such
extension would result in the interest period for a Eurodollar Loan being
carried into another calendar month, such interest period shall end on the
preceding business day.

          If the Bank institutes any action for the enforcement or collection of
this Note, the Company shall pay on demand all costs and expenses of such action
including reasonable legal fees.

          If the unpaid principal amount of any Loan, interest accrued thereon
or any amount owing by the Company hereunder or under the Agreement shall have
become due and payable (by acceleration or otherwise), the Bank shall have the
right, in addition to all other rights and remedies available to it, without
notice to the Company, to set-off against and to appropriate and apply to such
due and payable amounts any debt owing to, and any other funds held in any
manner for the account of, the Company by the Bank including, without
limitation, all funds in all deposit accounts (whether time or demand, general
or special, provisionally credited or finally credited, or otherwise) now or
hereafter maintained by the Company with the Bank.  Such right shall exist
whether or not the Bank shall have given notice or made any demand hereunder,
and regardless of the existence or adequacy of any collateral, guarantee or any
other security, right or remedy available to the Bank.  Nothing herein or in the
Agreement shall be deemed a waiver or prohibition of or restriction on the
Bank's rights of banker's lien or set-off.

                                 PP&L CAPITAL FUNDING, INC.



                                 By:  ________________________

<PAGE>
 
                                                                   Exhibit 10(i)
================================================================================




                             AMENDED AND RESTATED
                              OPERATING AGREEMENT
                                      OF
                          PJM INTERCONNECTION, L.L.C.









                              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)



================================================================================
<PAGE>
 
                              OPERATING AGREEMENT
- --------------------------------------------------------------------------------

                               TABLE OF CONTENTS
1. DEFINITIONS
     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..................................................... 2
     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


                                       i
<PAGE>
 
     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


                                      ii
<PAGE>
 
     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..................................23
         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


                                      iii
<PAGE>
 
         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


                                      iv
<PAGE>
 
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................................................ 3
         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........................................ 5
         1.3.34 Transmission Congestion Charge............................ 5
         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
     1.4 Market Buyers.................................................... 6
         1.4.1 Qualification.............................................. 6
         1.4.2 Submission of Information.................................. 7

                                      iv
<PAGE>
 
         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 Interconnection.................................... 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..........................14
         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................................................15
         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
         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


                                      vi
<PAGE>
 
         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....................................26
         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
     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


                                      vii
<PAGE>
 
     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
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
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


                                     viii
<PAGE>
 
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 
     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............................................. 3
     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


                                      ix
<PAGE>
 
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


                                       x
<PAGE>
 
                             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 2nd 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
<PAGE>
 
                                  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, (SS)
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
<PAGE>
 
     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
<PAGE>
 
     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
<PAGE>
 
     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
<PAGE>
 
     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
<PAGE>
 
     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
<PAGE>
 
     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
<PAGE>
 
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
<PAGE>
 
     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
<PAGE>
 
                 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.

     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.

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<PAGE>
 
     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.

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<PAGE>
 
     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
<PAGE>
 
     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
<PAGE>
 
            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
<PAGE>
 
            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
<PAGE>
 
         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
<PAGE>
 
     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

                                       18
<PAGE>
 
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
<PAGE>
 
     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
<PAGE>
 
                                  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
<PAGE>
 
     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
<PAGE>
 
     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
<PAGE>
 
        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
<PAGE>
 
                                  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
<PAGE>
 
         (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
<PAGE>
 
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
<PAGE>
 
         (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
<PAGE>
 
     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
<PAGE>
 
                     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
<PAGE>
 
     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 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
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.

                                       31
<PAGE>
 
         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 transactions in the PJM Interchange Energy Market or other
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. Any Member that fails to make such payment, 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 30 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 30th 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.

                                       32
<PAGE>
 
     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
<PAGE>
 
                          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
<PAGE>
 
         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
<PAGE>
 
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
<PAGE>
 
             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
<PAGE>
 
         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
<PAGE>
 
     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
<PAGE>
 
     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
<PAGE>
 
     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
<PAGE>
 
     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
<PAGE>
 
         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
<PAGE>
 

         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
<PAGE>
 

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.


                                      45
<PAGE>
 
      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 number determined 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.


                                       2
<PAGE>
 
         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.

         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.


                                       3
<PAGE>
 
         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.


                                       4
<PAGE>
 
         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.


                                       5
<PAGE>
 
         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.


                                      5a
<PAGE>
 
         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 a Member 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. [SUBJECT TO COMPLIANCE FILING TO 86 FERC (S)
61,015.]

         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:

         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
<PAGE>
 
            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.
<PAGE>
 
      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.


                                       8
<PAGE>
 
      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;


                                       9
<PAGE>
 
     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.


                                      10
<PAGE>
 
      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
<PAGE>
 
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.


                                      12
<PAGE>
 
      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
<PAGE>
 
     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 curtailed or interrupted for any reason (except for
curtailments or interruptions through active load management for load located
within the PJM Control Area); provided, however, that a Market Participant may
elect in the day-ahead scheduling process not to have Spot Market Backup as
specified in Section 1.10.1(d)(iv).

     (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.


                                      14
<PAGE>
 
     1.7.13 RELATIONSHIP TO PJM CONTROL AREA.

     The PJM Interchange Energy Market operates within and subject to the
requirements for the operations of the PJM Control Area.



                                     14a 

<PAGE>
 
      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.

     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).

     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.

                                      15
<PAGE>
 
     (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.


                                      16
<PAGE>
 
     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
<PAGE>
 
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
<PAGE>
 
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
<PAGE>
 
         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
<PAGE>
 
     (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:


                                      21
<PAGE>
 
          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; 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.

         iv) Market Participants shall specify any bilateral transactions from
sources inside the PJM Control Area for delivery to load outside the PJM Control
Area that are not to have Spot Market Backup, provided that the sources for such
transactions shall not be Capacity Resources and shall be subject to imbalance
payments in accordance with an interconnection or other agreement with the LLC.

         (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;

                                      22
<PAGE>
 
         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;


                                      22a
<PAGE>
 
       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

                                      23
<PAGE>
 
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.


                                      24
<PAGE>
 
        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. A Market Seller offering an External Resource on a 
resource-specific basis that does not deliver energy as schedule by the Office 
of the Interconnection shall be assessed a non-delivery charge as specified 
below, unless the resource being offered has suffered a Generator Forced Outage.
The burden shall be on the Market Seller to demonstrate to the reasonable 
satisfaction of the Office of the Interconnection that the resource being 
offered has experience a Generator Forced Outage.

        (d) Subject to the conditions specified in this paragraph, the 
non-delivery charge for External Resources that do not deliver energy as 
schedule shall be calculated hourly as follows:  Pro-rated start-up plus hourly 
no-load fees specified in the Offer Data + [offered minimum dispatch level * 
(Locational Marginal Price - offered energy price) * 110%]. For purposes of the 
foregoing calculation:  (i) the Locational Marginal Price shall be the 
Locational Marginal Price at the buses at which the energy from the External 
Resource should have been delivered to the PJM Control Area; (ii) if the 
Locational Marginal Price less the offered energy price is less than zero, this 
difference shall be set to zero; (iii) start-up and no-load fees shall be 
subject to the requirements of the Schedule; and (iv) the non-delivery charge 
shall not be assessed for energy the delivery of which is curtailed by a 
control area operator.  Payments or credits for non-delivery charges shall be 
used by the Office of the Interconnection to reduce or offset PJM Control Area 
costs for Operating Reserves.


                                      25
<PAGE>
 
        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.

        (d) An external Market Buyer that does not take delivery of the amounts
of energy specified in its request to purchase shall be assessed a non-delivery
charge, or if using Point-to-Point service within the PJM Control Area shall pay
for imbalance service as specified in the Tariff. The non-delivery charge shall
be calculated as the summation of all applicable busses of the product of (i)
the Locational Marginal Price at each load bus at which delivery was not taken,
times (ii) the amount of energy not taken each hour at such bus. The non-
delivery charge shall not apply to deliveries curtailed be a control area
operator, or for periods when the Dispatch Rate exceeds the maximum value
specified by the External Market Buyer in accordance with this Schedule.
Payments or credits for non-delivery charges shall be used by the Office of the
Interconnection to reduce or offset PJM Control Area costs for Operating
Reserves.
 
        1.10.6A TRANSMISSION LOADING RELIEF CUSTOMERS.
        
        (a) A Member 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.

        (b) If a Member has made the election specified in Section (a), then PJM
shall not request security coordinators to curtail such Member's energy
transactions, except as may be necessary to respond to Emergencies. [SUBJECT TO
COMPLIANCE FILING TO 86 FERC ' 61,015.]

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.

                                      26
<PAGE>
 
           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
<PAGE>
 
              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.

                                      28
<PAGE>
 
         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.


                                      29
<PAGE>
 
          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
<PAGE>
 
     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
<PAGE>
 
      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
<PAGE>
 
                           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


                                      33
<PAGE>
 
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


                                      34
<PAGE>
 
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) 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.

         (d) 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 for delivery to
load outside the PJM Control Area for which it elected pursuant to Section
1.10.1(d)(iv) not to receive Spot Market Backup or, until such times as Section
1.10.1(d)(iv) applies to Capacity Resources, its bilateral transactions for
Capacity Resources to load outside the PJM Control Area.

         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.


                                      35
<PAGE>
 
          (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


                                      35a
<PAGE>
 
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.


                                      36
<PAGE>
 
         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.


                                      37
<PAGE>
 
         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.


                                      38
<PAGE>
 
     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.


                                      39
<PAGE>
 
         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
<PAGE>
 
                                 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.


                                      41
<PAGE>
 
         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
<PAGE>
 
         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 Transmission Customer using firm Point-to-Point Transmission
Service and each Network Service User 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 of each Network Service User and Transmission
Customer, determined as specified below.


                                      43
<PAGE>
 
         (b) Each Network Service User shall designate a subset of its Network
Resources for which Fixed Transmission Rights will be assigned. The sum of the
Fixed Transmission Right for each Network Resource shall be 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 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
even 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) The foregoing assignment of Fixed Transmission Rights shall be
enhanced by an amendment to this Schedule, to be filed with FERC not later than
December 31, 1997, that will provide for an auction of Fixed Transmission Rights
over and above those FTRs obtained and retained by Network Service Users and
Transmission Customers then receiving firm Point-to-Point Transmission Service
(including firm Point-to-Point transmission service for existing bilateral
contracts), such auction to be implemented as soon after December 31, 1997 as
shall be determined by the Office of the Interconnection to be reasonably
practical. For so long as Fixed Transmission Rights are assigned on the basis of
Network Transmission Service and firm Point-to-Point Transmission Service, any
Fixed Transmission Rights awarded pursuant to an auction shall be simultaneously
feasible with all Network Transmission Service and firm Point-to-Point
Transmission Service obligations. 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 an auction, including but not limited to
the nature of the bidding process, the frequency of auctions, and the duration
of the Fixed Transmission Rights purchased at auction.


                                      43a
<PAGE>
 
         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
<PAGE>
 
     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
<PAGE>
 
                                  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
<PAGE>
 
     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 number determined 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.
<PAGE>
 
     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.
<PAGE>
 
Revised: November 19, 1998
Effective: January 19, 1999

     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.

     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.
Financial Printing GroupFinancial Printing Group

AMENDED AND RESTATEDAMENDED AND RESTATED OPERATING AGREEMENT OF PJM
INTERCONNECTION, L.L.C. 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, AND NOVEMBER 19, 1998)
<PAGE>
 
                             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
<PAGE>
 
                                  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, 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.

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     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.

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     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 " 202 of the Federal Power Act established pursuant to the MAAC Agreement
dated August 1, 1994, or any successor thereto.

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     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.


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     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.

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     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.


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<PAGE>
 
     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

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<PAGE>
 
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.


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<PAGE>
 
     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.

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<PAGE>
 
                 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 " 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. "
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.

     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.


Revised:   November 19, 1998
Effective: January 19, 1999

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     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.



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     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.



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     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


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                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
<PAGE>
 
                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
<PAGE>
 
         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
<PAGE>
 
     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
<PAGE>
 
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
<PAGE>
 
     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
<PAGE>
 
                                  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
<PAGE>
 
     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
<PAGE>
 
     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
<PAGE>
 
        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
<PAGE>
 
                                  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
<PAGE>
 
        (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
<PAGE>
 
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
<PAGE>
 
         (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.


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<PAGE>
 
      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
<PAGE>
 
                     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
<PAGE>
 
     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 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
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.



                                      31
<PAGE>
 
         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 transactions in the PJM Interchange Energy Market or other
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. Any Member that fails to make such payment, 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 30 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. "
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 30th 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.


                                      32
<PAGE>
 
     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
<PAGE>
 
                          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
<PAGE>
 
     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
<PAGE>
 
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
<PAGE>
 
             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
<PAGE>
 
         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
<PAGE>
 
     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
<PAGE>
 
     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
<PAGE>
 
     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
<PAGE>
 
     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.

         18.17.1PARTY 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
<PAGE>
 
         18.17.2REQUIRED 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.

         18.18.1TERMINATION.

         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.

         18.18.2WITHDRAWAL.

         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
<PAGE>
 
         18.18.3WINDING 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

<PAGE>
                                                                   Exhibit 10(l)
 
                             PP&L RESOURCES, INC.

                     DIRECTORS DEFERRED COMPENSATION PLAN

                          EFFECTIVE JANUARY 26, 1972



                                                            Amended and Restated
                                                       Effective January 1, 1998
<PAGE>
 
                             PP&L RESOURCES, INC.

                     DIRECTORS DEFERRED COMPENSATION PLAN

                          EFFECTIVE JANUARY 26, 1972

                               TABLE OF CONTENTS
                               -----------------
 
PARAGRAPH                                                            PAGE
- ---------                                                            ----
                                  
  1.     Purpose...................................................... 1
                                                                       
  2.     Definitions.................................................. 2
                                                                       
  3.     Effective Date............................................... 5
                                                                       
  4.     Eligibility.................................................. 6
                                                                       
  5.     Mandatory Deferral........................................... 7
 
  6.     Deferred Cash Compensation................................... 8
 
  7.1    Stock Account................................................ 10
                                                                       
  7.2    Cash Account................................................. 11
                                                                       
  8.     Payment of Accounts.......................................... 13
                                                                       
  9.     Administration............................................... 16
                                                                       
  10.    Miscellaneous................................................ 17
                                                                       
  11.    Termination or Amendment..................................... 19
 
<PAGE>
 
                             PP&L RESOURCES, INC.
                     DIRECTORS DEFERRED COMPENSATION PLAN
                     ------------------------------------
 
1. PURPOSE.  The purpose of this Directors Deferred Compensation Plan is to
   provide certain Directors of PP&L Resources, Inc. an additional means to
   increase their incomes after service as a Director, while at the same time
   increasing their equity interest in Resources, and to enable them to meet
   other important personal and financial needs.

                                      -1-
<PAGE>
 
2. Definitions.

   (a) "BOARD OF DIRECTORS" means the board of directors of Resources.

   (b) "CASH ACCOUNT" means the account of Deferred Cash Compensation
       established for each Participant solely as a bookkeeping entry and
       described in Paragraph 7.2 of this Plan.

   (c) "CASH COMPENSATION" means  the cash compensation payable to a Director,
       including retainer, meeting fees and other fees payable for service as
       Director as requested by Resources, minus the Mandatory Deferral Amount.

   (d) "COMMITTEE" means two or more directors, who have been designated by the
       Board to act as the Committee and who qualify as "non-employee
       directors," under the rules of the Securities and Exchange Commission
       issued pursuant to section 16 of the Securities Exchange Act of 1934.

   (e) "COMMON STOCK" means the Common Stock, without par value, of Resources.

   (f) "COMPENSATION" means the total compensation payable to a Director,
       including retainer, meeting fees and other fees payable for service as
       Director.

   (g) "DEFERRED CASH COMPENSATION" means the Cash Compensation of a Participant
       deferred under  the terms of this Plan.

   (h) "DEFERRED SAVINGS PLAN" means the PP&L Deferred Savings Plan.

   (i) "DIRECTOR" means an individual elected to the Board of Directors who is
       not 

                                      -2-
<PAGE>
 
       an employee of Resources or who served on the Board of Directors of
       PP&L prior to the Effective Time and was not an employee of PP&L.

   (j) "EBPB" means the Employee Benefit Plan Board, the members of which are
       appointed by the board of directors of PP&L.

   (k) "EFFECTIVE TIME" means the date as defined in the Agreement and Plan of
       Exchange between PP&L, Inc. and PP&L Resources, Inc.

   (l) "FAIR MARKET VALUE" on any date means the mean of the high and the low
       sale prices of Common Stock on the New York Stock Exchange composite tape
       on such date if such date is a day on which the common stock actually
       trades or otherwise on the next preceding date on which the common stock
       trades.  If, as of any valuation date, the Common Stock is not traded on
       the New York Stock Exchange, valuations shall be based on the mean of the
       high and low sale prices on the principal national securities exchange on
       which the Common Stock is then traded or, if the Common Stock is not
       traded on any national securities exchange, on the mean of the high and
       low bid prices of the Common Stock in the over-the-counter market.

   (m) "MANDATORY DEFERRAL AMOUNT" means a portion of the retainer fee payable
       to the Participant equal to an amount established by resolution of the
       Committee from time to time, but in no event later than December 31 of
       the calendar year preceding the calendar year in which the retainer fee
       is payable to the Participant.

                                      -3-
<PAGE>
 
   (n) "PARTICIPANT" means an eligible Director of Resources, any or all of
       whose Compensation is deferred under this Plan.

   (o) "PLAN" means this Directors Deferred Compensation Plan as set forth
       herein and as hereafter amended from time to time.

   (p) "PP&L" means PP&L, Inc.

   (q) "RESOURCES" means PP&L Resources, Inc.

   (r) "STOCK ACCOUNT" means the account of Deferred Compensation established
       for each Participant solely as a bookkeeping entry and described in
       Paragraph 7.1 of this Plan.

   (s) "STOCK UNIT" means a unit equal in value from time-to-time to the Fair
       Market Value of one share of Common Stock.

   (t) "TOTAL AMOUNT PAYABLE" means the amount credited to a Participant's Cash
       Account and the Participant's Stock Account.

The masculine pronoun shall be deemed to include the feminine and the singular
to include the plural unless a different meaning is plainly required by the
context.

                                      -4-
<PAGE>
 
3. EFFECTIVE DATE.  The amendments to this Plan necessary to make it a Plan of
   PP&L Resources, Inc. rather than PP&L are effective as of the Effective Time.
   The Plan, as hereby amended and restated to provide for a Stock Account,
   shall become effective as of January 1, 1998.

                                      -5-
<PAGE>
 
4. ELIGIBILITY.  All Directors of Resources who are or become duly elected
   Directors shall be eligible to participate in this Plan as of the  effective
   date of first election as a Director.  An employee of PP&L or Resources who
   is a member of the Board of Directors who retires or otherwise terminates his
   employment but continues as a member of the Board shall be eligible to
   participate as of the date of his termination of employment with PP&L or
   Resources.

                                      -6-
<PAGE>
 
5. MANDATORY DEFERRAL.

   (a) A Participant's Mandatory Deferral Amount shall automatically be deferred
       to such Participant's Stock Account on the date such amount would
       otherwise be payable to such Participant.  Mandatory Deferral Amounts
       shall be subject to the rules set forth in this Plan, and each
       Participant shall have the right to receive payments of Common Stock on
       account of Mandatory Deferral Amounts under  the circumstances
       hereinafter set forth.

   (b) A Participant may not convert any portion of such Participant's Stock
       Account attributable to the Mandatory Deferral Amount or dividends
       thereon, as described in Paragraph 7.1(c), to the Participant's Cash
       Account for a period of 3 years from the date such Mandatory Deferral
       Amount was credited to the Participant's Stock Account.

                                      -7-
<PAGE>
 
6. DEFERRED CASH COMPENSATION.

   (a) Participant shall have the right to elect to have all, or a portion, of
       his Cash Compensation deferred hereunder, either to his Stock Account or
       his Cash Account and may change the allocation between such accounts of
       any such Cash Compensation so deferred.  The amount of Cash Compensation
       credited to either the Stock Account or the Cash Account will be limited
       to the Cash Compensation earned after the date of the election.

   (b) Any election to defer future Cash Compensation for the first calendar
       year that Participant is eligible to participate in this Plan shall be
       made by the Participant in writing by the thirtieth (30th) day following
       the date on which the Participant is first eligible to participate by
       filing with the EBPB the appropriate election form.  Any such election
       shall be limited to Cash Compensation earned after the date of the
       election.

   (c) Any election to defer or change the amount of Cash Compensation to be
       deferred for any subsequent calendar year after the first calendar year
       of eligibility may be made by Participant not later than December 31 of
       the year preceding such calendar year by filing with the EBPB an election
       form; provided, however, that an election once made will be presumed to
       continue with respect to subsequent years unless changed or revoked by
       Participant.  Participant, may, prior to December 31, 1994, elect to
       defer some or all of his Cash Compensation otherwise payable after July
       1, 1995 to this Stock Account.

                                      -8-
<PAGE>
 
   (d) Participant may revoke his election to defer Cash Compensation at any
       time by so notifying the EBPB in writing not later than December 31 of
       the year preceding the year for which the revocation will be effective.
       For any subsequent calendar year, Participant may resume his election to
       defer if he files with the EBPB an election form not later than December
       31 of the year preceding such subsequent calendar year.

   (e) The deferral of Cash Compensation shall be made in amounts elected  for
       the calendar year in which such Cash Compensation is to be earned, unless
       the election specifies otherwise.

   (f) Any election will be effective when actually received by PP&L's Payroll
       Section.

   (g) An election, once made, will be irrevocable as to Cash Compensation
       already deferred.

                                      -9-
<PAGE>
 
7.1  STOCK ACCOUNT.  Resources shall maintain a Stock Account in the name of
     each Participant.  Such Stock Account shall be maintained as follows:

   (a) Resources shall credit to Participant's Stock Account the number of Stock
       Units equal to the Mandatory Deferral Amount on the date such amount
       would otherwise be payable to such Participant, divided by the Fair
       Market Value of one share of Common Stock on such date.

   (b) Resources shall credit to Participant's Stock Account, the number of
       Stock Units equal to the amount of Deferred Cash Compensation elected by
       Participant to be credited to his Stock Account, divided by the Fair
       Market Value of one share of Common Stock on such date.

   (c) As of each date a dividend or other distribution is paid or made on
       Common Stock to holders of record on and after the date of deferral
       hereunder, the Participant's Stock Account shall be credited with a
       number of additional Stock Units equal to the product of:  (i) the amount
       of such dividend or distribution paid with respect to one share of Common
       Stock, multiplied by (ii) the number of Stock Units held by the
       Participant, divided by (iii) the Fair Market Value of one share of
       Common Stock on such date.  If an in-kind dividend or distribution is
       made on Common Stock, the Fair Market Value of such in-kind dividend or
       distribution paid with respect to one share of Common Stock will be equal
       to the amount of the dividend or distribution for purposes of
       subparagraph (i) of this Section.

   (d) Subject to the limitations of Paragraph 5(b) and provided that such an

                                      -10-
<PAGE>
 
       election is at least six months after the date of such Participant's last
       election, if any, to convert all or any portion of his Cash Account into
       interests in his Stock Account, a Participant may elect to convert all or
       any portion of his Stock Account into interests in such Participant's
       Cash Account by filing with the EBPB an election form.  If such an
       election is made,  the Participant's Cash Account shall be credited with
       an amount equal to the number of Stock Units being converted, multiplied
       by the Fair Market Value of one share of Common Stock on the date such
       amount is credited.

7.2  CASH ACCOUNT.  Resources shall maintain a Cash Account in the name of each
     Participant.  Such Cash Account shall be maintained as follows:

   (a) Resources shall credit to Participant's Cash Account as of the same day
       on which the last Cash Compensation for the month would have been paid to
       said Participant an amount equal to the Deferred Cash Compensation
       elected by Participant to be credited to his Cash Account.
   (b) Participant's Cash Account shall be credited with interest monthly based
       on a rate of interest substantially equivalent to that applied on account
       balances in the Blended Interest Rate Fund in the Deferred Savings Plan
       or such other comparable fund as may be selected by the EBPB.
   (c) Provided that such an election is at least six months after the date of
       such Participant's last election, if any, to convert all or any portion
       of his Stock Account into interests in his Cash Account, a Participant
       may elect to 

                                      -11-
<PAGE>
 
       convert all or any portion of his Cash Account into interests in such
       Participant's Stock Account by filing with the EBPB an election form. If
       such an election is made, the Participant's Stock Account shall be
       credited with a number of Stock Units equal to the Cash Account amount to
       be converted, divided by the Fair Market Value of one share of Common
       Stock on such date.

                                      -12-
<PAGE>
 
8.   PAYMENT OF ACCOUNTS.

   (a) The Total Amount Payable shall be payable at the election of the
       Participant within thirty (30) days after:

       (i)   Participant ceases serving on the Board of Directors; or

       (ii)  the later of:

             (A) the Participant's cessation of service on the Board of
                 Directors; or

             (B) the age elected by the Participant, provided such age is not
                 greater than 72.

     Such election must be made before the applicable Cash Compensation is
deferred and may not be changed with respect to Cash Compensation once it has
been deferred.  The Participant may defer commencement of distribution until
January of the next calendar year after such event occurs.  If the Participant
has made no election, payments will commence within thirty (30) days after a
Participant ceases to be a Director.

   (b) (i)   The Total Amount Payable shall be paid to the Participant in a
             single sum or, if elected by the Participant, in annual
             installments up to a maximum of ten (10) years. Such election must
             be made before the applicable Cash Compensation is deferred and may
             not be changed with respect to Cash Compensation once it has been
             deferred.

       (ii)  Payments in respect of the Stock Account shall be made in Common
             Stock and payments in respect of the Cash Account shall be made in
             cash. A Participant shall receive a number of shares of Common

                                      -13-
<PAGE>
 
             Stock equal to the number of Stock Units in his Stock Account.

       (iii) All annual installments shall, except for the final payment, be not
             less than $5,000. To the extent necessary, the number of annual
             installments may be reduced to ensure that annual installments are
             at least $5,000.

       (iv)  The amount of each annual installment shall be determined by
             dividing the Total Amount Payable less any payments already made to
             Participant by the remaining number of annual installments to be
             made (i.e., a 10-year payout shall pay 1/10 of the Total Amount
             Payable as the first installment, 1/9 as the second annual
             installment, etc.).

   (c) (i)   If Participant dies while a Director or before all installments
             have been paid under Paragraph 8(b), payments shall be made to
             Participant's estate within 30 days after Participant's death.

       (ii)  Payments made to Participant's estate will be made in a single
             sum.

   (d) As long as there is a balance in Participant's Cash Account, the balance
       shall be credited with interest pursuant to Paragraph 7.2(b).  For any
       installment or other payment from the Cash Account, interest shall accrue
       up to the last day of the month prior to that payment to Participant or
       his estate.  As long as there is a balance in Participant's Stock
       Account, the remaining balance shall be credited with dividend amounts
       pursuant to Paragraph 7.1(c).

   (e) The EBPB may determine, in its sole discretion, that the Total Amount

                                      -14-
<PAGE>
 
       Payable shall be paid to Participant or his estate in different amounts
       or at different times than provided under this Plan if, in the opinion of
       the EBPB, it would be necessary as the result of a personal emergency or
       hardship which results in a severe and immediate financial burden to the
       Participant, in which case payment shall be made only to the extent
       necessary to alleviate the Participant's hardship.  Any determination by
       EBPB to change the amount or timing of a Participant's distribution shall
       not, however, result in the Participant receiving distributions in lesser
       amounts or over a longer period of time.

                                      -15-
<PAGE>
 
9.   ADMINISTRATION. The EBPB shall have the discretionary authority and final
     right to interpret, construe and make benefit determinations (including
     eligibility and amount) under the Plan. The decisions of the EBPB are final
     and conclusive for all purposes.

                                      -16-
<PAGE>
 
10.  MISCELLANEOUS.

   (a) If the person to receive payment is deemed by the EBPB or is adjudged to
       be legally incompetent, the payments shall be made to the duly appointed
       guardian or committee of such incompetent, or they may be made to such
       person or persons whom the EBPB believes are caring for or supporting the
       incompetent.

   (b) Nothing in this Plan shall confer any right on the Participant to
       continue as a Director.

   (c) The expenses of the administration hereunder shall be borne by Resources.

   (d) This Plan shall be construed, administered and enforced according to the
       laws of the Commonwealth of Pennsylvania.

   (e) All payments from this Plan shall be made from the general assets of
       Resources.  This Plan shall not require Resources to set aside,
       segregate, earmark, pay into trust or special account or otherwise
       restrict the use of its assets in the operation of the business.
       Participants shall have no greater right or status than as an unsecured
       general creditor of Resources with respect to any amounts owed to
       Participant hereunder.

   (f) The Plan shall be unfunded.

   (g) All payments to persons entitled to benefits hereunder shall be made to
       such persons and shall not be grantable, transferable, pledged or
       otherwise assignable in anticipation of payment thereof, or subject to
       attachment, alienation, garnishment, levy, execution or other legal or
       equitable process 

                                      -17-
<PAGE>
 
       in whole or in part, by the voluntary or involuntary acts of any such
       persons, or by operation of law, and shall not be liable or taken for any
       obligation of such person. Resources will observe the terms of the Plan
       unless and until ordered to do otherwise by a state or federal court. As
       a condition of participation, a Participant agrees to hold Resources
       harmless from any claim that arises out of Resources obeying any such
       order whether such order effects a judgment of such court or is issued to
       enforce a judgment or order of another court.

   (h) Participant's benefits under group life insurance, and other benefit
       plans as may be maintained by Resources for Directors will be provided
       based on  all Compensation to Participant.

                                      -18-
<PAGE>
 
11.  TERMINATION OR AMENDMENT.

   (a) The Committee may, in its discretion, terminate or amend this Plan from
       time to time.  In addition, the EBPB 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 Resources or significantly
       alter the benefit design or eligibility requirements of the Plan.  No
       termination or amendment shall (without Participant's consent) alter: a)
       Participant's right to payments of amounts previously credited to
       Participant's Accounts, which amounts shall continue to earn interest or
       accumulate dividends as provided for herein as though termination or
       amendment had not been effected, or b) the amount or times of payment of
       such amounts which have commenced prior to the effective date of such
       termination or amendment; provided, however, that no such consent may
       accelerate the Participant's payments.  Notwithstanding the foregoing, if
       Resources is liquidated, the EBPB shall have the right to determine the
       Total Amount Payable under Paragraph 8 to Participant, and to cause the
       amount so determined to be paid in one or more installments or upon such
       other terms and conditions and at such other time (not beyond the time
       provided for herein) as the EBPB determines to be just and equitable.
       Any determinations made pursuant to the preceding sentence shall be
       consistent as to all Participants.

                                      -19-
<PAGE>
 
       Executed this ______ day of November, 1998.

                         PP&L RESOURCES, INC.


                         By:
                            --------------------------------------
                            John M. Chappelear
                            Chairman
                            Employee Benefit Plan Board






                                                            11/03/98

                                      -20-

<PAGE>
 
                                     PP&L

                      OFFICERS DEFERRED COMPENSATION PLAN

                            EFFECTIVE JULY 1, 1985




                                                            Amended and Restated
                                                      Effective January 1, 1998
<PAGE>
 
                                     PP&L

                      OFFICERS DEFERRED COMPENSATION PLAN

                            EFFECTIVE JULY 1, 1985

                               TABLE OF CONTENTS
                               -----------------

PARAGRAPH                                               PAGE
- ---------                                               ----

  1.   Purpose.......................................... 1


  2.   Definitions...................................... 2


  3.   Eligibility...................................... 5


  4.   Deferred Cash Compensation and
       Deferred Cash Awards............................. 6


  5.   Account.......................................... 8


  6.   Payment of Account - General Provisions..........10


  7.   Supplemental Payments............................13


  8.   Administration...................................15


  9.   Miscellaneous....................................16


  10.  Termination or Amendment.........................18


  11.  Effective Date...................................19
<PAGE>
 
                                     PP&L
                      OFFICERS DEFERRED COMPENSATION PLAN
                      -----------------------------------

1.   Purpose.  The purpose of this Officers Deferred Compensation Plan is to
     provide certain executive officers of PP&L, Inc. an additional means to
     increase their incomes after retirement or disability, and in order to meet
     other important personal and financial needs.

                                      -1-
<PAGE>
 
2.   DEFINITIONS.

     (a) "Account" means the account of Deferred Cash Compensation and Deferred
         Cash Awards established solely as a bookkeeping entry and maintained
         under paragraph 5 of this Plan.

     (b) "Cash Award" means any incentive awards payable under the executive
         incentive awards program prior to any deferrals under this Plan.

     (c) "Cash Compensation" means base salary prior to any deferrals to this
         Plan or the Deferred Savings Plan.

     (d) "Change in Control" - means any one of the following events:  (a) any
         change in control of Resources of a nature that would be required to be
         reported in response to Item 1(a) of Form 8-K under the Securities
         Exchange Act of 1934, as amended (the "Exchange Act"); (b) during any
         period of two consecutive years, individuals who at the beginning of
         such period constitute the Board of Resources cease for any reason to
         constitute at least a majority thereof unless the election, or the
         nomination for election, of each new director was approved by a vote of
         at least two-thirds of the directors then still in office who were
         directors at the beginning of such period; (c) any person (within the
         meaning of section 13(d) of the Exchange Act) becomes the beneficial
         owner, directly or indirectly, of securities of Resources representing
         20% or more of the combined voting power of Resources' then outstanding
         securities entitled to vote generally in the election of directors; (d)
         the approval by the 

                                      -2-
<PAGE>
 
         stockholders of Resources of any merger or consolidation of Resources
         with any other corporation or the sale or other disposition of all or
         substantially all of the assets of Resources to any other person or
         persons unless, after giving effect thereto, (1) holders of Resources'
         then outstanding securities entitled to vote generally in the election
         of directors will own a majority of the outstanding stock entitled to
         vote generally in the election of directors of the continuing,
         surviving or transferee corporation or any parent (within the meaning
         of Rule 12b-2 under the Exchange Act) thereof and (2) the incumbent
         members of the Board of Resources as constituted immediately prior
         thereto shall constitute at least a majority of the directors of the
         continuing, surviving or transferee corporation and any parent thereof;
         or (e) the Board of Resources adopts a resolution to the effect that a
         "Change in Control" has occurred or is anticipated to occur.

     (e) "PP&L" means PP&L, Inc.

     (f) "Deferred Cash Award" means the Cash Award of a Participant deferred
         under paragraph 4 of this Plan.

     (g) "Deferred Cash Compensation" means the Cash Compensation of a
         Participant deferred under paragraph 4 of this Plan.

     (h) "Deferred Savings Plan" means the PP&L Deferred Savings Plan.

     (i) "EBPB" means Employee Benefit Plan Board, the members of which are
         appointed by the Board of Directors of PP&L.

                                      -3-
<PAGE>
 
     (j) "ESOP" means the PP&L Employee Stock Ownership Plan.

     (k) "Participant" means an eligible officer of PP&L who elects to defer
         Cash Compensation and/or Cash Awards under this Plan.

     (l) "Plan" means this Officers Deferred Compensation Plan as set forth
         herein and as hereafter amended from time to time.

     (m) PP&L "PP&L Resources" shall mean PP&L Resources, Inc.

     (n) "Retirement Plan" means the PP&L Retirement Plan.

     (o) "Total Amount Payable" means the amount credited to a Participant's
         Account plus interest.

The masculine pronoun shall be deemed to include the feminine and the singular
to include the plural unless a different meaning is plainly required by the
context.

                                      -4-
<PAGE>
 
3.   ELIGIBILITY.  All officers of PP&L who are or become officers in Salary
     Grades I through IV shall be eligible to participate in this Plan as of the
     later of September 1, 1985 or the effective date of first election to a
     position within said Salary Grades.

                                      -5-
<PAGE>
 
4.   DEFERRED CASH COMPENSATION AND DEFERRED CASH AWARDS.

     (a) Participant shall have the right to elect to have all, or a portion, of
         his Cash Compensation in excess of $20,000 deferred hereunder.

     (b) Participant shall have the right to elect to have all, or a portion, of
         his Cash Awards deferred hereunder.

     (c) Any election to defer future Cash Compensation and/or Cash Awards for
         the first calendar year that Participant is eligible to participate in
         this Plan shall be made by the Participant in writing by the thirtieth
         (30th) day following the date on which the Participant is first
         eligible to participate by filing with the EBPB the appropriate
         election form.  Any such election shall be limited to Cash Compensation
         and Cash Awards earned after the date of the election.

     (d) Any election to defer or change the amount of Cash Compensation and/or
         Cash Awards to be deferred for any subsequent calendar year after the
         first calendar year of eligibility may be made by Participant not later
         than December 31 of the year preceding such calendar year by filing
         with the EBPB an election form; provided, however, that an election
         once made will be presumed to continue unless changed or revoked by
         Participant.

     (e) Participant may revoke his election to defer Cash Compensation and/or
         Cash Awards at any time by so notifying the EBPB in writing not later
         than December 31 of the year preceding the year for which the
         revocation will be effective.  For any subsequent calendar year,

                                      -6-
<PAGE>
 
         Participant may resume his election to defer if he files with the EBPB
         an election form not later than December 31 of the year preceding such
         subsequent calendar year.

     (f) The deferral of Cash Compensation shall be made in equal amounts in
         each bi-weekly pay period during the calendar year in which such Cash
         Compensation is to be earned, unless the election specifies otherwise.

     (g) Any election is filed with the EBPB and will be effective when actually
         received by PP&L's Payroll Section.

     (h) Such an election, once made, will be irrevocable as to Cash
         Compensation and Cash Awards already deferred.

     (i) Deferred Cash Compensation and Deferred Cash Awards shall be subject to
         the rules set forth in this Plan, and each Participant shall have the
         right to receive cash payments on account of Deferred Cash Compensation
         and Deferred Cash Awards only in the amounts and under the
         circumstances hereinafter set forth.

                                      -7-
<PAGE>
 
5.   ACCOUNT.  PP&L shall maintain an Account in the name of each Participant.
     Such Account shall be maintained as follows:

     (a) PP&L shall credit the Deferred Cash Compensation to Participant's
         Account as of the same day on which the last Cash Compensation for the
         month would have been paid to said Participant.

     (b) PP&L shall credit the Deferred Cash Award to Participant's Account as
         of the same day that all Cash Awards not being deferred are paid.

     (c) Within sixty (60) days of the close of any calendar year during which
         Participant authorized salary reduction contributions to the Deferred
         Savings Plan, PP&L will credit Participant's Account with the
         difference, if any, between PP&L matching contributions Participant
         would have received for the prior calendar year under the Deferred
         Savings Plan if Participant had participated in the Deferred Savings
         Plan based on Participant's Cash Compensation and the actual PP&L
         matching contributions allocated to Participant's Account in the
         Deferred Savings Plan for the prior calendar year.  Participant will
         forfeit any such allocation to his Account if Participant terminates
         employment with PP&L at a time when PP&L matching contributions under
         the Deferred Savings Plan are not vested under that plan.

     (d) At the time when any allocations are made under ESOP for contributions
         under Article IV of that plan, PP&L will credit Participant's Account
         with an amount equal to the difference, if any, between the value of
         PP&L 

                                      -8-
<PAGE>
 
         contributions that would have been made under ESOP based on
         Participant's Cash Compensation and the value of PP&L contributions
         actually made for Participant under ESOP.

     (e) Participant's Account shall be credited with interest quarterly based
         on a rate of interest substantially equivalent to that applied on
         account balances in the Blended Interest Rate Fund in the Deferred
         Savings Plan or such other comparable fund as may be selected by the
         EBPB.

                                      -9-
<PAGE>
 
6.   PAYMENT OF ACCOUNT  GENERAL PROVISIONS

     (a) The Total Amount Payable shall be payable to Participant:

          (i) if Participant becomes totally disabled while employed by PP&L or
              an Affiliated Company, as determined by the EBPB in its
              discretion;

         (ii) if Participant retires from PP&L and all Affiliated Companies
              under the Retirement Plan; or
 
        (iii) if Participant resigns or otherwise ceases employment with PP&L
              and all Affiliated Companies;

         within thirty (30) days of such event or in the January of the calendar
         year following such event, as elected by Participant.  Such election
         must be made before the applicable Cash Compensation and/or Cash Award
         is deferred and may not be changed with respect to Cash Compensation
         and/or Cash Award once it has been deferred.  If Participant has made
         no election, payments will commence within thirty (30) days after
         cessation of employment.

     (b)  (i) The Total Amount Payable shall be paid to Participant in a single
              sum or in annual installments up to a maximum of fifteen (15)
              years, as elected by the Participant. Such election must be made
              before the applicable Cash Compensation and/or Cash Award is
              deferred and may not be changed with respect to Cash Compensation
              and/or Cash Award once it has been deferred.

         (ii) All annual installments shall, except for the final payment, be
              not 

                                      -10-
<PAGE>
 
              less than $5,000. To the extent necessary, the number of
              annual installments may be reduced to insure that annual
              installments are at least $5,000.

        (iii) The amount of each annual installment shall be determined by
              dividing the Total Amount Payable less any payments already made
              to Participant by the remaining number of annual installments to
              be made (i.e., a 10 year payout shall pay 1/10 of the Total Amount
              Payable as the first installment, 1/9 as the second annual
              installment, etc.).

     (c)  (i) If Participant dies while employed by PP&L or an Affiliated
              Company or before all installments have been paid under paragraph
              5(b), payments shall be made within 30 days after Participant's
              death to the beneficiary designated in writing by Participant.
              Participant shall have a continuing power to designate a new
              beneficiary in the event of his death at any time prior to his
              death by written instrument delivered by Participant to the EBPB
              without the consent or approval of any person theretofore named as
              his beneficiary. In the event the designated beneficiary does not
              survive Participant, payment will be made to an alternate
              beneficiary designated in writing by Participant. If no such
              designation is in effect at the time of death of Participant, or
              if no person so designated shall survive Participant, payment
              shall be made to Participant's estate.

                                      -11-
<PAGE>
 
         (ii) Payments made to Participant's designated beneficiary will be made
              at the times and in the amounts as if Participant were living
              based on Participant's elected form of distribution; provided,
              however, if payments are to be made to Participant's estate,
              payment will be made in a single sum.

     (d) So long as there is a balance in Participant's Account, the balance
         shall be credited with interest pursuant to paragraph 5(d).  For any
         installment or other payment from the Account, interest shall accrue up
         to the last day of the month prior to that payment to Participant or
         his beneficiary.

     (e) The EBPB may determine, in its sole discretion, that the Total Amount
         Payable shall be paid to a Participant or his beneficiary in different
         amounts or at different times than provided under this Plan if, in the
         opinion of the EBPB, it would be necessary as the result of a personal
         emergency or hardship which results in a severe and immediate financial
         burden to the Participant in which case payment shall be made only to
         the extent necessary to alleviate the Participant's hardship.

                                      -12-
<PAGE>
 
7.   SUPPLEMENTAL PAYMENTS.

     (a) Upon his retirement under the Retirement Plan or PP&L's Supplemental
         Executive Retirement Plan or upon his death while still employed by
         PP&L or an Affiliated Company, Participant and/or his beneficiaries
         shall be paid a monthly supplemental retirement benefit (or
         supplemental pre-retirement spouse's annuity, as the case may be) equal
         to the difference, if any, between the benefit which would have been
         payable to him under such plan if the Participant's Deferred Cash
         Compensation had been included in the Participant's compensation for
         such plan and the benefit actually payable to the Participant and/or
         his beneficiaries thereunder.  Such supplemental retirement benefit
         shall be payable in accordance with all the terms and conditions
         applicable to the Participant's or his beneficiary's benefit under the
         Retirement Plan, including any optional form of payment.  If such
         supplemental retirement payments would be less than one hundred dollars
         ($100) per month, the EBPB, in its discretion, may elect to make such
         monthly supplemental retirement payments in such installments as the
         EBPB may determine or in a single lump-sum payment.  Notwithstanding
         the foregoing, in the event that Participant's benefits under the
         Retirement Plan are subject to a qualified domestic relations order,
         any supplemental retirement benefits payable under this paragraph shall
         be calculated and made without regard to such order.

                                      -13-
<PAGE>
 
     (b) Any Participant who terminates employment with PP&L (by retirement or
         otherwise) under circumstances where PP&L has requested or demanded
         such termination of employment for proper cause (including, without
         limitation, theft, fraud, breach of any fiduciary duty,
         misrepresentation, deceit, illegal or criminal act(s)) shall have no
         right to receive any payment from this Plan under paragraph 7(a).  The
         preceding sentence shall not apply to any Participant who terminates
         employment with PP&L within three (3) years after the effective date of
         a Change in Control.

                                      -14-
<PAGE>
 
8.   ADMINISTRATION.  The Employee Benefit Plan Board shall have the
     discretionary authority and final right to interpret, construe and make
     benefit determinations (including eligibility and amount) under the Plan.
     The decisions of the Employee Benefit Plan Board are final and conclusive
     for all purposes.  If one or more members of the EBPB are disqualified by
     personal interest from taking part in a particular decision, the remaining
     member or members of the EBPB (although less than a quorum) shall have full
     power to act on the matter.

                                      -15-
<PAGE>
 
9.   MISCELLANEOUS.

     (a) If the person to receive payment is a minor, or is deemed by the EBPB
         or is adjudged to be legally incompetent, the payments shall be made to
         the duly appointed guardian or committee of such minor or incompetent,
         or they may be made to such person or persons who the EBPB believes are
         caring for or supporting such minors or incompetents.

     (b) Nothing in this Plan shall confer any right on any Participant to
         continue in PP&L's employ or to receive compensation, nor shall
         anything in this Plan affect in any way the right of PP&L to terminate
         any Participant's employment at any time.

     (c) The expenses of administration hereunder shall be borne by PP&L.

     (d) This Plan shall be construed, administered and enforced according to
         the laws of the Commonwealth of Pennsylvania.

     (e) All payments from this Plan shall be made from the general assets of
         PP&L.  This Plan shall not require PP&L to set aside, segregate,
         earmark, pay into trust or special account or otherwise restrict the
         use of its assets in the operation of the business.  Participant shall
         have no greater right or status than as an unsecured general creditor
         of PP&L with respect to any amounts owed to Participant hereunder.

     (f) All payments to persons entitled to benefits hereunder shall be made to
         such persons and shall not be grantable, transferable, pledged or
         otherwise assignable in anticipation of payment thereof, or subject to

                                      -16-
<PAGE>
 
         attachment, alienation, garnishment, levy, execution or other legal or
         equitable process in whole or in part, by the voluntary or involuntary
         acts of any such persons, or by operation of law, and shall not be
         liable or taken for any obligation of such person.  PP&L will observe
         the terms of the Plan unless and until ordered to do otherwise by a
         state or federal court.  As a condition of participation, a Participant
         agrees to hold PP&L harmless from any claim that arises out of PP&L's
         obeying any such order whether such order effects a judgment of such
         court or is issued to enforce a judgment or order of another court.

     (g) Participant's benefits under group life insurance, accidental death and
         disability, short term disability, long term disability and other
         similar employee benefit plans maintained by PP&L will be provided
         based on Cash Compensation to Participant.

                                      -17-
<PAGE>
 
10.  TERMINATION OR AMENDMENT.  The Board of Directors may, in its discretion,
     terminate and amend this Plan from time to time.  In addition, the EBPB 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 significantly alter the benefit design or eligibility requirements of
     the Plan.  No termination or amendment shall (without Participant's
     consent) alter: a) Participant's right to payments of amounts previously
     credited to Participant's Account, which amounts shall continue to earn
     interest as provided for herein as though termination or amendment had not
     been effected, b) the amount or times of payment of such amounts which have
     commenced prior to the effective date of such termination or amendment, or
     c) the rights set forth in paragraph 5 to designate beneficiaries in the
     event of Participant's death or alter Participant's right to monthly
     supplemental payments under paragraph 7; provided, however, that no such
     consent may accelerate the Participant's payments.  Notwithstanding the
     foregoing, if PP&L is liquidated, the EBPB shall have the right to
     determine the Total Amount Payable and any monthly supplemental payments
     payable under paragraph 7 to Participant, and to cause the amount so
     determined to be paid in one or more installments or upon such other terms
     and conditions and at such other time (not beyond the time provided for
     herein) as the EBPB determines to be just and equitable.  Any
     determinations made pursuant to the preceding sentence shall be consistent
     as to all Participants.

                                      -18-
<PAGE>
 
11.  EFFECTIVE DATE.  The effective date of this Plan is January 1, 1998.
     Executed this ______ day of _______________, 1998.

                                PP&L, INC.


                                By:
                                   ----------------------------------
                                   John M. Chappelear
                                   Vice President - Investments &
                                   Pensions

                                      -19-

<PAGE>
 
                                                                 Exhibit 10(m)-2
                                AMENDMENT NO. 1

                                      TO

                   PP&L OFFICERS DEFERRED COMPENSATION PLAN

     WHEREAS, PP&L, Inc. ("Company") has adopted the PP&L Officers Deferred

Compensation Plan ("Plan") effective July 1, 1985; and

     WHEREAS, the Plan was amended and restated effective January 1, 1999; and

     WHEREAS, the Company desires to further amend the Plan;

     NOW, THEREFORE, the Plan is hereby amended as follows:

 I.  Effective September 14, 1998, Articles 1, 2, 3, 5, 7, 9 and 10 are amended
     to read:

1.   PURPOSE.  The purpose of this Officers Deferred Compensation Plan is to
     provide certain executive officers of PP&L, Inc. and other Participating
     Companies an additional means to increase their incomes after retirement or
     disability, and in order to meet other important personal and financial
     needs.

2.   DEFINITIONS.

     (a) "ACCOUNT" means the account of Deferred Cash Compensation and Deferred
         Cash Awards established solely as a bookkeeping entry and maintained
         under paragraph 5 of this Plan.

     (b) "AFFILIATED COMPANY" OR "AFFILIATED COMPANIES" shall mean any parent or
         subsidiaries of PP&L (or companies under common control with PP&L)
         which are members of the same controlled group of corporations (within
         the meaning of section 1563(a) of the Code) as PP&L.

     (c) "CASH AWARD" means any incentive awards payable under the executive
         incentive awards program prior to any deferrals under this Plan.

     (d) "CASH COMPENSATION" means base salary prior to any deferrals to this
         Plan or the Deferred Savings Plan.

     (e) "CHANGE IN CONTROL" means any one of the following events:  (a) any

                                      -1-
<PAGE>
 
         change in control of Resources of a nature that would be required to be
         reported in response to Item 1(a) of Form 8-K under the Securities
         Exchange Act of 1934, as amended (the "Exchange Act"); (b) during any
         period of two consecutive years, individuals who at the beginning of
         such period constitute the Board of Resources cease for any reason to
         constitute at least a majority thereof unless the election, or the
         nomination for election, of each new director was approved by a vote of
         at least two-thirds of the directors then still in office who were
         directors at the beginning of such period; (c) any person (within the
         meaning of section 13(d) of the Exchange Act) becomes the beneficial
         owner, directly or indirectly, of securities of Resources representing
         20% or more of the combined voting power of Resources' then outstanding
         securities entitled to vote generally in the election of directors; (d)
         the approval by the stockholders of Resources of any merger or
         consolidation of Resources with any other corporation or the sale or
         other disposition of all or substantially all of the assets of
         Resources to any other person or persons unless, after giving effect
         thereto, (1) holders of Resources' then outstanding securities entitled
         to vote generally in the election of directors will own a majority of
         the outstanding stock entitled to vote generally in the election of
         directors of the continuing, surviving or transferee corporation or any
         parent (within the meaning of Rule 12b-2 under the Exchange Act)
         thereof and (2) the incumbent members of the Board of Resources as
         constituted immediately prior thereto shall constitute at least a
         majority of the directors of the continuing, surviving or transferee
         corporation and any parent thereof; or (e) the Board of Resources
         adopts a resolution to the effect that a "Change in Control" has
         occurred or is anticipated to occur.

     (f) "DEFERRED CASH AWARD" means the Cash Award of a Participant deferred
         under paragraph 4 of this Plan.

     (g) "DEFERRED CASH COMPENSATION" means the Cash Compensation of a
         Participant deferred under paragraph 4 of this Plan.

     (h) "DEFERRED SAVINGS PLAN" means the PP&L Deferred Savings Plan.

     (i) "EBPB" means Employee Benefit Plan Board, the members of which are
         appointed by the Board of Directors of PP&L.

     (j) "ESOP" means the PP&L Employee Stock Ownership Plan.

     (k) "PARTICIPANT" means an eligible officer of a Participating Company who
         elects to defer Cash Compensation and/or Cash Awards under this Plan.

                                      -2-
<PAGE>
 
     (l) "PARTICIPATING COMPANY" means PP&L, PP&L EnergyPlus Co., and each other
         Affiliated Company that is designated by the Board of Directors of PP&L
         to adopt this Plan by action of its board of directors or other
         governing body.

     (m) "PLAN" means this Officers Deferred Compensation Plan as set forth
         herein and as hereafter amended from time to time.

     (n) "PP&L" means PP&L, Inc.

     (o) "PP&L RESOURCES" shall mean PP&L Resources, Inc.

     (p) "RETIREMENT PLAN" means the PP&L Retirement Plan.

     (q) "TOTAL AMOUNT PAYABLE" means the amount credited to a Participant's
         Account plus interest.

The masculine pronoun shall be deemed to include the feminine and the singular
to include the plural unless a different meaning is plainly required by the
context.

3.   ELIGIBILITY.  All officers of PP&L in PP&L Salary Grades I through IV and
     any officer of a Participating Company who is designated as eligible in a
     resolution adopted by the board of directors of such Participating Company
     shall be eligible to participate in this Plan.

5.   ACCOUNT.  PP&L shall maintain an Account in the name of each Participant.
     Such Account shall be maintained as follows:

     (c) Within sixty (60) days of the close of any calendar year during which
         Participant authorized salary reduction contributions to the Deferred
         Savings Plan, PP&L will credit Participant's Account with the
         difference, if any, between the Participating Company matching
         contributions Participant would have received for the prior calendar
         year under the Deferred Savings Plan if Participant had participated in
         the Deferred Savings Plan based on Participant's Cash Compensation and
         the actual Participating Company matching contributions allocated to
         Participant's Account in the Deferred Savings Plan for the prior
         calendar year.  Participant will forfeit any such allocation to his
         Account if Participant terminates employment with all Participating
         Companies at a time when Participating Company matching contributions
         under the Deferred Savings Plan are not vested under that plan.

                                      -3-
<PAGE>
 
     (d) At the time when any allocations are made under ESOP for contributions
         under Article IV of that plan, PP&L will credit Participant's Account
         with an amount equal to the difference, if any, between the value of
         PP&L contributions that would have been made under ESOP based on
         Participant's Cash Compensation and the value of PP&L contributions
         actually made for Participant under ESOP.

7.   SUPPLEMENTAL PAYMENTS.

     (b) Any Participant who terminates employment with PP&L or an Affiliated
         Company (by retirement or otherwise) under circumstances where PP&L or
         an Affiliated Company has requested or demanded such termination of
         employment for proper cause (including, without limitation, theft,
         fraud, breach of any fiduciary duty, misrepresentation, deceit, illegal
         or criminal act(s)) shall have no right to receive any payment from
         this Plan under paragraph 7(a).  The preceding sentence shall not apply
         to any Participant who terminates employment with PP&L or an Affiliated
         Company within three (3) years after the effective date of a Change in
         Control.

9.   MISCELLANEOUS.

     (a) If the person to receive payment is a minor, or is deemed by the EBPB
         or is adjudged to be legally incompetent, the payments shall be made to
         the duly appointed guardian or committee of such minor or incompetent,
         or they may be made to such person or persons who the EBPB believes are
         caring for or supporting such minors or incompetents.

     (b) Nothing in this Plan shall confer any right on any Participant to
         continue in PP&L's or in an Affiliated Company's employ or to receive
         compensation, nor shall anything in this Plan affect in any way the
         right of PP&L or an Affiliated Company to terminate any Participant's
         employment at any time.

     (c) The expenses of administration hereunder shall be borne by PP&L.

     (d) This Plan shall be construed, administered and enforced according to
         the laws of the Commonwealth of Pennsylvania.

     (e) All payments from this Plan shall be made from the general assets of
         PP&L or an Affiliated Company.  This Plan shall not require PP&L or an
         Affiliated Company to set aside, segregate, earmark, pay into trust or
         special account or otherwise restrict the use of its assets in the
         operation of the business.  Participant shall have no greater right or
         status than as 

                                      -4-
<PAGE>
 
         an unsecured general creditor of PP&L or an Affiliated Company with
         respect to any amounts owed to Participant hereunder.

10.  TERMINATION OR AMENDMENT.  The Board of Directors may, in its discretion,
     terminate and amend this Plan from time to time.  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.  No
     termination or amendment shall (without Participant's consent) alter:  a)
     Participant's right to payments of amounts previously credited to
     Participant's Account, which amounts shall continue to earn interest as
     provided for herein as though termination or amendment had not been
     effected, b) the amount or times of payment of such amounts which have
     commenced prior to the effective date of such termination or amendment, or
     c) the rights set forth in paragraph 5 to designate beneficiaries in the
     event of Participant's death or alter Participant's right to monthly
     supplemental payments under paragraph 7; provided, however, that no such
     consent may accelerate the Participant's payments.  Notwithstanding the
     foregoing, if PP&L is liquidated, the EBPB shall have the right to
     determine the Total Amount Payable and any monthly supplemental payments
     payable under paragraph 7 to Participant, and to cause the amount so
     determined to be paid in one or more installments or upon such other terms
     and conditions and at such other time (not beyond the time provided for
     herein) as the EBPB determines to be just and equitable.  Any
     determinations made pursuant to the preceding sentence shall be consistent
     as to all Participants.

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
January, 1999.

                              PP&L, INC.


                              By:_______________________________
                                  John M. Chappelear
                                  Chairman
                                  Employee Benefit Plan Board

                                      -5-

<PAGE>
 
                                                                 Exhibit 10(n)-1

                                     PP&L, INC.

                     SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN


                               Amended and Restated
                            Effective as of January 1, 1998
<PAGE>
 
                                   PP&L, INC.

                     SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

                 AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1998

                               TABLE OF CONTENTS
                               -----------------
<TABLE>
<CAPTION>
 
ARTICLE                                                         PAGE
- ---------                                                       ----
<S>        <C>                                                  <C>
 
  1.       Purpose.............................................   
                                                               
  2.       Definitions.........................................   
                                                               
  3.       Entitlement to Benefits.............................   
 
  4.       Amount of Supplemental Executive Retirement Benefit.   
                                                              
  5.       Time of Payment.....................................   
                                                               
  6.       Method of Payment...................................   
 
  7.       Death Benefit.......................................   
                                                              
  8.       Administration......................................   
 
  9.       Miscellaneous ......................................   
 
  10.      Termination or Amendment............................   
 
  11.      Effective Date......................................   
 
           Appendix A..........................................   
</TABLE>
<PAGE>
 
                                   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, PP&L desires at this time to amend and restate the Plan;

    NOW, THEREFORE, effective as of January 1, 1998, the Plan is continued,
amended and restated as hereinafter set forth:

1 . Purpose. The purpose of this Supplemental Executive Retirement Plan is to
    provide certain executive officers of PP&L additional retirement income so
    that total retirement income for key officers is competitive with other
    employers and in order to facilitate early retirement from key positions
    carrying the most important responsibilities.
<PAGE>
 
2.   Definitions.

     (a)  "ACTUARIAL EQUIVALENT" means having or that which has equal actuarial
          value to the Supplemental Executive Retirement Benefit based on the

          (1)  For purposes of the annuity forms of benefit described in Article
               6, a Participant's SERB as calculated under Article 4 shall be
               converted to an optional annuity form of benefit by using the
               assumptions and factors described in Schedule A of the Retirement
               Plan.

          (2)  For purposes of the single sum form of benefit described in
               Article 6, the Participant's SERB as calculated under Article 4,
               shall be converted to a single sum by using the following
               factors:

               (A)  An interest rate equal to the immediate annuity rate that
                    would be used by the Pension Benefit Guaranty Corporation
                    for purposes of determining a lump sum distribution upon
                    plan termination, as in effect for the month in which the
                    Participant's benefit commencement date occurs.

               (B)  A mortality rate based on the 1983 GAM Unisex Table.

     (b)  "Affiliated Company" or "Affiliated Companies" shall mean any parent
          or subsidiaries of PP&L (or companies under common control with PP&L)
          which are members of the same controlled group of corporations (within
          the meaning of section 1563(a) of the Code) as PP&L.

     (c) "Board" means the Board of Directors of PP&L, Inc.

     (d) "Cause" for Participant's Termination of Employment by PP&L means:

          (1) and continued failure by Participant to substantially perform
              Participant's duties with PP&L or an Affiliated Company (other
              than any such failure resulting from Participant's incapacity due
              to physical or mental illness or, if applicable, any such actual
              or anticipated failure after the issuance of any "Notice of
              Termination for Good Reason" by the Participant pursuant to any
              severance agreement between Participant and PP&L or an Affiliated
              Company) after a written demand for substantial performance is
              delivered to Participant by the Board, which demand specifically
              identifies the manner in which the Board believes that Participant
              has not substantially performed Participant's duties, or

          (2) the willful engaging by Participant in conduct which is
              demonstrably and materially injurious to PP&L or an Affiliated
              Company, monetarily or otherwise.

          (3) For purposes of Subsections (1) and (2) of this definition, (A) no
              act, or failure to act, on Participant's part shall be deemed
              "willful" unless done, or omitted to be done, by Participant not
              in good faith and without reasonable belief that Participant's
              act, or failure to act, was in the best interest of PP&L or the
              Affiliated Company, and (B) in the event of a dispute concerning
              the application of this provision, no claim by PP&L or an
              Affiliated Company that Cause exists shall be given effect unless
              PP&L or the 
<PAGE>
 
              Affiliated Company establishes to the Board by clear and
              convincing evidence that Cause exists.

     (e) "CHANGE IN CONTROL" means the occurrence of any one of the following
events:

          (1) any change in the control of Resources of a nature that would be
              required to be reported in response to Item 1(a) of Form 8-K under
              the Exchange Act;

          (2) during any period of not more than two consecutive years,
              individuals who at the beginning of such period constitute the
              Board of Directors of Resources and any new director (other than a
              director designated by a Person who has entered into an agreement
              with Resources to effect a transaction described in Paragraph (1),
              (3) or (4) of this definition) whose election by the Board of
              Directors of Resources or nomination for election by the
              shareowners of Resources was approved or recommended by a vote of
              at least two-thirds (2/3) of the directors then still in office
              who either were directors at the beginning of the period or whose
              election or nomination for election was previously so approved or
              recommended, cease for any reason to constitute at least a
              majority thereof;

          (3) any Person becomes the beneficial owner (within the meaning of
              Rule 13d-3 under the Exchange Act), directly or indirectly, of
              securities of Resources representing 20% or more of the combined
              voting power of Resources' then outstanding securities entitled to
              vote generally in the election of directors;

          (4) the approval by the shareowners of Resources of any merger or
              consolidation of Resources with any other corporation or a plan of
              complete liquidation of Resources or the sale or other disposition
              of all or substantially all of the assets of Resources to any
              other person or persons unless, after giving effect thereto, (A)
              holders of Resources' then outstanding securities entitled to vote
              generally in the election of directors will own a majority of the
              outstanding stock entitled to vote generally in the election of
              directors of the continuing, surviving or transferee corporation
              or any parent (within the meaning of Rule 12b-2 under the Exchange
              Act) thereof, and (B) the incumbent members of the Board of
              Directors of Resources as constituted immediately prior thereto
              shall constitute at least a majority of the directors of the
              continuing, surviving or transferee corporation and any parent
              thereof; or

          (5) the Board of Directors of Resources adopts a resolution to the
              effect that a "Change in Control" has occurred or is anticipated
              to occur.

(f)  "CHANGE IN CONTROL PARTICIPANT" means the following:

          (1) a Participant whose Termination of Employment occurs after a
              Change in Control and within 36 months after the month in which
              the Change in Control occurs, unless such Termination of
              Employment is (A) by PP&L or an Affiliated Company for Cause, (B)
              by reason of the Participant's death, Disability or Retirement, or
              (C) by the Participant without Good Reason, or

          (2) a Participant whose Termination of Employment occurs prior to a
              Change in Control (whether or not a Change in Control ever occurs)
              (A) at the request or direction of a 
<PAGE>
 
              Person who has entered into an agreement with Resources the
              consummation of which would constitute a Change in Control, or (B)
              at the Participant's initiative for Good Reason if the
              circumstance or event which constitutes Good Reason occurs at the
              direction of such Person or (C) the Participant's Termination of
              Employment is by PP&L or an Affiliated Company without Cause or is
              by the Participant for Good Reason, and such Termination of
              Employment or the circumstance or event which constitutes Good
              Reason is otherwise in connection with or in anticipation of a
              Change in Control (whether or not a Change in Control occurs). For
              purposes of any determination regarding the applicability of the
              immediately preceding sentence, any position taken by the
              Participant shall be presumed to be correct unless PP&L
              establishes to the Board by clear and convincing evidence that
              such position is not correct.

     (g)  "DISABILITY" shall be deemed the reason for a Participant's
          Termination of Employment by PP&L or an Affiliated Company, if, (1) as
          a result of the Participant's incapacity due to physical or mental
          illness, the Participant shall have been absent from the full-time
          performance of the Participant's duties with PP&L and all Affiliated
          Companies for a period of six consecutive months, and (2), if
          applicable, PP&L shall have given the Participant any "Notice of
          Termination for Disability" required by any severance agreement
          between the Participant and PP&L or an Affiliated Company, and, within
          thirty days after such "Notice of Termination," if any, is given, the
          Participant shall not have returned to the full-time performance of
          the Participant's duties.

     (h)  "DISPLACED PARTICIPANT" means a Participant who has a Termination of
          Employment after completing one or more Years of Vesting Service, and
          who qualifies for benefits pursuant to PP&L's Displaced Managers
          Policy (SPM 606).

     (i)  "EARLY RETIREMENT REDUCTION FACTOR" means the percentage that appears
          adjacent to the Participant's age below determined under the
          appropriate column.

          (1) Column (1) shall apply to any Retiree.

          (2) Column (2) shall apply to any Terminated Vested Participant.

          (3) Column (3) shall apply to any Change in Control Participant.
              Notwithstanding anything in this Section to the contrary, a
              Participant who meets the definition of a Retiree, a Terminated
              Vested Participant and/or a Displaced Participant, who also meets
              the definition of a Change in Control Participant, shall be
              treated as a Change in Control Participant for purposes of this
              Section.

          (4) Column (4) shall apply to any Displaced Participant.
              Notwithstanding Subsection (1) or (2), a Participant who meets the
              definition of a Retiree or a Terminated Vested Participant, but
              not the definition of a Change in Control Participant, who also
              meets   the definition of a Displaced Participant, shall be
              treated as a Displaced Participant for purposes of this Section.
<PAGE>
 
                 Percentage of Benefit Received
                 ------------------------------
<TABLE>
<CAPTION>
 
<S>                     <C>       <C>          <C>           <C>
                          (1)        (2)           (3)           (4)
       Age When                                  Change in
       Benefits                   Terminated       Control   Displaced
        Start           Retiree     Vested     Participant   Participant
- ----------------------  -------   ----------           ---   -----------
 
          60                100          100           100           100
          59                 95           90            95           100
          58                 90           80            90           100
          57                 85           70            85           100
          56                 80           60            80           100
          55                 75           50            75           100
          54                 70          N/A            70           100
          53                 65          N/A            65           100
          52                 60          N/A            60           100
          51                 55          N/A            55           100
          50                 50          N/A            50           100
          49 or younger N/A              N/A           N/A           N/A
</TABLE>
     (j)  "EBPB" means the Employee Benefit Plan Board, the members of which are
          appointed by the Board.

     (k)  "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
          from time to time.

     (I)  "Good Reason" for Termination of Employment by a Participant means the
          occurrence (without the Participant's express written consent) after a
          Change in Control, or prior to a Change in Control under the
          circumstances described in paragraphs (B) and (C) of Section (2) of
          the definition of "Change in Control Participant" (treating all
          references in paragraphs (1) through (7) below to a "Change in
          Control" as references to a "Potential Change in Control"), of any one
          of the following acts by PP&L or an Affiliated Company, or failures by
          PP&L or an Affiliated Company to act:

          (1) the assignment to the Participant of any duties inconsistent with
              the Participant's status as an executive officer or key employee
              of PP&L or a substantial adverse alteration in the nature or
              status of the Participant's responsibilities from those in effect
              immediately prior to a Change in Control;

          (2) a reduction by PP&L or an Affiliated Company of the Participant's
              annual base salary as in effect on the effective date of this
              amended and restated Plan, or as the same may be increased from
              time to time, except for across-the-board decreases uniformly
              affecting management, key employees and salaried employees of PP&L
              or the Affiliated Company, or the business unit in which
              Participant is then employed,

          (3) the relocation of the Participant's principal work location to a
              location more than 30 miles from the vicinity of such work
              location immediately prior to a Change in Control or PP&L's or an
              Affiliated Company's requiring the Participant to be based
              anywhere other than such principal place of employment (or
              permitted relocation thereof) except 
<PAGE>
 
              for required travel on PP&L's or an Affiliated Company's business
              to an extent substantially consistent with the Participant's
              present business travel obligations;

          (4) the failure by PP&L or an Affiliated Company to pay to the
              Participant any portion of the Participant's current compensation
              or to pay to the Participant any portion of an installment of
              deferred compensation under any deferred compensation program of
              PP&L or an Affiliated Company, within seven days of the date such
              compensation is due, except for across-the-board compensation
              deferrals uniformly affecting management, key employees and
              salaried employees of PP&L or the Affiliated Company, or the
              business unit in which Participant is then employed;

          (5) the failure by PP&L or an Affiliated Company to continue in effect
              any compensation or benefit plan in which the Participant
              participates immediately prior to a Change in Control which is
              material to the Participant's total compensation, or any
              substitute plans adopted prior to a Change in Control, unless an
              equitable arrangement (embodied in an ongoing substitute or
              alternative plan) has been made with respect to such plan, or the
              failure by PP&L or an Affiliated Company to continue the
              Participant's participation therein (or in such substitute or
              alternative plan) on a basis not materially less favorable, both
              in terms of the amount or timing of payment of benefits provided
              and the level of the Participant's participation relative to other
              participants, as existed immediately prior to the Change in
              Control, or

          (6) the failure by PP&L or an Affiliated Company to continue to
              provide the Participant with benefits substantially similar to
              those enjoyed by the Participant under any of PP&L's pension,
              savings, life insurance, medical, health and accident, or
              disability plans in which the Participant was participating
              immediately prior to a Change in Control, except for across-the-
              board changes to any such plans uniformly affecting all
              participants in such plans, the taking of any other action by PP&L
              or an Affiliated Company which would directly or indirectly
              materially reduce any of such benefits or deprive the Participant
              of any material fringe benefit enjoyed by the Participant at the
              time of the Change in Control, or the failure by PP&L or an
              Affiliated Company to provide the Participant with the number of
              paid vacation days to which the Participant is entitled on the
              basis of years of service with PP&L or an Affiliated Company in
              accordance with PP&L's normal vacation policy at the time of the
              Change in Control; or

          (7) any purported termination of the Participant's employment which is
              not effected pursuant to any "Notice of Termination" required by
              any severance agreement between the Participant and PP&L or an
              Affiliated Company.

              The Participant's right to terminate his or her employment with
              PP&L for Good Reason shall not be affected by the Participant's
              incapacity due to physical or mental illness. The Participant's
              continued employment shall not constitute consent to, or a waiver
              of rights with respect to, any act or failure to act constituting
              Good Reason hereunder.

              For purposes of any determination regarding the existence of Good
              Reason, any claim by the Participant that Good Reason exists shall
              be presumed correct unless 
<PAGE>
 
              PP&L establishes to the Board by clear and convincing evidence
              that Good Reason does exist.

     (m)  "OFFICERS DEFERRED COMPENSATION PLAN" means the PP&L Officers Deferred
          Compensation Plan, as amended from time to time.

     (n)  "PARTICIPANT" means an eligible officer or former officer of PP&L
          entitled to receive benefits under Article 3 of this Plan.

     (o)  "PERSON" shall have the meaning given in section 3(a)(9) of the
          Exchange Act, as modified and used in sections 13(d) and 14(d)
          thereof, however, a Person shall not include (1) Resources or any of
          its subsidiaries, (2) a trustee or other fiduciary holding securities
          under an employee benefit plan of Resources or any of its
          subsidiaries, (3) an underwriter temporarily holding securities
          pursuant to an offering of such securities, or (4) a corporation
          owned, directly or indirectly, by the shareowners of Resources in
          substantially the same proportions as their ownership of stock of
          Resources.

     (p)  "PLAN" means this Supplemental Executive Retirement Plan, as amended
          from time to time.

     (q)  "POTENTIAL CHANGE IN CONTROL" shall be deemed to have occurred if the
          conditions set forth in any one of the following paragraphs shall have
          been satisfied:

          (1) Resources enters into an agreement, the consummation of which
              would result in the occurrence of a Change in Control;

          (2) any Person publicly announces an intention to take or to consider
              taking actions which if consummated would constitute a Change in
              Control;

          (3) any Person is or becomes the beneficial owner (within the meaning
              of Rule 13d-3 under the Exchange Act), directly or indirectly, of
              securities of Resources representing 5% or more of the combined
              voting power of Resources' then outstanding securities entitled to
              vote generally in the election of directors; or

          (4) the Board of Resources adopts a resolution to the effect that, for
              purposes of this Plan, a Potential Change in Control has occurred.

     (r)  "PP&L" means PP&L, Inc.

     (s)  "Prior Plan" means any defined benefit plan, as defined in section
          3(35) of the Employee Retirement Income Security Act of 1974, as
          amended, which at any time satisfies the applicable requirements of
          section 401 (a) of the Internal Revenue Code of 1986, as amended,
          provided that (1) such plan has a sponsor other than PP&L, and (2)
          Participant was a participant in such plan prior to employment with
          PP&L.

     (t)  "Projected Years of Service" means the number of full or partial
          twelve-month periods beginning on the date on which Participant
          attains the age of 30 and ending on the date Participant ceases to be
          employed by PP&L.

     (u)  "Resources" shall mean PP&L Resources, Inc.
<PAGE>
 
     (v)  "Retiree" means a Participant who has a Termination of Employment
          after:

          (1) attaining age 55 and completing at least 10 Years of Service, or

          (2) attaining age 60, or

          (3) attaining age 50, completing at least 10 Years of Service, and
              whom the Compensation and Corporate Governance Committee of the
              Board, in its sole discretion, determines is entitled to an
              immediately payable SERB.

     (w)  "Retirement" shall be deemed the reason for a Participant's
          Termination of Employment if such employment is terminated in
          accordance with PP&L's retirement policy, including early retirement,
          generally appliG6619 to its salaried employees.

     (x)  "Retirement Plan" means the PP&L Retirement Plan, as amended from time
          to time.

     (y)  "SERB" means the Supplemental Executive Retirement Benefit payable
          under this Plan calculated under Article 4.

     (z)  "Supplemental Final Average Earnings" means the following:

          (1) Supplemental Final Average Earnings means twelve times the average
              of a Participant's "compensation" as defined in Paragraphs (A)
              through (C) below, from PP&L and/or an Affiliated Company, for the
              60 full consecutive months in the final 120 (or fewer) full
              consecutive months during which he is employed by PP&L and/or an
              Affiliated Company. For this purpose, non-consecutive months
              interrupted by periods in which the Participant receives no
              "compensation" shall be treated as consecutive. For purposes of
              this Section, "compensation" shall include the following:

              (A) the Participant's base salary from PP&L and/or any Affiliated
                  Company prior to any deferrals to the Officers Deferred
                  Compensation Plan or any other nonqualified deferred
                  compensation plan of an Affiliated Company or any Internal
                  Revenue Code section 401(k) plan by which Participant is
                  covered, plus

              (B) the value of any cash grants attributable to any month used in
                  the average, awarded to Participant pursuant to the executive
                  incentive awards program initially approved by the Board on
                  October 25, 1989 or any similar program maintained by an
                  Affiliated Company, plus

              (C) with respect only to Participants who were officers in
                  positions in PP&L Salary Groups I through IV on December 31,
                  1997, the value of any Restricted Stock (including any
                  dividends distributed on Restricted Stock during the
                  Restriction Period) granted to Participant under the Incentive
                  Compensation Plan attributable to any month prior to the dates
                  set forth in (1) and (11) below.

                  (I)  For purposes of the benefit formula in Subsection
                       4(b)(1), each month prior to January 1, 1998.
<PAGE>
 
                  (II) For purposes of the benefit formula in Subsection
                       4(b)(2), each month prior to January 1, 2002.

          (2) For the purposes of determining the Participant's "compensation"
              under Subsection (1) of this definition, the EBP13 will determine:

              (A) the value of any Restricted Stock under the Incentive
                  Compensation Plan as of the Restricted Stock's Date of Grant
                  (as defined by the Incentive Compensation Plan) and prorate
                  such value over the year for which the Restricted Stock was
                  granted;

              (B) the amount of any dividends distributed on Restricted Stock
                  during the Restriction Period and prorate such amount over the
                  period for which such dividends are paid; and

              (C) the amount of any cash grant awarded under the Participant
                  incentive awards program and prorate such amount over the year
                  for which the award was granted.

          (3) The Supplemental Final Average Earnings of a Displaced Participant
              who has less than 60 full consecutive months of employment shall
              be a reduced amount, equal to the difference of (A) minus (B),
              below.

              (A) (I) His total earnings as determined under Subsection (1) of
                      this definition for his entire period of employment with
                      PP&L and Affiliated Companies, divided by

                 (II) the number of years the Participant was employed by PP&L
                      and Affiliated Companies, including any fraction of a full
                      year thereof, calculated by dividing the total number of
                      full consecutive months of employment by 12.

              (B) (I) The amount determined in Paragraph (3)(A) immediately
                      above, multiplied by

                 (II) the Reduction Factor in Appendix A which corresponds with
                      the Participant's total number of full consecutive months
                      of employment with PP&L and Affiliated Companies.

     (aa) "Terminated Vested Participant" means a Participant:

          (1) who has a Termination of Employment after attaining age 50 but not
              age 55, and completing at least 10 Years of Service, and

          (2) whom the Board, in its sole discretion, does not determine is
              entitled to an immediately payable SERB.

     (bb) "Termination of Employment" means the Participant's termination of
          employment with PP&L and all Affiliated Companies.
<PAGE>
 
     (cc) "Years of Service" means the number of full and partial years used to
          calculate Participant's accrued benefit under the Retirement Plan, but
          (1) excluding years prior to Participant's attainment of age 30, and
          (2) including service with any Affiliated Company prior to the
          Participant's becoming an officer of PP&L, provided such service would
          otherwise be counted under the Retirement Plan, but excluding any such
          service with an Affiliated Company performed before the Affiliated
          Company became an Affiliated Company.

     (dd) "Year(s) of Vesting Service" means the number of full years used to
          calculate Participant's vested interest in his accrued benefit under
          the Retirement Plan, but excluding any such service with an Affiliated
          Company performed before the Affiliated Company became an Affiliated
          Company.
<PAGE>
 
3.   ENTITLEMENT TO BENEFITS.

     (a)  Any officer of PP&L who is in a position in PP&L Salary Group I
          through IV immediately prior to his Termination of Employment or the
          date of his transfer to an Affiliated Company shall be entitled to a
          SERB benefit if and only if he is either:

          (1) a Retiree,

          (2) a Terminated Vested Participant,

          (3) a Change in Control Participant, or

          (4) a Displaced Participant.

     (b)  Notwithstanding Section 3(a), any officer of PP&L who is in a position
          in PP&L Salary Group I through IV immediately prior to his Termination
          of Employment or the date of his transfer to an Affiliated Company and
          who terminates employment with PP&L on account of his death shall be
          entitled to the death benefit in Article 7 in lieu of any other
          benefit under the Plan.

     (c)  Notwithstanding Section 3(a) or (b), any Participant otherwise
          eligible for benefits shall forfeit any and all benefits under the
          Plan if such Participant's Termination of Employment is by PP&L or an
          Affiliated Company for Cause.

     (d)  All officers who are eligible for benefits under Section 3(a) and who
          are entitled to annual benefits of at least $44,000 in the aggregate
          from all PP&L and Affiliated Company-sponsored pension, profit-
          sharing, savings or deferred compensation plans, shall terminate their
          employment with PP&L and all Affiliated Companies no later than the
          first day of the month following attainment of age 65, unless PP&L or
          Affiliated Company requests that employment be extended for up to one
          year. In such event, Participant must retire at the end of the
          extension, unless PP&L or Affiliated Company requests additional
          extensions, at the end of which Participant must retire. Any
          Participant requested to serve beyond the mandatory retirement date
          may decline to do so without affecting his benefit status under this
          Plan or any other PP&L or Affiliated Company benefit program. Failure
          to accept benefits provided for in this Plan shall not affect the
          requirements of this paragraph.
<PAGE>
 
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:

               (A)  the benefit determined under Subsection (4)(b)(1) shall (1)
                    be calculated using Projected Years of Service instead of
                    Years of Service, and (11) be reduced by the annual amount
                    payable to Participant from a Prior Plan;

               (B)  such Participant's SERB shall not be less than the greater
                    of (1) or (11) 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 to Participant from a Prior Plan, less (iv) 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
<PAGE>
 
     (c)  The amount calculated under Section (b) shall be multiplied by the
          applicable Early Retirement Reduction Factor,

     (d)  With respect to all Participants, the amount calculated under Sections
          (b) and (c) shall be reduced by the following amounts, to the extent
          such amounts are accrued during periods for which the Participant is
          credited with Years of Service or Projected Years of Service under
          this Plan:

          (1)  The Participant's vested accrued benefit under the Retirement
               Plan (but not including any temporary supplemental amounts
               payable under Section 5.3(b) of the Retirement Plan), (A)
               expressed as a single life annuity, and (B) expressed as a
               benefit payable at the same time as Participant's SERB, except
               that in the event Participant commences benefits under this Plan
               prior to commencing benefits under the Retirement Plan, the
               reduction will be made as if Participant had commenced benefits
               under the Retirement Plan at the later of age 55 or commencement
               of benefits under this Plan, based on the ea0y retirement
               factors, and interest and mortality assumptions used in the
               Retirement Plan. The amount of the reduction will not thereafter
               be changed upon Participant's actual commencement of benefits
               under the Retirement Plan.

               For purposes of this Subsection (d)(1), the term "Retirement
               Plan" shall include any successor plan.

          (2)  Supplemental payments to Participant under section 7(a) of the
               Officers Deferred Compensation Plan as if Participant had chosen
               a single life annuity under such Plan payable at the same time as
               Participant's SERB.

          (3)  The Participant's vested accrued benefit under any other
               nonqualified defined benefit plan maintained by PP&L, expressed
               as a single life annuity payable at the same time as
               Participant's SERB, based on the early retirement factors and
               interest and mortality rates used in such plan.

     (e)  With respect to those Participants who have service with an Affiliated
          Company,

          (1)  The amount calculated under Sections (b), (c) and (d) shall be
               reduced by the following:

               (A)  The participant's vested accrued benefit under the Pension
                    Plan for Employees of Penn Fuel Gas, Inc. and North Penn Gas
                    Company, and/or the Pennsylvania Mines Corporation
                    Retirement Plan, determined as follows:

                    (I)  to the extent accrued during periods for which the
                         Participant is credited with Years of Service or
                         Projected Years of Service under this Plan, and

                    (II) expressed as a single life annuity, and

                   (III) expressed as a benefit payable at the same time as
                         Participant's SERB, except that in the event
                         Participant commences benefits under 
<PAGE>
 
                         this Plan prior to commencing benefits under such other
                         plan, the reduction will be made as if Participant had
                         commenced benefits under such other plan at the later
                         of such plan's earliest retirement age or commencement
                         of benefits under this Plan. The amount of the
                         reduction will not thereafter be changed upon
                         Participant's actual commencement of benefits under
                         such plan, and

                    (IV) based on the early retirement factors and interest and
                         mortality rates used in such other plan.

          (B)  The Participant's vested account under the PP&L Resources
               Subsidiary Savings Plan and the H.T. Lyons, Inc. 401(k) Plan, and
               their successors, determined as follows:

                    (I)  based on contributions other than the Participant's own
                         elective deferrals or employee contributions and
                         earnings thereon.

                    (II) to the extent attributable to contributions made during
                         periods for which these Participant is credited with
                         Years of Service or Projected Years of Service under
                         this Plan,

                   (III) such account valued as of the date Participant's SERB
                         benefit commences to be paid, but including any amounts
                         distributed to or on behalf of Participant,

                    (IV) such account converted to a benefit expressed as a
                         single life annuity for Participant's lifetime,
                         commencing at the same time as Participant's SERB,
                         based on the 30-year U.S. Treasury bond rate as of the
                         month preceding the month SERB payments commence, and
                         the 1983 Group Annuity Mortality Table (unisex):

          (C)  The Participant's employer-derived benefit under any taxqualified
               plan not listed in Paragraph (A) or (B) of this Subsection
               5(e)(1) of an Affiliated Company who becomes an Affiliated
               Company after the effective date of this amended and restated
               Plan, to the extent that such plan is the primary tax-qualified
               retirement plan of such Affiliated Company, and such benefit is
               based on service counted under this Plan. If such plan is a
               defined benefit plan, the offset shall be calculated in a manner
               similar to that described in Paragraph (A) of this Subsection
               5(e)(1). If such plan is a defined contribution plan, the offset
               shall be calculated in a manner similar to that described in
               Paragraph (B) of this Subsection 5(e)(1).

          (D)  The Participant's vested accrued benefit under any nonqualified
               defined benefit plan maintained by an Affiliated Company that was
               accrued prior to becoming an employee of PP&L, expressed as a
               single life annuity payable at the same time as Participant's
               SERB.

          (2)  The best data available will be used to determine the amounts to
               be offset under this Section (e). The EBPB has the absolute,
               discretionary power to make reasonable approximations and
               estimates to determine the value and amount of such offset
<PAGE>
 
               amounts, applied uniformly to all similarly situated
               Participants.. If reasonable approximations and estimates of such
               amounts are necessary, the EBPB will so inform the Participant. A
               Participant may elect to have his SERB calculated without regard
               to the offsets described in this Section (e) with respect to
               contributions made to such plans and/or benefits accrued under
               such plans prior to the date the Participant first becomes
               employed by PP&L, in which case his Years of Service and
               Projected Years of Service shall not include service before the
               date the Participant W becomes employed by PP&L.

          (3)  The amount calculated under Section (b) of this Article with
               respect to a Participant who has ceased to be an officer of PP&L
               by reason of a transfer to an Affiliated Company shall be
               calculated on the basis of his Years of Service and/or Projected
               Years of Service as of the date of his transfer, and on the basis
               of his Supplemental Final Average Earnings and his Years of
               Vesting Service as of the date of his Termination of Employment.

     (f)  In the event that a Participant's benefits under any plan to which
          Section (d) or (e) of this Article refers or under a Prior Plan are
          subject in whole or in part to a domestic relations order, SERB
          payments shall be calculated and paid without regard to such order.
<PAGE>
 
5.   TIME OF PAYMENT.

     A Participant who is eligible for benefits under Article 3 shall start
     receiving SERB payments on the date set forth below.

     (a)  A Retiree shall receive benefits as soon as administratively
          practicable following his Termination of Employment.

     (b)  A Terminated Vested Participant shall receive benefits as follows:

          (1)  If he has elected a single sum form of benefit under Article 6,
               such single sum shall be paid as soon as administratively
               practicable following his Termination of Employment.

          (2)  If he has elected an annuity form of benefit under Article 6,
               such annuity form shall start to be paid as soon as
               administratively practicable following his attainment of age 55;
               provided that if he also meets the definition of a Change in
               Control Participant or a Displaced Participant, such annuity form
               shall start to be paid as soon as administratively practicable
               following the later of age 50 or his Termination of Employment.

     (c)  A Change in Control Participant or a Displaced Participant shall
     receive benefits as follows:

          (1)  If he has elected a single sum form of benefit under Article 6,
               such single sum shall be paid as soon as administratively
               practicable following his Termination of Employment

          (2)  If he has elected an annuity form of benefit under Article 6,
               such annuity form shall start to be paid as soon as
               adminisbvffive4y practicable following the later of his
               attainment of age 50 or his Termination of Employment.

     (d)  In the event that Resources disputes to its shareowners as a dividend
          a sufficient number of shares of PP&L or an Affiliated Company, on a
          pro rata basis, in accordance with their Resources equity ownership,
          or in the event of the sale of up to 25% of the securities of PP&L or
          an Affiliated Company in an initial public offering of securities
          registered under the Securities Act of 1933, such distribution or sale
          of shares resulting in a Spin-Off Company (the "Spun-Off Company"),
          with the effect that the Spun-Off Company no longer meets the
          definition of PP&L or an Affiliated Company, and in connection with
          such distribution or sale, a Participant becomes an employee of the
          Spun-Off Company, the payment of any SERB to which Participant (or his
          beneficiary) is entitled under the Plan shall be made or shall
          commence to be made no earlier than at such time as the Participant
          (or his beneficiary) is eligible to commence to receive to a
          distribution (either immediate or deferred) under the Retirement Plan
          or any successor plan.
<PAGE>
 
6.  METHOD OF PAYMENT.

     (a)  A Participant who is eligible to receive benefits under the Retirement
          Plan and who elects to receive such benefits at the time SERB payments
          begin may elect to have his SERB paid in one of the following forms of
          benefit, each of which shall be the Actuarial Equivalent of his SERB
          benefit:

          (1)  the form of annuity payment in which his Retirement Plan benefits
               are to be paid, (provided, however, if any monthly payment would
               be 100 dollars or less, the EBPB, in its discretion, may elect to
               make such payments in such installments as the EBPB may determine
               or in a single sum payment), or

          (2)  a single sum

     (b)  A Participant who is not eligible to receive benefits under the
          Retirement Plan or who has elected not to receive such benefits under
          the Retirement Plan at the time SERB payments begin, may elect one of
          the following forms of benefit, which shall be the Actuarial
          Equivalent of his SERB benefit, provided, however, that if he elects
          an annuity form under Paragraph (1), (2) or (3) below, and if any
          monthly payment would be 100 dollars or less, the EBPB, in its
          discretion, may elect to make such payments in such installments as
          the EBPB may determine, or in a single sum payment:

          (1)  a single life annuity with equal monthly installments payable to
               the Participant for his lifetime; or

          (2)  a joint and survivor annuity with the Participant's designated
               beneficiary, payable in monthly installments to the Participant
               for his lifetime and with a specified percentage of the amount of
               such monthly installment payable after the death of the
               Participant to the designated beneficiary of such Participant, if
               then living, for the life of such designated beneficiary; or

          (3)  a single life annuity payable in equal monthly installments to
               the Participant for his lifetime, with 60, 120 or 180 monthly
               payments guaranteed, or

          (4)  a single sum.

     (c)  A Participant may elect a form of benefit hereunder by filing written
          notice with the EBPB at anytime at least 12 months prior to the first
          day of the calendar month for which a SERB is first payable to
          Participant. If a Participant described in Section (a) of this Article
          fails to elect a form of benefit within the prescribed time period,
          the benefit shall be paid in the form in which such Participant's
          Retirement Plan benefits are paid. If a Participant described in
          Section (b) of this Article fails to elect a form of benefit within
          this time period, the benefit shall be paid in the form of a single-
          life annuity if the Participant does not have a spouse on the date of
          benefit commencement and in the form of a 50% joint and survivor
          annuity with Participant's spouse as the beneficiary if the
          Participant has a spouse on the date of benefit commencement.
<PAGE>
 
7.   Death Benefit. If a pre-retirement spouse's annuity is payable under the
     Retirement Plan on account of Participant's death, the Participant's
     surviving spouse will be paid a supplemental spouse's annuity based on the
     SERB and made in accordance with all the terms and conditions applicable to
     such preretirement spouse's annuities under the Retirement Plan.
<PAGE>
 
8.   ADMINISTRATION. The EBPB shall have the discretionary authority and final
     right to interpret, construe and make benefit determinations (including
     eligibility and amount) under the Plan. The decisions of the EBPB are final
     and conclusive for all purposes. If one or more members of the EBPB are
     disqualified by personal interest from taking part in a particular
     decision, the remaining member or members of the EBPB (although less than a
     quorum) shall have full authority to act on the matter.
<PAGE>
 
9.  MISCELLANEOUS.

     (a)  If any person to receive payment is a minor, or is deemed by the EBPB
          or is adjudged to be legally incompetent, the payments shall be made
          to the duly appointed guardian or committee of such minor or
          incompetent, or they may be made to such person or persons who the
          EBPB believes are caring for or supporting such minor or incompetent.

     (b)  All payments to persons entitled to benefits under this Plan shall be
          made to such persons and shall not be grantable, transferable or
          otherwise assignable in anticipation of payment thereof, in whole or
          in part, by the voluntary or involuntary acts of any such persons, or
          by operation of law, and shall not be liable or taken for any
          obligation of such person. PP&L will observe the terms of the Plan
          unless and until ordered to do otherwise by a state or Federal court.
          As a condition of participation, Participant agrees to hold PP&L
          harmless from any claim that arises out of PP&L's obeying any such
          order whether such order effects a judgment of such court or is issued
          to enforce a judgment or order of another court.

     (c)  Nothing in this Plan shall confer any right on any Participant to
          continue in PP&L's employ or to receive compensation, nor shall
          anything in this Plan affect in any way the right of PP&L to terminate
          any Participant's employment at any time.

     (d)  The expenses of administration hereunder shall be borne by PP&L.

     (e)  This Plan shall be construed, administered and enforced according to
          the laws of the Commonwealth of Pennsylvania.

    (f)   All payments from this Plan shall be made from the general assets of
          PP&L. This Plan shall not require PP&L to set aside, segregate,
          earmark, pay into trust or special account or otherwise restrict the
          use of its assets in the operation of the business. Participant shall
          have no greater right or status than as an unsecured creditor of PP&L
          with respect to any amounts owed to Participant hereunder.

    (g)   The masculine pronoun shall be deemed to include the feminine and the
          singular to include the plural unless a different meaning is plainly
          required by the context.
<PAGE>
 
10.  TERMINATION OR AMENDMENT. The Board may, in its sole discretion, terminate
     and amend this Plan from time to time provided, however, that the Plan may
     not be terminated or amended to the prejudice or detriment of any
     Participant during the three (3) year period immediately following a Change
     in Control (or, if later, thirty six (36) months from the consummation of
     the transaction giving rise to the Change in Control). Without limiting the
     generality of the foregoing, the proviso of the preceding sentence shall
     not, at any time or in any event, be amended or deleted. Subject to the
     foregoing, the EBPB 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 significantly alter the benefit design or
     eligibility requirements of the Plan. No termination or amendment shall
     (without Participant's consent) alter Participant's right to monthly
     payments which have commenced prior to the effective date of such
     termination or amendment. Prior to a Change in Control, the Board
     specifically reserves the right to terminate or amend this Plan to
     eliminate the right of any Participant to receive payment hereunder prior
     to the time when payments are in pay status under this Plan.
     Notwithstanding the foregoing, if PP&L is liquidated, the EBPB shall cause
     the amounts due hereunder to be paid in one or more installments or upon
     such other terms and conditions and at such other time as the EBPB
     determines to be just and equitable, but in no event later than the time
     such amounts would otherwise have been paid.
<PAGE>
 
11.  Effective Date. The original effective date of this Plan is July 1, 1985.
     The effective date of this amended and restated Plan is January 1, 1998.
        
       Executed this ____ day of July, 1998.
 
                                          PP&L, INC.
 
                                          By:
                                             -----------------------   
                                             John M. Chappelear
                                             Vice President-Investments Pensions
<PAGE>
 
<TABLE>
<CAPTION> 

                                  APPENDIX A
<S>                         <C>                          <C>                            <C>      
# of Full Consecutive                                    # of Full Consecutive
Months of Employment        Reduction Factor (%)         Months of Employment           Reduction Factor
        60                         0.0000                       36                          15.0000
        59                         0.4167                       35                          16.2500
        58                         0.8333                       34                          17.5000
        57                         1.2500                       33                          18.7500
        56                         1.6667                       32                          20.0000
        55                         2.0833                       31                          21.2500
        54                         2.5000                       30                          22.5000
        53                         2.9167                       29                          23.7500
        52                         3.3333                       28                          25.0000
        51                         3.7500                       27                          26.2500
        50                         4.1667                       26                          27.5000
        49                         4.5833                       25                          28.7500
        48                         5.0000                       24                          30.0000
        47                         5.8333                       23                          31.6667
        46                         6.6667                       22                          33.3333
        45                         7.5000                       21                          35.0000
        44                         8.3333                       20                          36.6667
        43                         9.1667                       19                          38.3333
        42                        10.0000                       18                          40.0000
        41                        10.8333                       17                          41.6667
        40                        11.6667                       16                          43.3333
        39                        12.5000                       15                          45.0000
        38                        13.3333                       14                          46.6667
        37                        14.1667                       13                          48.3333
</TABLE>

<PAGE>
                                                                 Exhibit 10(n)-2
 
                                AMENDMENT NO. 1

                                      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

    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 1, 2, 3, 4, 9
   and 10 are amended to read:

1. PURPOSE.  The purpose of this Supplemental Executive Retirement Plan is to
   provide certain executive officers of PP&L and Participating Companies with
   additional retirement income so that total retirement income for key officers
   is competitive with other employers and in order to facilitate early
   retirement from key positions carrying the  most important responsibilities.

2.   DEFINITIONS.

     (a)  "ACTUARIAL EQUIVALENT" means having or that which has equal actuarial
          value to the SERB based on the following.

     (d)  "CAUSE" for Participant's Termination of Employment by PP&L or an
          Affiliated Company means

     (f)  "CHANGE IN CONTROL PARTICIPANT" means the following:

          (1)  a Participant whose Termination of Employment occurs after a
               Change in Control and within 36 months after the month in which
               the Change in Control occurs, unless such Termination of
               Employment is (A) by PP&L or an Affiliated Company for Cause, (B)
               by reason of the Participant's death, Disability or Retirement,
               or (C) by the Participant without Good Reason, or

                                      -1-
<PAGE>
 
          (2)  a Participant whose Termination of Employment occurs prior to a
               Change in Control (whether or not a Change in Control ever
               occurs) (A) at the request or direction of a Person who has
               entered into an agreement with Resources the consummation of
               which would constitute a Change in Control, or (B) at the
               Participant's initiative for Good Reason if the circumstance or
               event which constitutes Good Reason occurs at the direction of
               such Person or (C) the Participant's Termination of Employment is
               by PP&L or an Affiliated Company without Cause or is by the
               Participant for Good Reason, and such Termination of Employment
               or the circumstance or event which constitutes Good Reason is
               otherwise in connection with or in anticipation of a Change in
               Control (whether or not a Change in Control occurs).  For
               purposes of any determination regarding the applicability of the
               immediately preceding sentence, any position taken by the
               Participant shall be presumed to be correct unless PP&L or an
               Affiliated Company establishes to the Board by clear and
               convincing evidence that such position is not correct.

     (g)  "DISABILITY" shall be deemed the reason for a Participant's
          Termination of Employment by PP&L or an Affiliated Company, if, (1) as
          a result of the Participant's incapacity due to physical or mental
          illness, the Participant shall have been absent from the full-time
          performance of the Participant's duties with PP&L and all Affiliated
          Companies for a period of six consecutive months, and (2), if
          applicable, PP&L or an Affiliated Company shall have given the
          Participant any "Notice of Termination for Disability" required by any
          severance agreement between the Participant and PP&L or an Affiliated
          Company, and, within thirty days after such "Notice of Termination,"
          if any, is given, the Participant shall not have returned to the full-
          time performance of the Participant's duties.

     (h)  "DISPLACED PARTICIPANT" means a Participant who has a Termination of
          Employment after completing one or more Years of Vesting Service, and
          who qualifies for benefits pursuant to PP&L's Displaced Managers
          Policy (SPM 606) and who executes a severance agreement and release as
          specified by the Participating Company.

     (l)  "GOOD REASON" for Termination of Employment by a Participant means the
          occurrence (without the Participant's express written consent) after a
          Change in Control, or prior to a Change in Control under the
          circumstances described in paragraphs (B) and (C) of Section (2) of
          the definition of "Change in Control Participant" (treating all
          references in paragraphs (1) through (7) below to a "Change in
          Control" as references to a "Potential Change in 

                                      -2-
<PAGE>
 
          Control"), of any one of the following acts by PP&L or an Affiliated
          Company, or failures by PP&L or an Affiliated Company to act:

          (1)  the assignment to the Participant of any duties inconsistent with
               the Participant's status as an executive officer or key employee
               of PP&L or an Affiliated Company or a substantial adverse
               alteration in the nature or status of the Participant's
               responsibilities from those in effect immediately prior to a
               Change in Control;

          (2)  a reduction by PP&L or an Affiliated Company of the Participant's
               annual base salary as in effect on the effective date of this
               amended and restated Plan, or as the same may be increased from
               time to time, except for across-the-board decreases uniformly
               affecting management, key employees and salaried employees of
               PP&L or the Affiliated Company, or the business unit in which
               Participant is then employed;

          (3)  the relocation of the Participant's principal work location to a
               location more than 30 miles from the vicinity of such work
               location immediately prior to a Change in Control or PP&L's or an
               Affiliated Company's requiring the Participant to be based
               anywhere other than such principal place of employment (or
               permitted relocation thereof) except for required travel on
               PP&L's or an Affiliated Company's business to an extent
               substantially consistent with the Participant's present business
               travel obligations;

          (4)  the failure by PP&L or an Affiliated Company to pay to the
               Participant any portion of the Participant's current compensation
               or to pay to the Participant any portion of an installment of
               deferred compensation under any deferred compensation program of
               PP&L or an Affiliated Company, within seven days of the date such
               compensation is due, except for across-the-board compensation
               deferrals uniformly affecting management, key employees and
               salaried employees of PP&L or the Affiliated Company, or  the
               business unit in which Participant is then employed;

          (5)  the failure by PP&L or an Affiliated Company to continue in
               effect any compensation or benefit plan in which the Participant
               participates immediately prior to a Change in Control which is
               material to the Participant's total compensation, or any
               substitute plans adopted prior to a Change in Control, unless an
               equitable arrangement (embodied in an ongoing substitute or
               alternative plan) has been made with respect to such plan, or the
               failure by PP&L 

                                      -3-
<PAGE>
 
               or an Affiliated Company to continue the Participant's
               participation therein (or in such substitute or alternative plan)
               on a basis not materially less favorable, both in terms of the
               amount or timing of payment of benefits provided and the level of
               the Participant's participation relative to other participants,
               as existed immediately prior to the Change in Control, or

          (6)  the failure by PP&L or an Affiliated Company to continue to
               provide the Participant with benefits substantially similar to
               those enjoyed by the Participant under any of PP&L's or an
               Affiliated Company's pension, savings, life insurance, medical,
               health and accident, or disability plans in which the Participant
               was participating immediately prior to a Change in Control,
               except for across-the-board changes to any such plans uniformly
               affecting all participants in such plans, the taking of any other
               action by PP&L or an Affiliated Company which would directly or
               indirectly materially reduce any of such benefits or deprive the
               Participant of any material fringe benefit enjoyed by the
               Participant at the time of the Change in Control, or the failure
               by PP&L or an Affiliated Company to provide the Participant with
               the number of paid vacation days to which the Participant is
               entitled on the basis of years of service with PP&L or an
               Affiliated Company in accordance with PP&L's or an Affiliated
               Company's normal vacation policy at the time of the Change in
               Control; or

          (7)  any purported termination of the Participant's employment which
               is not effected pursuant to any "Notice of Termination" required
               by any severance agreement between the Participant and PP&L or an
               Affiliated Company.

               The Participant's right to terminate his or her employment with
               PP&L or an Affiliated Company for Good Reason shall not be
               affected by the Participant's incapacity due to physical or
               mental illness.  The Participant's continued employment shall not
               constitute consent to, or a waiver of rights with respect to, any
               act or failure to act constituting Good Reason hereunder.

               For purposes of any determination regarding the existence of Good
               Reason, any claim by the Participant that Good Reason exists
               shall be presumed correct unless PP&L or an Affiliated Company
               establishes to the Board by clear and convincing evidence that
               Good Reason does exist.

                                      -4-
<PAGE>
 
     (n)  "PARTICIPANT" means an eligible officer or former officer of a
          Participating Company entitled to receive benefits under Article 3 of
          this Plan.

     (O)  "PARTICIPATING COMPANY" means PP&L, PP&L EnergyPlus Co., and each
          other Affiliated Company that is designated by the Board to adopt this
          Plan by action of its board of directors.

     (t)  "PRIOR PLAN" means any defined benefit plan, as defined in section
          3(35) of the Employee Retirement Income Security Act of 1974, as
          amended, which at any time satisfies the applicable requirements of
          section 401(a) of the Internal Revenue Code of 1986, as amended,
          provided that (1) such plan has a sponsor other than a Participating
          Company, and (2) Participant was a participant in such plan prior to
          employment with a Participating Company.

     (u)  "PROJECTED YEARS OF SERVICE" means the number of full or partial
          twelve-month periods beginning on the date on which Participant
          attains the age of 30 and ending on the date Participant ceases to be
          employed by a Participating Company.

     (x)  "RETIREMENT" shall be deemed the reason for a Participant's
          Termination of Employment if such employment is terminated in
          accordance with PP&L's or an Affiliated Company's retirement policy,
          including early retirement, generally applicable to its salaried
          employees.

    (dd)  "YEARS OF SERVICE" means the number of full and partial years used to
          calculate Participant's accrued benefit under the Retirement Plan, but
          (1) excluding years prior to Participant's attainment of age 30, and
          (2) including service with any Affiliated Company prior to the
          Participant's becoming an officer of a Participating Company eligible
          under this Plan, provided such service would otherwise be counted
          under the Retirement Plan, but excluding any such service with an
          Affiliated Company performed before the Affiliated Company became an
          Affiliated Company.

3.   ENTITLEMENT TO BENEFITS.

     (a)  Any officer of PP&L who is in a position in PP&L Salary Group I
          through IV immediately prior to his Termination of Employment or the
          date of his transfer to an Affiliated Company and any officer of a
          Participating Company who is designated as eligible in a resolution
          adopted by the board of directors of such Participating Company and
          remains such until his Termination of Employment or the date of his
          transfer to an Affiliated Company shall be entitled to a SERB benefit
          if and only if he is either:

                                      -5-
<PAGE>
 
          (1)  a Retiree,

          (2)  a Terminated Vested Participant,

          (3)  a Change in Control Participant, or

          (4)  a Displaced Participant.

     (b)  Notwithstanding Section 3(a), any officer of PP&L who is in a position
          in PP&L Salary Group I through IV immediately prior to his Termination
          of Employment or the date of his transfer to an Affiliated Company and
          any officer of a Participating Company who is designated as eligible
          in a resolution adopted by the board of directors of such
          Participating Company and remains such until his Termination of
          Employment or the date of his transfer to an Affiliated Company and
          who terminates employment with a Participating Company on account of
          his death shall be entitled to the death benefit in Article 7 in lieu
          of any other benefit under the Plan.

     (c)  Notwithstanding Section 3(a) or (b), any Participant otherwise
          eligible for benefits shall forfeit any and all benefits under the
          Plan if such Participant's Termination of Employment is by PP&L or an
          Affiliated Company for Cause.

     (d)  All officers who are eligible for benefits under Section 3(a) and who
          are entitled to annual benefits of at least $44,000 in the aggregate
          from all PP&L and Affiliated Company-sponsored pension, profit-
          sharing, savings or deferred compensation plans, shall terminate their
          employment with PP&L and all Affiliated Companies no later than the
          first day of the month following attainment of age 65, unless PP&L or
          Affiliated Company requests that employment be extended for up to one
          year.  In such event, Participant must retire at the end of the
          extension, unless PP&L or Affiliated Company requests additional
          extensions, at the end of which period Participant must retire.  Any
          Participant requested to serve beyond the mandatory retirement date
          may decline to do so without affecting his benefit status under this
          Plan or any other PP&L or Affiliated Company benefit program.  Failure
          to accept benefits provided for in this Plan shall not affect the
          requirements of this paragraph.

4.   AMOUNT OF SUPPLEMENTAL EXECUTIVE RETIREMENT BENEFIT.

     (e)  With respect to those Participants who have service with an Affiliated
          Company,

                                      -6-
<PAGE>
 
          (1)  The amount calculated under Sections (b), (c) and (d) shall be
               reduced by the following:

               (A)  The participant's vested accrued benefit under the Pension
                    Plan for Employees of Penn Fuel Gas, Inc. and North Penn Gas
                    Company, and/or the Pennsylvania Mines Corporation
                    Retirement Plan, determined as follows:

                    (I)   to the extent accrued during periods for which the
                          Participant is credited with Years of Service or
                          Projected Years of Service under this Plan, and

                    (II)  expressed as a single life annuity, and

                    (III) expressed as a benefit payable at the same time as
                          Participant's SERB, except that in the event
                          Participant commences benefits under this Plan prior
                          to commencing benefits under such other plan, the
                          reduction will be made as if Participant had commenced
                          benefits under such other plan at the later of such
                          plan's earliest retirement age or commencement of
                          benefits under this Plan. The amount of the reduction
                          will not thereafter be changed upon Participant's
                          actual commencement of benefits under such plan, and

                    (IV)  based on the early retirement factors and interest and
                          mortality rates used in such other plan.

               (B)  The Participant's vested account under the PP&L Resources
                    Subsidiary Savings Plan and the H.T. Lyons, Inc. 401(k)
                    Plan, and their successors, determined as follows:

                    (I)   based on contributions other than the Participant's
                          own elective deferrals or employee contributions and
                          earnings thereon.

                    (II)  to the extent attributable to contributions made
                          during periods for which these Participant is credited
                          with Years of Service or Projected Years of Service
                          under this Plan,

                                      -7-
<PAGE>
 
                    (III) such account valued as of the date Participant's SERB
                          benefit commences to be paid, but including any
                          amounts distributed to or on behalf of Participant,

                    (IV)  such account converted to a benefit expressed as a
                          single life annuity for Participant's lifetime,
                          commencing at the same time as Participant's SERB,
                          based on the 30-year U.S. Treasury bond rate as of the
                          month preceding the month SERB payments commence, and
                          the 1983 Group Annuity Mortality Table (unisex):

               (C)  The Participant's employer-derived benefit under any tax-
                    qualified plan not listed in Paragraph (A) or (B) of this
                    Subsection 5(e)(1) of an Affiliated Company who becomes an
                    Affiliated Company after the effective date of this amended
                    and restated Plan, to the extent that such plan is the
                    primary tax-qualified retirement plan of such Affiliated
                    Company, and such benefit is based on service counted under
                    this Plan.  If such plan is a defined benefit plan, the
                    offset shall be calculated in a manner similar to that
                    described in Paragraph (A) of this Subsection 5(e)(1).  If
                    such plan is a defined contribution plan, the offset shall
                    be calculated in a manner similar to that described in
                    Paragraph (B) of this Subsection 5(e)(1).

               (D)  The Participant's vested accrued benefit under any
                    nonqualified defined benefit plan maintained by an
                    Affiliated Company that was accrued prior to becoming an
                    employee of a Participating Company, expressed as a single
                    life annuity payable at the same time as Participant's SERB.

          (2)  The best data available will be used to determine the amounts to
               be offset under this Section (e). The EBPB has the absolute,
               discretionary power to make reasonable approximations and
               estimates to determine the value and amount of such offset
               amounts, applied uniformly to all similarly situated
               Participants.  If reasonable approximations and estimates of such
               amounts are necessary, the EBPB will so inform the Participant.
               A Participant may elect to have his SERB calculated without
               regard to the offsets described in this Section (e) with respect
               to contributions made to such plans and/or benefits accrued under
               such plans prior to the 

                                      -8-
<PAGE>
 
               date the Participant first becomes employed by a Participating
               Company, in which case his Years of Service and Projected Years
               of Service shall not include service before the date the
               Participant first becomes employed by a Participating Company.

          (3)  The amount calculated under Section (b) of this Article with
               respect to a Participant who has ceased to be an officer of a
               Participating Company eligible under the Plan by reason of a
               transfer to an Affiliated Company that is not a Participating
               Company shall be calculated on the basis of his Years of Service
               and/or Projected Years of Service as of the date of his transfer,
               and on the basis of his Supplemental Final Average Earnings and
               his Years of Vesting Service as of the date of his Termination of
               Employment.

9.   MISCELLANEOUS.

     (c)  Nothing in this Plan shall confer any right on any Participant to
          continue in a Participating Company's employ or to receive
          compensation, nor shall anything in this Plan affect in any way the
          right of a Participating Company to terminate any Participant's
          employment at any time.

10.  TERMINATION OR AMENDMENT.  The Board may, in its sole discretion, terminate
     and amend this Plan from time to time provided, however, that the Plan may
     not be terminated or amended to the prejudice or detriment of any
     Participant during the three (3) year period immediately following a Change
     in Control (or, if later, thirty six (36) months from the consummation of
     the transaction giving rise to the Change in Control).  Without limiting
     the generality of the foregoing, the proviso of the preceding sentence
     shall not, at any time or in any event, be amended or deleted.  Subject to
     the foregoing, 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.  No termination or amendment shall (without
     Participant's consent) alter Participant's right to monthly payments which
     have commenced prior to the effective date of such termination or
     amendment.  Prior to a Change in Control, the Board specifically reserves
     the right to terminate or amend this Plan to eliminate the right of any
     Participant to receive payment hereunder prior to the time when payments
     are in pay status under this Plan.  Notwithstanding the foregoing, if PP&L
     is liquidated, the EBPB shall cause the amounts due hereunder to be paid in
     one or more installments or upon such other terms and conditions and at
     such other time as the EBPB determines to be just 

                                      -9-
<PAGE>
 
     and equitable, but in no event later than the time such amounts would
     otherwise have been paid.

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
January, 1999.

                              PP&L, INC.


                              By:
                                 ------------------------------
                                 John M. Chappelear
                                 Vice President-Investments &
                                 Pensions

                                      -10-

<PAGE>
 
                                                                   Exhibit 10(q)
                             EMPLOYMENT AGREEMENT


          EMPLOYMENT AGREEMENT (this "Agreement"), dated as of October 1, 1998
                                      ---------                               
(the "Effective Time"), by and among PP&L, Inc., a Pennsylvania corporation (the
      --------------                                                            
"Company"), Terry H. Hunt (the "Executive") and, for purposes of Section 1(b)
 -------                        ---------                                    
only, Penn Fuel Gas, Inc., a Pennsylvania corporation ("PFG").
                                                        ---   

                             W I T N E S S E T H:
                             - - - - - - - - - - 

          WHEREAS, on August 21, 1998, PP&L Resources, Inc. ("Resources"), a
                                                              ---------     
Pennsylvania corporation and the parent corporation of the Company, acquired PFG
and PFG has become a wholly-owned subsidiary of Resources; and

          WHEREAS, PFG and the Executive are parties to that certain Employment
Agreement dated as of February 27, 1992 (the "1992 Employment Agreement"), and
                                              -------------------------       
that certain Retention Agreement dated as of July 18, 1996 by and between PFG
and the Executive (the "Retention Agreement"); and
                        -------------------       

          WHEREAS, in recognition of the Executive's experience and his
abilities, the Company desires to assure itself of the employment of the
Executive from and after the Effective Time in accordance with the terms and
conditions provided herein; and

          WHEREAS, the parties to the 1992 Employment Agreement and Retention
Agreement wish to terminate such Agreements, effective as of the Effective Time;
and

          WHEREAS, the Executive wishes to perform services for the Company in
accordance with the terms and conditions provided herein.

          NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties hereto agree as follows:

          1.   Employment.  (a) The Company hereby agrees to employ the
               ----------                                              
Executive, and the Executive hereby agrees to perform services for the Company,
on the terms and conditions set forth herein.

          (b)  At the Effective Time, the 1992 Employment Agreement and
Retention Agreement shall terminate and shall be null and void and of no further
force and effect.
<PAGE>
 
          2.   Term.  This Agreement is for the two-year period (the "Term")
               ----                                                   ----  
commencing as of the date of the Effective Time and terminating on the second
anniversary of such date, or upon the Executive's earlier death, Disability (as
defined in Section 7(b) hereof) or other termination of employment pursuant to
Section 7 hereof.

          3.   Position.  During the Term, the Executive shall serve as the
               --------                                                    
Senior Vice President -  Strategic Planning, of the Company.

          4.   Duties and Reporting Relationship. During the Term, the Executive
               ---------------------------------  
shall, on a full time basis, use his skills and render services to the best of
his abilities in carrying out his duties and obligations to the Company.  The
Executive shall report directly to the Chief Executive Officer of the Company.

          5.   Place of Performance.  The Executive shall perform his duties and
               --------------------                                             
conduct his business at the corporate headquarters of the Company located at
Allentown, Pennsylvania, or at such other location within 65 straight-line miles
of Villanova, Pennsylvania, except for required travel on the Company's
business.  The Executive acknowledges and agrees that a change in the
headquarters of the Company within these geographic areas would not constitute
"Good Reason," as such term is used in the Retention Agreement.

          6.   Compensation and Related Matters.
               -------------------------------- 

               (a)  Annual Base Salary. The Company shall pay to the Executive
                    ------------------   
an annual base salary (the "Base Salary") at a rate not less than $265,000, such
                            -----------                                         
salary to be paid in conformity with the payroll policies of the Company,
relating to its senior officers.  The Base Salary may, from time to time, be
increased by the Board of Directors of the Company, consistent in timing and
consideration with other senior officers of the Company.

               (b)  Bonus and Incentive Plans. During the Term, the Executive
                    -------------------------   
shall be entitled to participate in incentive, bonus, stock option, restricted
stock, phantom stock, stock purchase, deferred compensation, and other executive
compensation plans, programs and arrangements (the "Incentive Plans") comparable
                                                    ---------------             
to those that are available to senior vice presidents of the Company and shall
be provided a level of benefits and bonus opportunities under the Incentive
Plans comparable to the benefits and bonus opportunities provided to senior vice
presidents of the Company; provided, however, that with respect to the 1998
                           --------  -------                               
calendar year, in lieu of any other amounts due to the Executive under this
Section 6(b), if the Executive is employed by the Company as of December 31,
1998, he shall be entitled to receive an incentive compensation award in the
amount equal to the 1998 Bonus Amount (as defined below), paid at such time as
bonuses are paid generally to senior vice presidents of the Company, but in no
event later than March 31, 1999.  The determination of the level of any

                                       2
<PAGE>
 
compensation due to the Executive under the Incentive Plans after the 1998
calendar year shall be based solely upon the performance of the Company on a
consolidated basis.  Beginning in calendar year 1999, the Executive shall have
bonus opportunities under the Incentive Plans up to 100% of his Base Salary, to
be paid in such form as is the policy of the Company from time to time
(currently up to 40% in cash, up to 30% in restricted stock, and up to 30% in
stock options assuming such stock options are approved by the shareowners of
Resources at its 1999 annual meeting of shareowners).  As used herein, the 1998
Bonus Amount shall equal the average of the bonus payouts (as a percentage of
base salary) to the senior vice presidents of the Company of cash, restricted
stock and stock options in respect of their 1998 performances, but using
Executive's Base Salary as the multiplier, and then prorated to reflect the
portion of calendar year 1998 during which Resources owned PFG.

               (c)  Pension and Welfare Benefits. During the Term, the Executive
                    ----------------------------   
shall continue to participate in the qualified and nonqualified pension,
retirement, health and welfare, and insurance plans (including, without
limitation, retiree medical plans) provided to other senior vice presidents of
the Company (the "Pension Plans") and shall be provided a level of benefits
                  -------------                                            
under such plans comparable to the benefits provided to other senior vice
presidents of the Company.  Executive shall be granted past service credit under
such Pension Plans for all purposes for which service is counted (including,
without limitation, eligibility, vesting, waiting periods, preexisting
conditions, early retirement, and benefit accrual) for all of his years of
service with PFG; provided, however, that if Executive has previously accrued a
                  --------  -------                                            
retirement benefit under a tax qualified PFG defined benefit pension plan, then
any retirement benefit due to Executive under any Company sponsored tax
qualified defined benefit pension plan will be reduced by Executive's retirement
benefit under the PFG plan, to the extent, if any, necessary to prevent
duplicate credit for the same years of service (unless the PFG and Company plans
are merged, consolidated, or otherwise engage in an asset and liability transfer
with respect to Executive, in which case no such reduction shall occur).

               (d)  Fringe Benefits and Perquisites. During the Term, the
                    -------------------------------   
Company shall provide to the Executive all of the fringe benefits and
perquisites comparable to those provided to other senior vice presidents of the
Company, including, without limitation, moving and relocation benefits and
expense reimbursement and four weeks paid vacation per year.

               (e)  Business Expenses. The Executive shall be reimbursed for all
                    -----------------   
ordinary and necessary business expenses incurred by him in connection with his
employment (including, without limitation, expenses for travel and entertainment
incurred in conducting or promoting business for the Company) upon submission by
the Executive of receipts and other documentation in accordance with the
Company's normal reimbursement procedures.

                                       3
<PAGE>
 
               (f)  SERP.  During the Term, Executive shall participate in the
                    ----                                                      
Company's Supplemental Executive Retirement Plan ("SERP") on terms and
                                                   ----               
conditions comparable to those provided to other senior vice presidents of the
Company.  In addition, the Executive shall be granted past service credit under
the SERP for benefit accrual and early retirement purposes for all of his years
of service with PFG, which the Executive represents commenced on March 9, 1992,
and shall be entitled to four additional years of credit under the SERP.  The
foregoing notwithstanding, the Executive shall be granted two years of credit
under the SERP for vesting purposes.  Upon being vested in the SERP, amounts
payable to the Executive pursuant to the SERP shall be offset by any amounts
payable to the Executive pursuant to PFG's Supplemental Executive Retirement
Plan.

          7.   Termination.  The Executive's employment hereunder may be
               -----------                                              
terminated only under the following circumstances:

               (g)  Death.  The Executive's employment hereunder shall terminate
                    -----                                                       
upon his death.

               (h)  Disability. If, as a result of the Executive's incapacity
                    ----------       
due to physical or mental illness, the Executive shall have been absent from his
duties hereunder for the entire period of six consecutive months, and within
thirty (30) days after written Notice of Termination (as defined in paragraph
(e) below) is given, shall not have returned to the performance of his duties
hereunder, the Company may terminate the Executive's employment hereunder for
"Disability."
 ----------  

               (i)  Cause.  The Company may terminate the Executive's employment
                    -----                                                       
hereunder for "Cause."  For purposes of this Agreement, the Company shall have
"Cause" to terminate the Executive's employment hereunder (i) upon the
 -----                                                                
Executive's conviction for the commission of an act or acts constituting a
felony under the laws of the United States or any state thereof, or (ii) upon
the Executive's willful and continued failure to substantially perform his
duties hereunder (other than any such failure resulting from the Executive's
incapacity due to physical or mental illness), after written notice has been
delivered to the Executive by the Company, which notice specifically identifies
the manner in which the Executive has not substantially performed his duties,
and the Executive's failure to substantially perform his duties is not cured
within ten business days after notice of such failure has been given to the
Executive.

               (j)  Termination by the Executive. The Executive may terminate
                    ----------------------------   
his employment hereunder for "Good Reason." Good Reason" for termination by the
                                            -----------                        
Executive of the Executive's employment shall mean the occurrence (without the
Executive's consent) of any one of the following acts by the Company, or
failures by the Company to act:

                                       4
<PAGE>
 
               (i)  a material failure to comply with Section 6 of this
     Agreement;

               (ii)  the assignment to the Executive of any duties materially
     inconsistent with the Executive's status as a senior vice president of the
     Company or a substantial diminution in the nature or status of the
     Executive's responsibilities;

               (iii) the Executive is not elected, reelected, or otherwise
     continued in the office of the Company or any of its subsidiaries which he
     held on the Effective Date of this Agreement or at any time subsequent
     thereto;

               (iv)  the Company requires that the Executive's employment be
     based other than at Allentown, Pennsylvania or within 65 straight-line
     miles of Villanova, Pennsylvania; or

               (v)   any purchaser, assign, surviving corporation, or successor
     of the Company or its business or assets (whether by acquisition, merger,
     liquidation, consolidation, reorganization, sale or transfer of assets or
     business, or otherwise) fails or refuses to assume, in writing or by
     operation of law, this Agreement and all of the duties and obligations of
     the Company hereunder pursuant to Section 10 hereof.

          The Executive's continued employment shall not constitute consent to,
or a waiver of rights with respect to, any act or failure to act constituting
Good Reason hereunder.

               (k)   Notice of Termination.  Any termination of the Executive's
                     ---------------------                                     
employment by the Company or by the Executive (other than termination under
Section 7(a) hereof) shall be communicated by written Notice of Termination to
the other party hereto in accordance with Section 11 hereof.  For purposes of
this Agreement, a "Notice of Termination" shall mean a notice that shall
                   ---------------------                                
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated.

               (l)   Date of Termination. "Date of Termination" shall mean (i)
                     -------------------    -------------------  
if the Executive's employment is terminated by his death, the date of his death,
(ii) if the Executive's employment is terminated pursuant to paragraph (b)
above, thirty (30) days after Notice of Termination is given (provided that the
Executive shall not have returned to the performance of his duties on a full-
time basis during such thirty (30)-day period), and (iii) if the Executive's
employment is terminated pursuant to paragraph (c) or (d) above, the date
specified in the Notice of Termination.

                                       5
<PAGE>
 
          8.   Compensation Upon Termination or During Disability.
               -------------------------------------------------- 

               (m)  Disability or Death. During any period in which the
                    -------------------   
Executive fails to perform his duties hereunder as a result of incapacity due to
physical or mental illness, the Executive shall continue to receive his full
Base Salary, as well as other applicable employee benefits, until his employment
is terminated pursuant to Section 7(b) hereof. In the event the Executive's
employment is terminated pursuant to Section 7(a) or 7(b) hereof, then the
Company shall pay the Executive or the Executive's Beneficiary (as defined in
Section 10(b) hereof), as the case may be, (i) all unpaid amounts, if any, to
which the Executive was entitled as of the Date of Termination under Section
6(a) hereof, as soon as possible following such termination and (ii) all unpaid
amounts to which the Executive was then entitled pursuant to and in accordance
with the Incentive Plans, the Pension Plans and any other unpaid employee
benefits, accrued vacation, perquisites or other reimbursements. In addition, as
of the Executive's employment termination date, all stock options, restricted
stock, and other equity-based or performance-based grants or awards shall vest
in accordance with the terms of the applicable plans.

               (n)  Termination for Cause; Voluntary Termination Without Good
                    ---------------------------------------------------------
Reason. If the Executive's employment is terminated by the Company for Cause or
- ------
by the Executive other than for Good Reason, then the Company shall pay to the
Executive all unpaid amounts, if any, to which the Executive was entitled as of
the Date of Termination under Section 6 hereof (including any salary, Pension
Plan payments, accrued vacation, and other employee benefits, perquisites, or
reimbursements) within ten (10) days after the Date of Termination, and, except
as provided below, the Company shall have no further obligations to the
Executive under this Agreement.

               (o)  Termination for Good Reason or Other than for Cause. In the
                    ---------------------------------------------------    
event that the Executive's employment is terminated by the Executive for Good
Reason pursuant to Section 7(d) hereof, or by the Company other than for Cause,
then in lieu of further salary or bonus payments (pursuant to Sections 6(a) and
6(b) hereof), the Executive shall be entitled to the following benefits:

                    (1)  Severance Pay. Company shall pay to the Executive, as
                         -------------   
     soon as practicable, a lump sum payment equal to (i) all unpaid amounts, if
     any, to which the Executive was entitled as of the Date of Termination
     under Section 6(a) hereof, plus (ii) the present value of all salary and
     bonus that would have been payable to the Executive pursuant to Sections
     6(a) and 6(b) hereof had the Executive continued to be employed for the
     remainder of the Term, and his Base Salary for each year of the Term were
     equal to the Base Salary at the Date of Termination and his bonuses under
     the Incentive Plans for each year of the Term were equal to his targeted
     bonuses for the fiscal year in which the Date of Termination occurred, plus
     (iii) all amounts to which Executive

                                       6
<PAGE>
 
     is entitled under the Pension Plans and any other unpaid employee benefits,
     accrued vacation, perquisites or other reimbursements.

                    (2)  Long-Term Incentive Award; Equity-Based Compensation.
                         ----------------------------------------------------
     The Executive's interest under all of the Company's stock option and long-
     term incentive plans shall vest in accordance with the terms of the
     applicable plans.

                    (3)  Continuation of Benefits. For the remainder of the
                         ------------------------   
     Term, the Executive shall be treated as if he had continued to be an
     executive employee for all purposes under the Company's health and welfare
     plans. If and to the extent any benefits under this Section 8(c) are not
     paid or payable or otherwise provided to the Executive or his dependents or
     beneficiaries under any such plan or policy (whether due to the terms of
     the plan or policy, the termination thereof, applicable law, or otherwise),
     then the Company itself shall pay or provide for such benefits. Following
     this period, the Executive shall be entitled to receive continuation
     coverage under Part Six of Title I of ERISA ("COBRA Benefits") treating the
                                                   --------------               
     end of this period as a termination of the Executive's employment.

          9.   Non-Disclosure.  The parties hereto agree, recognize and
               --------------                                          
acknowledge that heretofore the Executive has, and during the Term the Executive
will obtain knowledge of confidential and/or proprietary information regarding
the business and affairs of the Company.  It is therefore agreed that the
Executive shall respect and protect the confidentiality of all confidential
and/or proprietary information pertaining to the Company, and shall not without
the prior written consent of the Company, disclose in any fashion such
confidential and/or proprietary information to any person at any time during the
Term or during the two-year period thereafter, unless required in the course of
the Executive's employment hereunder or required by applicable law, rules,
regulations or court, governmental or regulatory authority order or decree.

          10.  Successors; Binding Agreement.
               ----------------------------- 

               (a)  The Company shall require any successor (whether direct or
indirect, by asset purchase, stock purchase, merger, consolidation or otherwise)
to all or substantially all of the business and/or assets of the Company, by
agreement in form and substance reasonably satisfactory to the Executive, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place.  Failure of the Company to obtain such assumption
and agreement prior to the effectiveness of any such succession shall be a
breach of this Agreement and shall entitle the Executive to compensation from
the Company in the same amount and on the same terms as he would be entitled to
hereunder if he terminated his employment for Good Reason, except that 

                                       7
<PAGE>
 
for purposes of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of Termination. As used in
this Agreement, "Company" shall mean the Company as hereinbefore defined and any
                 -------                                                        
successor to its business or that otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law.

               (b)  This Agreement and all rights of the Executive hereunder
shall inure to the benefit of and be enforceable by the Executive's personal or
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while any
amounts would still be payable to him hereunder if he had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate (any of
which is referred to herein as a "Beneficiary").
                                  -----------   

          11.  Notice.  For the purposes of this Agreement, notices, demands and
               ------                                                           
all other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or, (unless otherwise
specified) mailed by United States certified or registered mail, return receipt
requested, postage prepaid, addressed as follows:

          If to the Company:

               PP&L, Inc.
               Two North Ninth Street
               Allentown, PA  18101-1171
               Attn:  General Counsel

          If to the Executive:

               Terry H. Hunt
               1500 Spring Mill Lane
               Villanova, PA  19085

or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.

          12.  Miscellaneous.  No provision of this Agreement may be modified,
               -------------                                                  
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer of the Company as may be
specifically designated by the Board.  No waiver by either party hereto at any
time of any breach by 

                                       8
<PAGE>
 
the other party hereto of, or compliance with, any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not set forth expressly in this Agreement.

          13.  Governing Law.  The validity, interpretation, construction and
               -------------                                                 
performance of this Agreement shall be governed by the laws of the Commonwealth
of Pennsylvania without regard to its conflicts of law principles.

          14.  Validity.  The invalidity or unenforceability of any provision or
               --------                                                         
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.

          15.  Counterparts.  This Agreement may be executed in one or more
               ------------                                                
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.

          16.  Entire Agreement.  This Agreement and the Severance Agreement
               ----------------                                             
between the Executive and the Company dated as of the date hereof set forth the
entire agreement of the parties hereto in respect of the subject matter
contained herein and supersedes any and all other prior agreements, promises,
covenants, arrangements, communications, representations or warranties, whether
oral or written, between the parties hereto concerning the subject matter
hereof; and, any prior agreement of the parties hereto in respect of the subject
matter contained herein, including, without limitation, the 1992 Employment
Agreement between the Executive and PFG and the Retention Agreement dated as of
July 18, 1996 between the Executive and PFG.

          17.  No Mitigation Obligation.  The parties hereto expressly agree
               ------------------------                                     
that the payment of the benefits by the Company to the Executive in accordance
with the terms of this Agreement will be liquidated damages, and that the
Executive shall not be required to mitigate the amount of any payment provided
for in his Agreement by seeking other employment or otherwise, nor shall any
profits, income, earnings or other benefits from any source whatsoever create
any mitigation, offset, reduction or any other obligation on the part of the
Executive hereunder or otherwise.

          18.  D&O Insurance.  The Company agrees to maintain adequate directors
               -------------                                                    
and officers liability insurance for the benefit of Executive for the term of
this Agreement and for at least three years thereafter on terms and conditions
comparable to the same level of protection afforded to any other senior
executive officer of the Company.

                                       9
<PAGE>
 
          IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.


                                        PP&L, INC.


                                        By:  /s/ William F. Hecht             
                                           -------------------------------    
                                           William F. Hecht                   
                                           Chairman, President and            
                                            Chief Executive Officer            



                                        TERRY H. HUNT


                                        /s/ Terry H. Hunt
                                        --------------------------------------



                                        PENN FUEL GAS, INC.                     
                                        (For Purposes of Section 1(b) Only)


                                        By:  /s/ Terry H. Hunt
                                          ------------------------------------
                                        Name: Terry H. Hunt
                                        Title:  President   

                                       10

<PAGE>
 
                                                               Exhibit 10(q)-1

                -----------------------------------------------    

                           ASSET PURCHASE AGREEMENT

                                 By and Among

                        BANGOR HYDRO-ELECTRIC COMPANY,

                             a Maine corporation,

                          PENOBSCOT HYDRO CO., INC.,

                              a Maine corporation

                                      and

                              PP&L GLOBAL, INC.,

                          a Pennsylvania corporation

                        Dated as of September 25, 1998

                -----------------------------------------------
<PAGE>
 
                               TABLE OF CONTENTS

<TABLE> 
<CAPTION> 
                                                                            Page
                                                                            ----

                                   ARTICLE I

                                  DEFINITIONS

<S>                                                                         <C> 
1.1  Definitions.........................................................     1

                                  ARTICLE II

                               PURCHASE AND SALE

2.1  The Sale............................................................    13
2.2  Excluded Assets.....................................................    13
2.3  Assumed Liabilities.................................................    14
2.4  Excluded Liabilities................................................    16

                                  ARTICLE III

                                PURCHASE PRICE


3.1  Purchase Price......................................................    18
3.2  Purchase Price Adjustment...........................................    19
3.3  Allocation of Purchase Price........................................    20
3.4  Proration...........................................................    20
3.5  Exclusion of Purchased Assets from Closing..........................    21
                                                                               
                                  ARTICLE IV                                   
                                                                               
                                  THE CLOSING                                  
                                                                               
4.1  Time and Place of Closing...........................................    22
4.2  Payment of Purchase Price...........................................    22
4.3  Deliveries By Sellers...............................................    22
4.4  Deliveries by the Buyer.............................................    23
                                                                               
                                   ARTICLE V                                   
                                                                               
                 REPRESENTATIONS AND WARRANTIES OF THE SELLERS                 
                                                                               
 5.1  Organization; Authority............................................    24
 5.2  Authority Relative to This Agreement...............................    24 
</TABLE> 

                                       i
<PAGE>
 
<TABLE> 
<S>                                                                          <C> 
 5.3  Consents and Approvals; No Violation...............................    24
 5.4  Title and Related Matters..........................................    25
 5.5  Environmental Matters..............................................    26
 5.6  Labor Matters......................................................    26
 5.7  ERISA; Benefit Plans...............................................    27
 5.8  Real Estate........................................................    27
 5.9  Condemnation.......................................................    28
 5.10 Certain Contracts and Arrangements.................................    28
 5.11 Legal Proceedings..................................................    29
 5.12 Permits............................................................    29
 5.13 Taxes..............................................................    29
 5.14 Representations Regarding Bangor-Pacific...........................    31
 5.15 Representations Regarding Wyman Unit No. 4.........................    33
 5.16 Insurance..........................................................    33
 5.17 Personal Property Included in Purchased Assets.....................    34
 5.18 Intellectual Property Rights.......................................    34
 5.19 Financial Statements...............................................    34 

                                  ARTICLE VI

                  REPRESENTATIONS AND WARRANTIES OF THE BUYER

 6.1  Organization.......................................................    34
 6.2  Authority Relative to This Agreement...............................    35
 6.3  Consents and Approvals; No Violation...............................    35
 6.4  Regulation as a Utility............................................    36
 6.5  Availability of Funds..............................................    36
 6.6  Litigation.........................................................    36
 6.7  Qualified Buyer....................................................    36
 6.8  Title Policy Commitment............................................    37
 6.9  "AS IS" Sale.......................................................    37
 6.10 Buyer's Affiliate..................................................    37 

                                  ARTICLE VII

                           COVENANTS OF THE PARTIES

 7.1  Conduct of Business of the Sellers.................................    37
 7.2  Access to Information..............................................    39
 7.3  Expenses...........................................................    40
 7.4  Further Assurances.................................................    41
 7.5  Public Statements..................................................    42
 7.6  Consents and Approvals.............................................    42
 7.7  Tax Matters........................................................    43
 7.8  Supplements to Schedules...........................................    45
 7.9  Employees..........................................................    45
 7.10 Risk of Loss.......................................................    48
</TABLE> 

                                      ii
<PAGE>
 
<TABLE> 
<S>                                                                          <C> 
 7.11 Confidential Information...........................................    49
 7.12 Observation, Inspection and Participation..........................    50
 7.13 Delivery of Books and Records, etc.; Removal of Property...........    51
 7.14 Millenium Compliance...............................................    52 

                                 ARTICLE VIII

                              CLOSING CONDITIONS

8.1   Conditions to Each Party's Obligations to Effect the Transactions..    52
8.2   Conditions to Obligations of the Buyer.............................    53
8.3   Conditions to Obligations of the Sellers...........................    56
                                                                               
                                  ARTICLE IX                                   
                                                                               
                                INDEMNIFICATION                                
                                                                               
9.1   Indemnification....................................................    57
9.2   Defense of Claims..................................................    59
                                                                               
                                   ARTICLE X                                   
                                                                               
                                  TERMINATION                                  
                                                                               
10.1  Termination........................................................    63
10.2  Procedure and Effect of Termination................................    64
                                                                               
                                  ARTICLE XI                                   
                                                                               
                           MISCELLANEOUS PROVISIONS                            
                                                                               
11.1  Amendment and Modification.........................................    64
11.2  Waiver of Compliance; Consents.....................................    64
11.3  No Survival........................................................    65
11.4  Notices............................................................    65
11.5  Assignment.........................................................    66
11.6  Governing Law......................................................    66
11.7  Counterparts.......................................................    66
11.8  Interpretation.....................................................    66
11.9  Schedules and Exhibits.............................................    67
11.10 Entire Agreement...................................................    67
11.11 No Punitive or Consequential Damages...............................    67
11.12 Parties' Knowledge of Others' Breach...............................    67 
</TABLE> 

                                      iii
<PAGE>
 
SCHEDULES

1.1(a)(31)  HQ Transfer Agreement Principles
1.1(a)(33)  Hydroelectric Assets
1.1(a)(49)  Project Maps
1.1(a)(53)  Seller Required Consents
1.1(a)(60)  Transitional Power Sales Agreement
1.1(a)(61)  Transmission Assets
1.1(a)(64)  West Enfield Project Finance Documents
2.2(d)      Excluded Assets
3.3         Purchase Price Allocation
5.4         Title Matters
5.5         Environmental Matters
5.6         Labor Matters
5.7         Summary of Benefit Plans
5.8         Real Estate, Easements and Encumbrances
5.9         Condemnation
5.10        Sellers' Agreements
5.11        Legal Proceedings
5.12        Permits and Permit Matters
5.13        Tax Matters
5.14        Bangor-Pacific
5.16        Insurance
5.18        Intellectual Property Rights
6.3         Buyer's Consents and Approvals
7.1         Conduct of Business; Capital Expenditures and Maintenance
            Expenditures

EXHIBITS

A  Form of Bill of Sale

B  Form of Assignment and Assumption Agreement

C  Form of FIRPTA Affidavit

D  Form of Interconnection Agreement

E  Form of Transitional Power Sales Agreement

                                      iv
<PAGE>
 
                           ASSET PURCHASE AGREEMENT

     ASSET PURCHASE AGREEMENT, dated as of September 25, 1998, by and among
BANGOR HYDRO-ELECTRIC COMPANY, a Maine corporation ("BHE"), PENOBSCOT HYDRO CO.,
INC., a Maine corporation ("PHC," and together with BHE, the "Sellers"), and
PP&L GLOBAL, INC., a Pennsylvania corporation (the "Buyer").

     WHEREAS, the Sellers own certain assets hereinafter defined as the
Purchased Assets;

     WHEREAS, the Sellers conducted an auction of the Purchased Assets, and the
Buyer was selected as the winning bidder therefor;

     WHEREAS, the Buyer and the Sellers desire to provide herein for the
purchase and sale of the Purchased Assets;

     WHEREAS, a material inducement for the Buyer and the Sellers of the
purchase and sale provided for herein is the execution on the Closing Date of
the Ancillary Agreements as defined herein;

     NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements hereinafter set forth, and intending to be legally
bound hereby, the parties hereto agree as follows:

                                   ARTICLE I

                                  DEFINITIONS
                                  -----------

     1.1 Definitions. (a) As used in this Agreement, the following terms have
         -----------
the meanings specified in this Section 1.1(a):

          (1) "Affiliate" has the meaning set forth in Rule 12b-2 of the General
Rules and Regulations under the Exchange Act.

          (2) "Ancillary Agreements" means the Assignment and Assumption
Agreement, the Interconnection Agreement (including the Separation Document),
the HQ Transfer Agreement, the Transitional Power Sales Agreement and the MEPCO
Confirmation Agreement.

          (3) "Assignment and Assumption Agreement" means the Assignment and
Assumption Agreement substantially in the form of Exhibit B hereto to be dated
as of the Closing Date pursuant to which Sellers shall assign certain intangible
Purchased Assets to Buyer and Buyer shall assume the Assumed Liabilities.

          (4) "Bid Date" means September 2, 1998.
<PAGE>
 
          (5) "Bill of Sale" means the Bill of Sale substantially in the form of
Exhibit A hereto to be delivered by a Seller at the Closing, relating to the
Purchased Assets of such Seller which constitute personal property and which are
to be transferred to the Buyer at the Closing (other than those certain
intangible Purchased Assets covered by the Assignment and Assumption Agreement).

          (6) "Business" means the business of ownership, operation and
maintenance of the Purchased Assets substantially in the manner such assets were
owned, operated and maintained on the Bid Date.

          (7) "Business Day" shall mean any day other than Saturday, Sunday and
any day which is a legal holiday or a day on which banking institutions in Maine
or New York are authorized by law or other governmental action to close.

          (8) "Buyer Representatives" means the Buyer's accountants, employees,
counsel, environmental consultants, financial advisors and other authorized
representatives.

          (9) "Capital Expenditures" means those capital expenditures which are
identified as capital expenditures on Schedule 7.1.

          (10) "CERCLA" means the Federal Comprehensive Environmental Response,
Compensation and Liability Act, as amended.

          (11) "Closing" means the closing of the sale of the Purchased Assets.

          (12) "Closing Date" means the date and time at which the Closing
actually occurs.

          (13) "Code" means the Internal Revenue Code of 1986, as amended.  All
citations to the Code or to the Treasury Regulations promulgated thereunder
("Treasury Regulations") shall include any amendments thereto and any substitute
or successor provisions thereto.

          (14) "Collective Bargaining Agreement" means the Union Agreement
between BHE and Local Union No. 1837 of the International Brotherhood of
Electrical Workers ("Local 1837"), effective January 1, 1996, as the same may be
amended from time to time.

          (15) "Confidentiality Agreement" means the Confidentiality Agreement
dated May 19, 1998 between BHE and Buyer.

          (16) "DOE" means the United States Department of Energy.

          (17) "Easements" means the reservations of easements in favor of BHE
to be included in the deeds of conveyance with respect to the Purchased Assets
constituting Real Estate as set forth in the Interconnection Agreement and the
Separation Document.

          (18) "Encumbrances" means any mortgages, pledges, liens, security
interests, conditional and installment sale agreements, options, claims,
possessory interests, title retention

                                       2
<PAGE>
 
agreements, devices or arrangements (including any lease and the nature
thereof), choate or inchoate tax liens, charges, assessments, covenants,
reservations, rights of first refusal, rights to acquire, rights of use,
restrictions (whether on use, operation, sale, transfer or otherwise), whether
imposed by deed, agreement, law or otherwise, activity and use limitations, and
conservation and other easements.

          (19)  "Environmental Laws" means all Federal, state, municipal and
local laws (including common laws), regulations, rules, ordinances, codes,
licenses, decrees, judgments, directives, or judicial or administrative orders
relating to pollution, protection, preservation or restoration of human health,
the environment or natural resources, including, without limitation, laws
relating to Releases or threatened Releases of Hazardous Substances (including,
without limitation, into or through ambient air, surface water, groundwater,
land, wetlands, surface and subsurface strata) or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Substances, including without limitation the
Clean Water Act, the Clean Air Act, the Resource Conservation and Recovery Act,
the Toxic Substances Control Act, and CERCLA, in each case as amended, and their
local counterparts.

          (20)  "Environmental Matters" means any notice of violation or any
claim, demand, liability, obligation, penalty, sanction, abatement or order or
direction by any governmental authority or any person for personal injury
(including death), tangible or intangible property damage, damage to the
environment or natural resources, pollution or contamination arising under
Environmental Laws.

          (21)  "Environmental Reports" means, collectively, the Phase 1
Environmental Assessments relating to the Hydroelectric Facilities prepared by
Dames & Moore as provided to the Buyer in the Supplement dated May 4, 1998 to
the Offering Memorandum dated April 1998, and as such reports may be amended
from time to time prior to the Closing Date solely for purposes of including
additional items therein.

          (21A) "Equity Contribution Agreement" means the Equity Contribution
Agreement dated September 25, 1998 among Buyer, Sellers and PP&L Resources, Inc.

          (22)  "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.

          (23)  "Estimated Adjustment Amount" means the Sellers' good faith
reasonable estimate of the Adjustment Amount for the Closing, calculated in
accordance with Section 3.2(b) hereof.

          (24)  "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

          (25)  "Federal Power Act" means the Federal Power Act of 1935, as
amended.

          (26)  "FERC" means the Federal Energy Regulatory Commission.

          (27)  "FIRPTA Affidavit" means a Foreign Investment in Real Property
Tax Act Certification and Affidavit substantially in the form of Exhibit C
hereto.

                                       3
<PAGE>
 
          (28) "Good Utility Practice" means any of the applicable practices,
methods and acts:

               (i) required of the party to whom Good Utility Practice is being
     applied under regulations of the National Electric Safety Code, New England
     Power Pool ("NEPOOL"), Northeast Power Coordinating Council, a regional
     reliability governing body, North American Electric Reliability Council, or
     the successor of any of them, whether or not the party whose conduct is at
     issue is a member thereof; or

               (ii) otherwise engaged in or approved by a significant portion of
     the electric utility industry during the relevant time period; 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 to the party being expected to apply Good
     Utility Practice, consistent with law, regulation, good business practices,
     generation, transmission, and distribution reliability, safety, and
     expedition.  Good Utility Practice is intended to include practices,
     methods, or acts generally accepted in the region, and is not intended to
     be limited to optimum practices, methods, or acts to the exclusion of all
     others.  Good Utility Practice does not include intentional disregard of
     contractual commitments, even if those commitments are uneconomic under
     current market conditions.

          (29) "Hazardous Substances" means (a) any petrochemical or petroleum
products, oil or coal ash, radioactive materials, radon gas, asbestos in any
form that is or could become friable, urea formaldehyde foam insulation and
transformers or other equipment that contain dielectric fluid which may contain
levels of polychlorinated biphenyls; (b) any chemicals, materials or substances
defined in any applicable Environmental Law as or included in the definition of
"hazardous substances," "hazardous chemicals," "hazardous wastes," "hazardous
materials," "hazardous matter," "restricted hazardous materials," "extremely
hazardous substances," "toxic substances," "contaminants" or "pollutants" or
words of similar meaning or regulatory effect; or (c) any other chemical,
material or substance, the discharge, emission or Release of which is
prohibited, limited or regulated by any applicable Environmental Law.

          (30) "Holding Company Act" means the Public Utility Holding Company
Act of 1935, as amended.

          (31) "HQ Transfer Agreement" means an agreement to be mutually agreed
by BHE and Buyer prior to the Closing Date in accordance with the principles set
forth in Schedule 1.1(a)(31) pursuant to which the rights and obligations
described in clause (ii) of the definition of "Transmission Assets" are to be
conveyed by BHE to Buyer, and the Additional Payments are to be made by Buyer to
BHE.

          (32) "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.

          (33) "Hydroelectric Assets" means, subject to the Easements and
Section 2.2, all of the Sellers' right, title and interest in, to and under: (a)
the real property described in clause (i)

                                       4
<PAGE>
 
below and the personal property, tangible or intangible, constituting or used or
held for use principally for the Business in connection with, or, as determined
pursuant to the Separation Document, necessary for the Business in connection
with, the hydroelectric facilities listed on Schedule 1.1(a)(33) (the
"Hydroelectric Facilities"), and (b) PHC's interest in Bangor-Pacific,
including, but not limited to, the following assets owned by the Sellers:

               (i)    with respect to each of the Hydroelectric Facilities and
     excluding any Excluded Assets, the real property (including all buildings,
     structures, fixtures and other improvements thereon) described in the deeds
     referenced in Schedule 5.8 (subject to the Separation Document) and
     contained within the boundary description set forth or referred to in the
     applicable FERC license, easements and rights of way of record relating to
     the Hydroelectric Facilities in favor of Sellers, as well as the real
     property described in the applicable Project Map as being included in the
     Hydroelectric Assets (other than any property identified therein as
     property being retained by Sellers) (the "Hydroelectric Facilities Real
     Property");

               (ii)   all inventories of supplies, materials and spares (a
     listing of which, as of the Bid Date, is included in Schedule 1.1(a)(33))
     located at, held for use principally in connection with or in transit to
     any of the Hydroelectric Facilities on the Closing Date;

               (iii)  the machinery, equipment, furniture and other personal
     property (but excluding any Excluded Assets) located at or held for use
     principally in connection with any of the Hydroelectric Facilities on the
     Closing Date, including, without limitation, the items of personal property
     identified in Schedule 1.1(a)(33) as being associated with any of the
     Hydroelectric Facilities as of the Bid Date and all warranties against
     manufacturers or vendors relating thereto to the extent such warranties are
     freely transferable by the Sellers;

               (iv)   the vehicles, boats, trailers and other rolling stock
     utilized or held for use as of the Closing Date by any of the Sellers
     principally in connection with any of the Hydroelectric Facilities
     including, without limitation, the items included in Schedule 1.1(a)(33) as
     of the Bid Date, and all warranties against manufacturers or vendors
     relating thereto to the extent such warranties are freely transferable by
     the Sellers;

               (v)    the contracts, agreements and personal property leases
     listed on Schedule 5.10 that are described therein as being associated with
     any of the Hydroelectric Facilities or the related Business and are
     assignable;

               (vi)   except for prepaid expenses and deposits of any of the
     Sellers attributable to contracts constituting Excluded Assets, all prepaid
     expenses, progress payments and deposits of or by any of the Sellers,
     rights to receive a prepaid expense, deposit or progress payment, and cash
     in transit that constitutes a prepaid expense, progress payment or deposit,
     if any, relating to the conduct of the Business in connection with any of
     the Hydroelectric Facilities, including without limitation the items listed
     on Schedule 1.1(a)(33);

                                       5
<PAGE>
 
               (vii)  all books, operating and maintenance records, operating,
     safety and maintenance manuals, engineering or design plans, drawings,
     blueprints and as-built plans, specifications, procedures and similar items
     of Sellers relating specifically to any of the Hydroelectric Facilities,
     other than books of account;

               (viii) all trade secrets, patents and patentable inventions
     owned by any of the Sellers, to the extent necessary for the ownership,
     operation and maintenance of the assets described in clauses (i)-(vii) of
     this Section 1.1(a)(33), and any rights of Sellers in and to the names of
     the Hydroelectric Facilities;

               (ix)   all rights, privileges, claims, causes of action and
     options relating to the Business in connection with any of the
     Hydroelectric Facilities (including any of the Sellers' goodwill therein);

               (x)    any other warranties and indemnities given by third
     parties with respect to any of the assets described above or in connection
     with the Business conducted in connection with any of the Hydroelectric
     Facilities;

               (xi)   BHE's "Request for Rehearing and Clarification" filed at
     the FERC on May 20, 1998 in respect of Projects Nos. 10981, 2712, 2534,
     2403 and 2710 and Docket No. DI97-10, and all causes of action and rights
     thereunder, and all causes of action and rights arising in any of those
     proceedings, together with their supporting documents, including, but not
     limited to, applications, exhibits and drawings; and

               (xii)  All of the rights and other assets of BHE described on
     Schedule 1.1(a)(33) relating to the license applications and water quality
     permits associated with the Basin Mills Project No. 10981, the Medway
     Project No. 2666 and the Howland Project No. 2721 (in each case as defined
     in such schedule), together with their supporting documents, including, but
     not limited to, applications, exhibits and drawings.

          (34) "Hydro Quebec Agreements" means those agreements listed under the
heading "Hydro Quebec Agreements" in Schedule 5.10.

          (35) "Indentures" means, collectively, (i) the Mortgage and Deed of
Trust, dated as of July 1, 1936, from BHE to Citibank, N.A., successor by merger
to City Bank Farmers Trust Company, as trustee, as from time to time amended and
supplemented, and (ii) the General and Refunding Mortgage Indenture and Deed of
Trust, dated as of June 1, 1995, from BHE to Chase Manhattan Bank, N.A.,
successor by merger to Chemical Bank, as trustee, as from time to time amended
and supplemented.

          (36) "Independent Accounting Firm" means an independent accounting
firm of national reputation mutually appointed by the Sellers and the Buyer.

          (37) "Interconnection Agreement" means the Interconnection Agreement
substantially in the form of Exhibit D hereto to be dated as of the Closing
Date, between BHE and the Buyer.

                                       6
<PAGE>
 
          (38) "Knowledge" means the actual and conscious knowledge of the
members of management of Sellers or Buyer, as the case may be, after reasonable
inquiry by them of selected employees of the Sellers or Buyer, as the case may
be, whom they believe, in good faith, to be the persons generally responsible
for the subject matters to which the knowledge is pertinent.

          (39) "Maintenance and Capital Expenditures Amount" means the aggregate
amount of all funds actually expended on, or for which liabilities were accrued
with respect to, Maintenance Expenditures and Capital Expenditures by BHE, if
any, during the period beginning on the date hereof and ending on the Closing
Date, but not to exceed $500,000 in the aggregate except as agreed in writing by
Buyer.

          (40) "Maintenance Expenditures" means those maintenance expenditures
which are identified as maintenance expenditures on Schedule 7.1.

          (41) "Material Adverse Effect" means any change in or effect on the
Purchased Assets or the Business after the Bid Date that is, individually or in
the aggregate, materially adverse to the physical condition, ownership or
operation of the Purchased Assets (including without limitation any change or
effect resulting from governmental action) and which change or effect causes the
value of the Purchased Assets, taken as a whole, to decrease by more than ten
percent (10%), other than any such materially adverse change in or effect on the
Purchased Assets which is cured (including by the payment of money) by the
Sellers before the Closing Date.

          (42) "MEPCO Confirmation Agreement" means the agreement of even date
herewith between BHE and Buyer providing for the terms of the reassignment by
BHE of the MEPCO Reservation to Buyer effective as provided therein.

          (43) "MEPCO Reservation" means BHE's transmission service reservation
with Maine Electric Power Company ("MEPCO"), pursuant to (i) 45 MW Long Term
Firm Transmission Service Agreement dated July 9, 1996 between MEPCO and BHE, as
extended by the Letter Agreement dated September 12, 1997 (the "Letter
Agreement") between MEPCO and BHE and (ii) 55 MW Long Term Firm Transmission
Service Agreement dated July 24, 1996 between MEPCO and BHE, as extended by the
Letter Agreement.  This reservation is for firm point-to-point transmission
service from the Maine/New Brunswick border to the MEPCO 345/115 kV substation
in Orrington, Maine, in the amount of 100 megawatts pursuant to the MEPCO
transmission tariff filed at and approved by FERC.

          (44) "Milford Project" means, subject to Section 2.2, the
hydroelectric generating plant and associated equipment and property described
in its FERC license, located in Milford, Maine as described in Schedule
1.1(a)(33).

          (45) "MPUC" means the Maine Public Utilities Commission.

          (46) "Permitted Encumbrances" means: (i) those Encumbrances and
exceptions to the title to the Purchased Assets set forth in Schedule 5.8 in the
form delivered on the date hereof and the Easements, provided that such
Encumbrances, exceptions and Easements do not render title to the Purchased
Assets unmarketable or prevent adequate access to the Purchased

                                       7
<PAGE>
 
Assets to which they relate, or materially interfere with the continuing
ownership, use, operation or maintenance of such assets consistent with
historical practice or materially detract from the Business; (ii) all
exceptions, restrictions, easements, charges, licenses, leases, rights-of-way
and encumbrances which, as of the Bid Date, are matters of record or are set
forth in an applicable FERC project license, except for such encumbrances which
secure indebtedness, provided that, to the Knowledge of Sellers, no such items
render title to the Purchased Assets unmarketable or prevent adequate access to
the Purchased Assets to which they relate, or materially interfere with the
continuing ownership, use, operation or maintenance of such assets consistent
with historical practice or materially detract from the Business; (iii) when
such term is used with respect to any date before the Closing Date, Encumbrances
created by the Indentures or, to the extent of Encumbrances specifically
described in such Schedule, the agreements listed in Schedule 5.10 in the form
delivered on the date hereof; (iv) Encumbrances incurred in connection with the
Sellers' purchase of properties or assets constituting Purchased Assets in the
ordinary course of business securing all or a portion of the purchase price
therefor; (v) when such term is used with respect to any date prior to the
Closing Date, Encumbrances permitted by the Indentures; (vi) statutory liens for
current taxes or assessments not yet delinquent or the validity of which is
being contested in good faith by appropriate proceedings; (vii) when such term
is used with respect to any date prior to the Closing Date, mechanics',
carriers', workers', repairers' and other similar liens arising or incurred in
the ordinary course of business; (viii) zoning, entitlement, conservation
restriction and other land or water use or Environmental Laws or regulations
administered by governmental authorities; (ix) such other minor liens,
imperfections in or failures of title, charges, easements, restrictions and
encumbrances, whether or not of record, which, individually or in the aggregate,
do not materially detract from the value of the Purchased Assets as currently
used or materially interfere with the ownership, use, operation or maintenance
of the Purchased Assets; and (x) with respect to the Wyman Assets, the terms and
provisions of the Wyman Agreements.

          (47) "Person" means any individual, partnership, limited liability
company, limited liability partnership, joint venture, corporation, trust,
unincorporated organization and any governmental entity or any department or
agency thereof.

          (48) "Pre-Closing Periods" means all Tax periods ending on or before
the Closing Date and, with respect to any Tax period that includes but does not
end on the Closing Date, the portion of such period that includes and ends on
the Closing Date.

          (49) "Project Maps" means the maps contained in Schedule 1.1(a)(49)
provided by the Sellers depicting certain portions of the Hydroelectric
Facilities Real Property and the Excluded Assets.

          (50) "Purchased Assets" means collectively the Hydroelectric Assets,
the Wyman Assets and the Transmission Assets, provided, that the term "Purchased
Assets" does not include any fuel, supplies, materials, spares or other
inventory listed as such on the schedules to this agreement to the extent such
fuel, supplies, materials, spares or inventory are used at or incorporated into
the Purchased Assets prior to the Closing Date and, for the avoidance of doubt,
Buyer acknowledges that for purposes of Sellers' representations and warranties
contained in this Agreement, "Purchased Assets" does not refer in any way to
Wyman Station, but only to Sellers' right, title and interest in the Wyman
Assets.

                                       8
<PAGE>
 
          (51) "Release" means release, spill, leak, discharge, dispose of,
pump, pour, emit, empty, inject, leach, dump or allow to escape into or through
the environment.

          (52) "SEC" means the Securities and Exchange Commission.

          (53) "Seller Required Consents" means those consents and waivers
listed or referenced on Schedule 1.1(a)(53) attached hereto.

          (54) "Sellers' Agreements" means those agreements listed or referenced
on Schedule 5.10.

          (55) "Separation Document" means the Separation Document to be
prepared under the terms of the Interconnection Agreement.

          (56)  [Intentionally omitted.]

          (57) "Tax Return" means any return, report, information return or
other document (including any related or supporting information) required to be
supplied to any authority with respect to Taxes.

          (58) "Tax" or "Taxes" means any or all taxes, charges, fees, levies,
penalties or other assessments imposed by any United States Federal, state or
local or foreign taxing authority, including, but not limited to, income,
excise, property, sales, use, transfer, franchise, payroll, withholding, social
security or other taxes, including any interest, penalties or additions
attributable thereto.

          (59) "Title Insurance Company" means Lawyers' Title Insurance
Corporation or First American Title Insurance Company or another reputable title
insurance company selected by Buyer and reasonably acceptable to Sellers.

          (60) "Transitional Power Sales Agreement" means a Transitional Power
Sales Agreement to be mutually agreed by BHE and Buyer prior to the Closing Date
providing for the sale by Buyer to BHE of installed capacity and energy from the
Hydroelectric Facilities, which agreement shall be based on the form thereof
attached as Exhibit E which shall be modified by BHE and Buyer in accordance
with the principles set forth in Schedule 1.1(a)(60).

          (61) "Transmission Assets" means (i) BHE's rights to develop and
utilize a second 345kV tie-line with New Brunswick Power Corporation as
described in Schedule 1.1(a)(61) (the "345 Line") and (ii) BHE's rights and
obligations under the Hydro Quebec Agreements, but does not include ownership or
operational control of any of such transmission facilities nor any obligations
to make support payments pursuant to the Hydro Quebec Agreements.

          (62) "WARN Act" means the Federal Worker Adjustment Retraining and
Notification Act of 1988.

                                       9
<PAGE>
 
          (63) "West Enfield Hydro Project" means the 13 MW hydroelectric power
station and associated dam and reservoir located on the Penobscot River just
upstream of its confluence with the Piscataquis River in the towns of Enfield
and Howland, Maine.

          (64) "West Enfield Project Finance Documents" means the agreements and
documents listed in Schedule 1.1(a)(64).

          (65) "Window Expiration Date" means the later of (i) the date six
months from the date of this Agreement and (ii) the date three months prior to
the Closing Date.

          (66) "Wyman Agreements" means (i) the William F. Wyman Unit No. 4
Agreement for Joint Ownership, Construction and Operation, dated as of November
1, 1974, by and among BHE, Central Maine Power Company, Maine Public Service
Company, Boston Edison Company, Fitchburg Gas and Electric Light Company,
Montaup Electric Company, New England Power Company, New Bedford Gas and Edison
Light Company, Newport Electric Corporation, Public Service Company of New
Hampshire, Central Vermont Public Service Corporation, Green Mountain Power
Corporation, City of Burlington Electric Department, Village of Lyndonville
Electric Department, and Massachusetts Municipal Wholesale Electric Company, as
amended by Amendments Nos. 1, 2 and 3 dated, respectively, June 30, 1975, August
16, 1976 and December 31, 1978, as amended (the "Wyman Joint Ownership
Agreement"), (ii) The William F. Wyman Unit No. 4 Transmission Agreement, dated
as of November 1, 1974, as amended, by and among BHE and the other parties to
the agreement described in clause (i) above, and (iii) the deed to BHE of its
joint ownership interest in common in Wyman Unit No. 4, by deed of Central Maine
Power Company to BHE et. al., dated December 22, 1976, and recorded in the
Cumberland County Registry of Deeds in Book 3955, Page 140.

          (67) "Wyman Assets" means, subject to Section 2.2, BHE's entire joint
ownership interest in Unit 4 of Wyman Station as set forth in the Wyman
Agreements, including, but not limited to, the following assets to the extent of
BHE's interest therein under the Wyman Agreements:

               (i)    the real property associated with Unit 4 of Wyman Station
     or the related Business;

               (ii)   all inventories of fuels, supplies, materials and spares
     located at, held for use principally in connection with, or in transit to
     Unit 4 of Wyman Station on the Closing Date;

               (iii)  the machinery, equipment, furniture and other personal
     property (but excluding any Excluded Assets) located at or held for use
     principally in connection with Unit 4 of Wyman Station on the Closing Date;
     and

               (iv)   the vehicles, trailers and other rolling stock utilized or
     held for use as of the Closing Date in connection with Unit 4 of Wyman
     Station.

                                      10
<PAGE>
 
         (68) "Wyman Station" means the electric generating facilities known as
the William F. Wyman Station (sometimes referred to as Yarmouth Station) located
in Yarmouth, Maine.

     (b) Each of the following terms has the meaning specified in the Section
set forth opposite such term:

         Term                                           Section                
         ----                                           -------               

         Additional Payments                            3.1                   
         Adjustment Amount                              3.2(b)                
         Adjustment Statement                           3.2(b)                
         Ancillary Agreements                           Recitals              
         Assumed Liabilities                            2.3(b)                
         Audited Balance Sheet                          5.19                  
         Bangor-Pacific                                 5.14(b)               
         Bangor-Pacific Interest                        5.14(b)               
         Bangor-Pacific Operating Co.                   5.14(b)               
         Basin Mills Hydro Project                      Schedule 1.1(a)(33)   
         BHE                                            Recitals              
         BP Permits                                     5.14(i)               
         Buyer                                          Recitals              
         Buyer Group                                    9.1(a)                
         Buyer Required Regulatory Approvals            6.3(b)                
         Buyer's Window                                 7.9(a)                
         Century Date Compliant                         7.14                  
         Certain Indemnifiable Loss                     9.1(a)                
         Closing Conditions                             4.1                   
         COBRA                                          7.9(h)                
         Direct Claim                                   9.2(c)                
         Employee Transition Plan                       7.9(f)                
         Employees                                      7.9(a)                
         Environmental Condition                        9.2(f)                
         Environmental Permits                          5.5(a)                
         EPA                                            5.3(b)                
         ERISA Affiliate Plan                           2.4(vii)              
         Excluded Assets                                2.2                   
         Excluded Liabilities                           2.4                   
         Final                                          8.1(c)                
         HIPAA                                          7.9(h)                
         HQ Transmission Support Agreements             Schedule 5.10         
         Hydroelectric Facilities                       1.1(a)(33)(a)         
         Hydroelectric Facilities Real Property         1.1(a)(33)(i)         
         Indemnifiable Loss                             9.1(a)                
         Indemnifying Party                             9.1(d)                
         Indemnitee                                     9.1(c)                

                                      11
<PAGE>
 
         Term                                           Section
         ----                                           -------

         Information                                    7.2(b)                
         Initial Payment                                3.1                   
         Intellectual Property                          5.18                  
         Inventory Adjustment Amount                    3.2(b)                
         Letter Agreement                               1.1(a)(43)            
         Local 1837                                     1.1(a)(14)            
         Maine Restructuring Law                        7.9(a)                
         MDEP                                           5.3(b)                
         MEPCO                                          1.1(a)(43)            
         NEPOOL                                         1.1(a)(28)(i)         
         Other Intellectual Property                    5.18                  
         Permits                                        5.12                  
         PHC                                            Recitals              
         Preliminary Purchase Price                     4.2                   
         Prior Welfare Plans                            7.9(d)                
         Process                                        7.14(a)               
         Purchase Price                                 3.1                   
         Purchased Assets Employee                      2.4(iv)               
         Remediation                                    9.2(f)                
         Replacement Welfare Plans                      7.9(d)                
         Representative                                 7.11(a)               
         Real Estate                                    5.8                   
         Site Representatives                           7.12                  
         Seller Indemnified Environmental Losses        9.1(a)                
         Seller Required Regulatory Approvals           5.3(b)                
         Sellers                                        Recitals              
         Sellers Group                                  9.1(b)                
         Technology                                     7.14                  
         Termination Date                               10.1(b)               
         Third Party Claim                              9.2(a)                
         345 Line                                       1.1(a)(61)            
         345 Line ROWs                                  Schedule 1.1(a)(61)   
         Title Commitment                               6.8                   
         Transferred Employee                           7.9(a)                
         Treasury Regulations                           1.1(a)(13)            
         Unaudited Balance Sheet                        5.19                  
         Veazie Hydro Project                           Schedule 1.1(a)(33)   
         VRAP                                           9.2(f)                
         West Enfield Loan Agreement                    Schedule 1.1(a)(64)   
         West Enfield Joint Venture Agreement           Schedule 5.10         
         Wyman 4 Interest                               5.15                  
         Wyman Joint Ownership Agreement                1.1(a)(66)            

                                      12
<PAGE>
 
                                  ARTICLE II

                               PURCHASE AND SALE
                               -----------------

     2.1  The Sale.  Upon the terms and subject to the satisfaction of the
          -------- 
conditions contained in this Agreement (or waiver of such conditions as
permitted by this Agreement), at the Closing the Sellers will sell, assign,
convey, transfer and deliver to the Buyer, and the Buyer will purchase and
acquire from Sellers, free and clear of all Encumbrances (except for those
Permitted Encumbrances which are permitted by definition to survive after the
Closing Date), all of the Sellers' right, title and interest in, to and under
the Purchased Assets.

     2.2  Excluded Assets.  Notwithstanding any provisions herein to the
          --------------- 
contrary, the Purchased Assets shall not include the following assets of Sellers
(herein referred to as the "Excluded Assets"):

          (a) all cash, cash equivalents, bank deposits, accounts receivable,
notes receivable, checkbooks and canceled checks, regulatory assets and any
income, sales, payroll or other tax receivables;

          (b) certificates of deposit, shares of stock, securities, bonds,
debentures, evidences of indebtedness, and interests in joint ventures,
partnerships, limited liability companies and other entities (other than those
described in Sections 1.1(a)(67) and 1.1(a)(33)(b) hereof);

          (c) any trade names, trademarks, service marks or logos incorporating
or associated with any names of the Sellers, provided that Buyer shall be
authorized to continue to use for internal purposes only and not for public use,
materials bearing such names, trademarks or logos (such as employee manuals)
used by Sellers prior to the Closing Date until such materials are reprinted or
otherwise replaced;

          (d) all transmission, distribution, and substation facilities,
including, but not limited to, those described or referred to in Schedule
2.2(d), the precise delineation and composition of which shall be subject to the
Separation Document;

          (e) all contracts between BHE and customers purchasing electric
capacity and energy from BHE under wholesale rates or otherwise subject to
regulation by the FERC and all contracts of any nature of Sellers which do not
expressly constitute Purchased Assets;

          (f) any refund or credit (i) related to real or personal property,
excise, sales or use Taxes paid by the Sellers prior to the Closing Date in
respect of the Purchased Assets, or paid by the Sellers after the Closing Date
but relating to periods prior to the Closing Date, whether such refund is
received as a payment or as a credit against future real or personal property,
excise, sales or use Taxes payable, or (ii) arising under any Sellers' Agreement
and relating to a period before the Closing Date;

                                      13
<PAGE>
 
          (g) except to the extent required by law, all personnel records
relating to the Purchased Assets Employees who become employees of the Buyer;

          (h) any amounts payable or which become payable pursuant to claims
asserted by any of the Sellers with respect to periods prior to the Closing Date
relating to the Purchased Assets, including, without limitation, all contractual
and equitable rights of BHE to receive payments from any other holder of a joint
ownership interest in Wyman Unit No. 4 pursuant to Sections 5, 6, 7 or 7.1 of
the Wyman Joint Ownership Agreement as a result of the sale by such holder of
real or personal property constituting a portion of Wyman Station regardless of
when such sale is consummated (but excluding any rights relating to the
development, construction or operation of a future generating unit at the Wyman
Station site arising under the second paragraph of Section 5 of the Wyman Joint
Ownership Agreement); and

          (i) all real property of Sellers described in the Project Maps or in
Schedule 5.8 or any other part of this Agreement as real property to be retained
by Sellers.

     2.3  Assumed Liabilities.
          ------------------- 

          (a) On the Closing Date, the Buyer and the Sellers shall enter into
the Assignment and Assumption Agreement, pursuant to which, among other things,
the Buyer shall assume and agree to discharge, when due, all of the liabilities
and obligations of the Sellers, direct or indirect, known or unknown, absolute
or contingent, which arise and are attributable to the period after the Closing
Date and relate solely to the Purchased Assets or which arose or relate to the
period on or prior to the Closing Date and are specifically referred to in this
Section 2.3(a), other than Excluded Liabilities, in accordance with the
respective terms and subject to the respective conditions thereof.  Without
limitation of the foregoing, the following liabilities and obligations shall be
included in the Assumed Liabilities:

              (i)  all liabilities and obligations of the Sellers, to the extent
     and only to the extent arising and attributable to the period after the
     Closing Date, under (a) the Sellers' Agreements and the real property
     leases comprising a part of the Purchased Assets in accordance with the
     terms thereof, (b) the Permits and Environmental Permits that are
     transferred to Buyer and (c) the contracts, leases and other agreements
     entered into by the Sellers with respect to the Purchased Assets after the
     date hereof in the ordinary course of business and consistent with the
     terms of this Agreement (including, without limitation, agreements with
     respect to liabilities for real or personal property Taxes on any of the
     Purchased Assets entered into by any Seller and any local government and in
     all cases involving agreements requiring Buyer's consent under Section 7.1,
     solely such agreements entered into with the prior written consent of
     Buyer); provided that Assumed Liabilities shall not include liabilities and
     obligations to the extent such liabilities and obligations, but for a
     breach or default by either of the Sellers, would have been paid, performed
     or otherwise discharged specifically by their terms or the terms hereof on
     or prior to the Closing Date or to the extent the same arise out of any
     such breach or default;

              (ii) all liabilities and obligations in respect of Taxes for
     which the Buyer is liable pursuant to Section 7.7;

                                      14
<PAGE>
 
               (iii)  any liabilities and obligations associated with the
     Purchased Assets for which the Buyer has indemnified the Sellers pursuant
     to Section 9.1;

               (iv)   all liabilities and obligations with respect to the
     Transferred Employees for which the Buyer is responsible pursuant to
     Section 7.9;

               (v)    any liability, obligation or responsibilities under or
     related to former, current or future Environmental Laws, Environmental
     Matters or the common law, whether such liability or obligation or
     responsibility is known or unknown, contingent or accrued, arising as a
     result of or in connection with (a) any violation or alleged violation of
     Environmental Laws with respect to the ownership or operation of the
     Purchased Assets after the Closing Date; (b) compliance with applicable
     Environmental Laws with respect to the ownership or operation of the
     Purchased Assets after the Closing Date; (c) loss of life, injury to
     persons or property or damage to natural resources caused (or allegedly
     caused) by the presence or Release of Hazardous Substances at, on, in,
     under, adjacent to, or migrating from the Purchased Assets after the
     Closing Date, including, but not limited to, Hazardous Substances contained
     in building materials at the Purchased Assets or in the soil, surface
     water, sediments, groundwater, landfill cells, or in other environmental
     media at or adjacent to the Purchased Assets; (d) loss of life, injury to
     persons or property or damage to natural resources caused (or allegedly
     caused) by the offsite disposal, storage, transportation, discharge,
     Release or recycling of Hazardous Substances in connection with the
     ownership or operation of the Purchased Assets after the Closing Date; (e)
     the investigation and/or remediation of Hazardous Substances that have been
     Released at, on, in, under, adjacent to, or migrating from the Purchased
     Assets after the Closing Date, including, but not limited to, Hazardous
     Substances contained in building materials at the Purchased Assets or in
     the soil, surface water, sediments, groundwater, landfill cells, or in
     other environmental media at the Purchased Assets; (f) the investigation
     and/or remediation of Hazardous Substances that are disposed, stored,
     transported, discharged, Released or recycled at any off-site location
     after the Closing Date in connection with the ownership or operation of the
     Purchased Assets; and (g) any violation or alleged violation of
     Environmental Law, and any loss of life, injury to persons or property or
     damage to natural resources caused (or allegedly caused) by (i) negligent
     acts or omissions by the Buyer at any of the Purchased Assets; (ii) acts or
     omissions by the Buyer at any of the Purchased Assets which cause a
     condition not in violation of Environmental Law or not in need of
     remediation under Environmental Law on or prior to the Closing Date to be
     in violation of Environmental Law or in need of remediation under
     Environmental Law (including, without limitation, the Release or
     destabilization of Hazardous Substances which are in a stable or contained
     state and are in compliance with all applicable Environmental Laws); or
     (iii) negligent acts or omissions by the Buyer at any of the Purchased
     Assets after the Closing Date that exacerbate or aggravate any condition in
     violation of Environmental Law or in need of remediation under
     Environmental Law on the Closing Date, to the extent of any such negligent
     exacerbation or aggravation; provided, that the mere discovery or failure
     to discover by the Buyer of a violation of Environmental Law or a condition
     in need of remediation under Environmental Law which violation or condition
     existed on the Closing Date, in and of itself shall not be included in this
     clause (g); provided, that 

                                      15
<PAGE>
 
     nothing set forth in this Section 2.3(a)(v) shall require the Buyer to
     assume any liabilities that are described in Section 2.4(v) or 2.4(vi);

              (vi)   all liabilities incurred by any of the Sellers for payment
     of Maintenance Expenditures and Capital Expenditures directly related to
     the Purchased Assets to the extent not included in the Maintenance and
     Capital Expenditures Amount and agreed to be reimbursed in writing by
     Buyer; and

              (vii)  with respect to the Purchased Assets, (a) any Tax that may
     be imposed by any state or local government on the ownership, sale,
     operation, or use of the Purchased Assets with respect to the periods after
     the Closing Date, including real or personal property Taxes except as
     otherwise provided in Section 7.7, (b) any software license transfer,
     reissuance or similar costs relating to any of the Purchased Assets and (c)
     Permitted Encumbrances which are permitted by definition to survive the
     Closing Date.

          (b) All of the foregoing liabilities and obligations to be assumed by
the Buyer under Section 2.3(a) (excluding any Excluded Liabilities) are referred
to herein as the "Assumed Liabilities."  None of the liabilities and obligations
of the Sellers assumed by Buyer are intended to be expanded, increased,
broadened or enlarged as to rights or remedies of third parties against the
Buyer as compared to such rights or remedies which such parties would have had
against the Sellers had the transactions contemplated by this Agreement not
taken place.

          (c) Subject to Section 9.2(f), the parties agree and acknowledge that
after the Closing Date the Buyer shall be entitled exclusively to control any
litigation, administrative or regulatory proceeding or investigation arising out
of or related to any Assumed Liabilities and the Sellers agree to promptly
notify the Buyer of the institution or commencement of any of the foregoing and
to cooperate fully with the Buyer in connection therewith (provided that
Sellers' cooperation need not include the payment of money or any other
financial accommodation).

     2.4  Excluded Liabilities.  Except as expressly stated in this Agreement to
          --------------------
the contrary, Buyer shall not assume and shall not be responsible for, and
Sellers shall be and remain liable for, the payment, performance or discharge of
any liability or obligation of Sellers whatsoever other than the Assumed
Liabilities. Sellers covenant and agree that they will fully discharge (or
mutually settle, compromise or, as provided in Section 9.1, indemnify the Buyer
against) all their respective liabilities and obligations as to which Sellers'
failure to so discharge or settle could result in an Encumbrance against any of
the Purchased Assets or a claim against Buyer, except the Assumed Liabilities.
All such liabilities and obligations not being assumed by Buyer pursuant to
Section 2.3 are herein called the "Excluded Liabilities." Without limitation of
the foregoing, the Excluded Liabilities shall include without limitation, the
following liabilities or obligations:

              (i)    any liabilities or obligations of any of the Sellers in
     respect of any Excluded Assets or other assets of the Sellers which are not
     Purchased Assets;

              (ii)   any liabilities or obligations in respect of Taxes for
     which any of the Sellers are liable pursuant to Section 7.7;

                                      16
<PAGE>
 
               (iii) any liabilities or obligations of the Sellers with respect
     to commitments for the purchase or sale of power or fuel, other than under
     any Sellers' Agreement;

               (iv)  Except for obligations assumed by Buyer under Section 7.9,
     any liabilities or obligations relating to the Sellers' employment of,
     termination of employment of, provision of benefits to, and compensation of
     employees employed at the Purchased Assets, including but not limited to an
     employee whose employment principally relates to any of the Purchased
     Assets (a "Purchased Assets Employee"), and any personal injury,
     discrimination, harassment, wrongful discharge or other wrongful employment
     practice, unfair labor practice, claims for benefits (including claims
     arising under ERISA or workers' compensation laws), or similar claims or
     causes of action, known or unknown, absolute or contingent, asserted or
     unasserted, of any such person arising out of acts or omissions occurring
     or otherwise attributable to the period on or before the Closing Date;

               (v)   any liabilities, obligations, or responsibilities under or
     related to former, current or future Environmental Laws, Environmental
     Matters or the common law, whether such liability or obligation or
     responsibility is known or unknown, contingent or accrued, arising as a
     result of or in connection with (a) any violation or alleged violation of
     Environmental Laws with respect to the offsite disposal, storage,
     transportation, discharge, Release or recycling of Hazardous Substances on
     or prior to the Closing Date in connection with the ownership, operation or
     maintenance of the Purchased Assets; (b) compliance with applicable
     Environmental Laws with respect to the offsite disposal, storage,
     transportation, discharge, Release or recycling of Hazardous Substances on
     or prior to the Closing Date in connection with the ownership, operation or
     maintenance of the Purchased Assets; (c) loss of life, injury to persons or
     property or damage to natural resources (whether or not such loss, injury
     or damage was made manifest before or after the Closing Date) caused (or
     allegedly caused) by the offsite disposal, storage, transportation,
     discharge, Release or recycling of Hazardous Substances on or prior to the
     Closing Date in connection with the Purchased Assets, or the ownership,
     operation or maintenance of the Purchased Assets; and (d) the investigation
     and/or remediation (whether or not such investigation or remediation
     commenced on or before the Closing Date) of Hazardous Substances that are
     disposed, stored, transported, discharged, Released or recycled, or the
     arrangement for such activities at any off-site location, on or prior to
     the Closing Date, in connection with the Purchased Assets or the ownership,
     operation or maintenance of the Purchased Assets;

               (vi)  any liabilities, obligations or responsibilities under or
     related to former, current or future Environmental Laws, Environmental
     Matters or the common law, whether such liability, obligation or
     responsibility is known or unknown, contingent or accrued, arising as a
     result of or in connection with (a) any violation or alleged violation of
     Environmental Laws with respect to the ownership or operation of the
     Purchased Assets on or prior to the Closing Date; (b) compliance with
     applicable Environmental Laws with respect to the ownership or operation of
     the Purchased Assets on or prior to the Closing Date; (c) loss of life,
     injury to persons or property or damage to natural resources (whether or
     not such loss, injury or damage was made manifest before or after the
     Closing Date) caused (or allegedly caused) by the presence or Release of
     Hazardous 

                                      17
<PAGE>
 
     Substances at, on, in, under, adjacent to or migrating from the Purchased
     Assets on or prior to the Closing Date, including, but not limited to,
     Hazardous Substances contained in building materials at the Purchased
     Assets or in the soil, surface water, sediments, groundwater, landfill
     cells, or in other environmental media at or adjacent to the Purchased
     Assets on or prior to the Closing Date and (d) the investigation and/or
     remediation (whether or not such investigation or remediation commenced on
     or before the Closing Date) of Hazardous Substances that are present or
     have been Released at, on, in, under, adjacent to or migrating from the
     Purchased Assets on or prior to the Closing Date, including, but not
     limited to, Hazardous Substances contained in building materials at the
     Purchased Assets or in the soil, surface water, sediments, groundwater,
     landfill cells, or in other environmental media at or adjacent to the
     Purchased Assets on or prior to the Closing Date;

               (vii)  any liabilities or obligations of Sellers relating to any
     benefit plan, or to any "employee pension benefit plan" (as defined in
     Section 3(2) of ERISA) of Sellers, whether or not terminated, established,
     maintained or contributed to by any of the Sellers or any of their ERISA
     Affiliates at any time, or to which any of the Sellers or any of their
     ERISA Affiliates are or have been obligated to contribute to at any time
     ("ERISA Affiliate Plan"); including any liability (A) to the Pension
     Benefit Guaranty Corporation under Title IV of ERISA; (B) relating to a
     multiemployer plan; (C) with respect to non-compliance with COBRA or HIPAA;
     (D) with respect to noncompliance with any other applicable provision of
     the Code, ERISA or any other applicable laws; or (E) with respect to any
     suit, proceeding or claim which is brought against the Buyer with respect
     to any such benefit plan or ERISA Affiliate Plan, against any such benefit
     plan or ERISA Affiliate Plan, or against any fiduciary or former fiduciary
     of any such benefit plan or ERISA Affiliate Plan; and

               (viii) BHE's obligations under the HQ Transmission Support
     Agreements (subject to the terms and conditions of the HQ Transfer
     Agreement).

     All such liabilities and obligations not being assumed pursuant to this
Section 2.4 are herein called the "Excluded Liabilities."

     Subject to Section 9.2(f), the parties agree and acknowledge that the
Sellers shall be entitled exclusively to control any litigation, administrative
or regulatory proceeding, investigation or inquiry of any kind or nature arising
out of or related to any Excluded Liabilities, and the Buyer agrees to promptly
notify the Sellers of the actual or threatened commencement or occurrence of any
of the foregoing and to cooperate fully with the Sellers in connection therewith
(provided that Buyer's cooperation need not include the payment of money or any
other financial accommodation).

                                  ARTICLE III

                                PURCHASE PRICE
                                --------------

     3.1  Purchase Price.  Subject to the express provisions of this Agreement,
          --------------
the purchase price for the Purchased Assets shall consist of the Initial Payment
and the Additional Payments 

                                      18
<PAGE>
 
(collectively, the "Purchase Price"). The "Initial Payment" shall be an amount
equal to the sum of (i) $89,000,000 and (ii) the Adjustment Amount. The
"Additional Payments" shall consist of the payment by Buyer to BHE of $400,000
per year (or pro rata portion thereof) for the term of the HQ Transmission
Support Agreements, to be payable as provided in the HQ Transfer Agreement.

     3.2  Purchase Price Adjustment.
          ------------------------- 

          (a) No later than five (5) Business Days before the Closing Date, BHE
shall notify the Buyer in writing of the Estimated Adjustment Amount, which
shall be payable by the Buyer to BHE as provided in Section 4.2.

          (b) Within thirty (30) days after the Closing, BHE shall prepare and
deliver to the Buyer a statement (the "Adjustment Statement") which reflects (i)
the net book value, as reflected on the books of the Sellers as of the Closing
Date, of BHE's interest under the Wyman Agreements in the fuel inventory at
Wyman Station (the "Inventory Adjustment Amount") and (ii) the Maintenance and
Capital Expenditures Amount applicable to the Purchased Assets.  The Inventory
Adjustment Amount and the Maintenance and Capital Expenditures Amount are
referred to collectively as the "Adjustment Amount."  The Inventory Adjustment
Amount will be based on an inventory survey conducted within five (5) Business
Days prior to the Closing Date consistent with Sellers' current inventory
procedures, and  Buyer will be entitled to have a Buyer Representative observe
such inventory survey.  The Adjustment Statement shall be prepared using the
same generally accepted accounting principles, policies and methods as the
Sellers have historically used in connection with the calculation of the items
reflected on the Adjustment Statement.  The Buyer agrees to cooperate with BHE
in connection with the preparation of the Adjustment Statement and related
information and shall provide to BHE such books, records and information as may
be reasonably requested from time to time.

          (c) The Buyer may dispute the Inventory Adjustment Amount or the
Maintenance and Capital Expenditures Amount; provided, however, that the Buyer
shall notify BHE in writing of the disputed amount, and the basis of such
dispute, within ten (10) Business Days of the Buyer's receipt of the Adjustment
Statement.  In the event of a dispute with respect to any part of an Adjustment
Amount, the Buyer and BHE shall attempt to reconcile their differences and any
resolution by them as to any disputed amounts shall be final, binding and
conclusive on the parties.  If the Buyer and BHE are unable to reach a
resolution of such differences within thirty (30) days of receipt by BHE of the
Buyer's written notice of dispute, the Buyer and BHE shall submit the amounts
remaining in dispute for determination and resolution to the Independent
Accounting Firm, which shall be instructed to determine and report to the
parties, within thirty (30) days after such submission, upon such remaining
disputed amounts, and such report shall be final, binding and conclusive on the
parties hereto with respect to the amounts disputed.  The fees and disbursements
of the Independent Accounting Firm shall be shared equally.

          (d) Within ten (10) Business Days after the Buyer's receipt of the
Adjustment Statement, if the Adjustment Amount is less than the Estimated
Adjustment Amount, the Sellers shall refund the difference to the Buyer, and if
the Adjustment Amount is greater than the Estimated Adjustment Amount, the Buyer
shall pay the difference to BHE on behalf of the 

                                      19
<PAGE>
 
Sellers; provided, that if there is a dispute with respect to any amount on the
Adjustment Statement, the Buyer shall immediately pay to BHE on behalf of the
Sellers any undisputed amounts (to the extent not previously paid). Within five
(5) Business Days after the final determination of any amounts on the Adjustment
Statement, the Buyer shall pay to BHE on behalf of the Sellers an amount equal
to (x) the Adjustment Amount as finally determined to be payable with respect to
the Adjustment Statement less (y) the sum of the Estimated Adjustment Amount and
any additional undisputed amount theretofore paid by the Buyer to the Sellers;
provided, however, that if such amount shall be less than zero, then the Sellers
will pay to the Buyer the amount by which such amount is less than zero. Any
amount paid or refunded under this Section 3.2(d) shall be paid or refunded with
interest for the period commencing on the Closing Date through the date of
payment, calculated at the "prime rate" for domestic banks as published in The
Wall Street Journal (Northeast Edition) in the "Money Rates" section on the
Closing Date, in cash by Federal or other wire transfer of immediately available
funds.

     3.3  Allocation of Purchase Price. Each of the Buyer and the Sellers agree
          ---------------------------- 
to allocate the Purchase Price among the Purchased Assets in accordance with
Schedule 3.3. Each of the Buyer and the Sellers agree to file Internal Revenue
Service Form 8594 with their Federal Income Tax Returns for the taxable year
that includes the Closing Date, and to file all Federal, state, local and
foreign Tax Returns, each in accordance with the allocation of the Purchase
Price among the tax categories of the Purchased Assets set forth above. Each of
the Buyer and the Sellers shall report the transactions contemplated by this
Agreement for Federal Income Tax and all other Tax purposes in a manner
consistent with such allocation. Each of the Buyer and the Sellers agree to
provide the others promptly with any other information and cooperation required
to complete Form 8594. Each of the Buyer and the Sellers shall notify and
provide the others with reasonable assistance in the event of an examination,
audit or other proceeding regarding the agreed-upon allocation of the Purchase
Price.

     3.4  Proration.
          --------- 

          (a)  The Buyer and the Sellers agree that all of the items normally
prorated, including those listed below, relating to the business and operation
of the Purchased Assets will be prorated as of the Closing Date, with the
Sellers liable with respect to Purchased Assets being sold by them to the extent
such items relate to any time period through the Closing Date, and the Buyer
liable to the extent such items relate to periods subsequent to the Closing Date
with, to the extent practicable, a cash settlement on the Closing Date:

               (i)    personal property and real estate taxes, assessments and
     other charges, if any, by the municipality, on the basis of the
     municipality's fiscal year, on or with respect to the business and
     operation of the Purchased Assets;

               (ii)   rent, Taxes and other items payable by or to a Seller
     under any of the Sellers' Agreements assigned to and assumed by the Buyer
     hereunder which are associated with the Purchased Assets;

               (iii)  any permit, license, registration, compliance assurance
     fees or other fees with respect to any Permit and Environmental Permit
     associated with the Purchased Assets;

                                      20
<PAGE>
 
              (iv) sewer rents and charges for water, telephone, electricity
     and other utilities; and

              (v)  fixed monthly charges to the NEPOOL.

          (b) In connection with the prorations referred to in (a) above, in the
event that actual figures are not available at the Closing Date, the proration
shall be based upon the actual Taxes or fees for the preceding year (or
appropriate period) for which actual Taxes or fees are available and such Taxes
or fees shall be reprorated upon request of the affected Sellers, on the one
hand, or the Buyer, on the other hand, made within sixty (60) days after the
date that the actual amounts become available.  The Sellers and the Buyer agree
to furnish each other with such documents and other records as may be reasonably
requested in order to confirm all adjustment and proration calculations made
pursuant to this Section 3.4.

          (c) To the extent required by any approval of the transfer of the FERC
project licenses related to the Hydroelectric Assets, Sellers agree to pay all
annual charges accrued under such licenses as of the Closing Date.

     3.5  Exclusion of Purchased Assets from Closing.

          (a) In the event (i) any Purchased Asset cannot be conveyed on the
Closing Date due to the failure on the part of Sellers to satisfy any condition
in Article VIII (other than Section 8.1(c)) required on their part to be
satisfied or (ii) the condition set forth in Section 8.1(c) is not satisfied
(without regard to any qualifications with respect to Material Adverse Effect
contained therein), then:

          (1) if the aggregate value of the Purchased Asset or group of
Purchased Assets that are so affected equals 10% or more of the Purchase Price
or if the exclusion of such asset(s) materially impairs the use of another
Purchased Asset or a group of Purchased Assets as historically used the
aggregate value of which equals 10% or more of the Purchase Price, then at
Buyer's option, Buyer may (i) terminate this Agreement pursuant to Section
10.1(d) (provided that Buyer shall not be entitled to terminate this Agreement
if the sole affected Purchased Asset is the Veazie Hydro Project), or (ii)
proceed with the Closing and the Purchase Price shall be decreased by an amount
equal to the aggregate value of such Purchased Asset or group of Purchased
Assets so affected; or

          (2) if the aggregate value of the Purchased Asset or group of
Purchased Assets that are so affected equals less than 10% of the Purchase Price
or if the exclusion of such asset(s) materially impairs the use of another
Purchased Asset or a group of Purchased Assets as historically used the
aggregate value of which equals 10% or less of the Purchase Price, the Closing
shall proceed and the Purchase Price shall be decreased by an amount equal to
the aggregate value of the Purchased Asset or group of Purchased Assets so
affected.

          (b) For purposes of this Section 3.5, the "value" of any asset shall
be determined in accordance with the allocation of the Purchase Price as set
forth on Schedule 3.3.  In the case of such an adjustment to the Purchase Price,
the Maintenance and Capital Expenditure Amount shall be reduced by the amounts
thereof attributable to such assets.

                                      21
<PAGE>
 
          (c) Notwithstanding Section 3.5(a)(1) above, Buyer agrees that in the
event BHE is unable to convey its interest in Bangor-Pacific to Buyer at Closing
for any reason, Buyer shall nevertheless proceed with the Closing and the
Purchase Price shall be reduced by the amount allocated to BHE's interest in
Bangor-Pacific as set forth on Schedule 3.3.

                                  ARTICLE IV

                                  THE CLOSING
                                  -----------

     4.1  Time and Place of Closing.  Upon the terms and subject to the
          ------------------------- 
satisfaction of the conditions contained in Article VIII of this Agreement (the
"Closing Conditions"), the Closing will take place at the offices of Winthrop,
Stimson, Putnam & Roberts, New York, New York on such date as the parties may
agree, which date shall be as soon as practicable, but, subject to Section 7.4
hereof, no later than five (5) Business Days following the date on which all of
the Closing Conditions have been satisfied or waived; or at such other place or
time as the parties may agree.

     4.2  Payment of Purchase Price.  Upon the terms and subject to the
          ------------------------- 
satisfaction (or waiver) of the conditions contained in this Agreement, in
consideration of the aforesaid sale, assignment, conveyance, transfer and
delivery of the Purchased Assets, the Buyer will pay or cause to be paid to BHE
on behalf of the Sellers at the Closing an amount in United States dollars equal
to the sum of (i) $89,000,000 (as adjusted, if so required, pursuant to the
express provisions of this Agreement including without limitation Sections 3.5
and 7.10 hereof) and (ii) the Estimated Adjustment Amount (the "Preliminary
Purchase Price"), by wire transfer of immediately available funds or by such
other means as are agreed upon by BHE and the Buyer. The balance of the Initial
Payment (or, alternatively, any amounts owing by the Sellers to Buyer), in each
case determined in accordance with Section 3.2 hereof, shall be paid as provided
in said Section 3.2.

     4.3  Deliveries By Sellers.  At the Closing, subject to the express
          --------------------- 
provisions of this Agreement including, without limitation, Sections 3.5 and
7.10 hereof, the appropriate Sellers will deliver the following to the Buyer:

          (a) Bill of Sale, duly executed by the Sellers, for the personal
     property included in the Purchased Assets;

          (b) All consents, waivers or approvals obtained by any of the Sellers
     with respect to the sale and purchase of the Purchased Assets or the
     consummation of the transactions related to the sale of the Purchased
     Assets, contemplated by this Agreement, to the extent specifically required
     hereunder;

          (c) Opinions of counsel and certificates (as contemplated by Section
     8.2) with respect to the Purchased Assets;

          (d) One or more deeds of conveyance of the Real Estate included in the
     Purchased Assets to the Buyer, reserving the applicable Easements, without
     covenants or 

                                      22
<PAGE>
 
     warranty of title, duly executed and acknowledged by the appropriate
     Sellers and in recordable form, together with transfer tax declarations
     with respect to such conveyances;

          (e) FIRPTA Affidavits executed by the appropriate Sellers;

          (f) The Assignment and Assumption Agreement, duly executed by the
     appropriate Sellers, together with the attachment thereto relating to the
     Wyman Assets;

          (g) All such other instruments of assignment or conveyance as shall,
     in the reasonable opinion of the Buyer and its counsel, be necessary or
     desirable to transfer to the Buyer the Purchased Assets in accordance with
     this Agreement and, where necessary or desirable, in recordable form;

          (h) Each of the other Ancillary Agreements, duly executed by the
     appropriate Sellers and, in the case of the Separation Document, the HQ
     Transfer Agreement and the Transitional Power Sales Agreement, in a form
     mutually satisfactory to BHE and Buyer;

          (i) A copy of the resolutions of the Board of Directors of each of the
     Sellers authorizing and approving this Agreement and each of the Ancillary
     Agreements to which such Seller is a party and the consummation of the
     transactions contemplated hereby and thereby, in each case certified by the
     secretary of the respective Seller;

          (j) Certificates by the secretary of each Seller as to the incumbency
     of each person executing this Agreement or any Ancillary Agreement on
     behalf of such Seller; and

          (k) Such other agreements, documents, instruments and writings as are
     required to be delivered by any of the Sellers at or prior to the Closing
     Date pursuant to this Agreement or otherwise required in connection
     herewith.

     4.4  Deliveries by the Buyer.  At the Closing, subject to the express
          ----------------------- 
provisions of this Agreement including, without limitation, Sections 3.5 and
7.10, the Buyer will deliver the following to the appropriate Sellers:

          (a) The Preliminary Purchase Price, by wire transfer of immediately
     available funds or such other means as are agreed upon by BHE and the
     Buyer;

          (b) An opinion of counsel and certificate (as contemplated by Section
     8.3) with respect to the Purchased Assets;

          (c) The Assignment and Assumption Agreement, duly executed by the
     Buyer, together with the attachment thereto relating to the Wyman Assets;

          (d) All such other instruments of assumption as shall, in the
     reasonable opinion of any Seller and its counsel, be necessary or desirable
     for the Buyer to assume the Assumed Liabilities related to the Purchased
     Assets being sold by such Seller in accordance with this Agreement;

                                      23
<PAGE>
 
          (e) Each of the Ancillary Agreements, duly executed by the Buyer and,
     in the case of the Separation Document, the HQ Transfer Agreement and the
     Transitional Power Sales Agreement, in a form mutually satisfactory to BHE
     and Buyer; and

          (f) Such other agreements, documents, instruments and writings as are
     required to be delivered by the Buyer at or prior to the Closing Date
     pursuant to this Agreement or otherwise required in connection herewith.

                                   ARTICLE V

                 REPRESENTATIONS AND WARRANTIES OF THE SELLERS
                 ---------------------------------------------

     The Sellers represent and warrant to the Buyer as follows as of the date
hereof and as of the Closing Date:

     5.1  Organization; Authority.  Each Seller is a corporation duly organized,
          ----------------------- 
validly existing and in good standing under the laws of the State of Maine and
has all requisite corporate power and authority to own, lease, and operate its
properties and to carry on its business as is now being conducted.

     5.2  Authority Relative to This Agreement.  Each Seller has full corporate
          ------------------------------------ 
power and authority to execute and deliver this Agreement and the Ancillary
Agreements to which it is a party and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Ancillary Agreements to which it is a party and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action required on the part of each Seller. This Agreement
has been duly and validly executed and delivered by each Seller, and, assuming
the accuracy of the Buyer's representations and warranties contained in Section
6.2, and subject to the receipt of the Seller Required Regulatory Approvals, the
Seller Required Consents and the Buyer Required Regulatory Approvals,
constitutes a valid and binding agreement of each Seller, enforceable against
the Sellers in accordance with their terms, except that such enforceability may
be limited by applicable bankruptcy, insolvency, moratorium or other similar
laws affecting or relating to enforcement of creditors' rights generally or
general principles of equity. The Ancillary Agreements, when executed, will,
assuming the accuracy of the Buyer's representations and warranties contained in
Section 6.2, and subject to the receipt of the Seller Required Regulatory
Approvals, the Seller Required Consents and the Buyer Required Regulatory
Approvals, constitute valid and binding obligations of each Seller party
thereto, enforceable against such Seller in accordance with their terms, except
that such enforceability may be limited by applicable bankruptcy, insolvency,
moratorium or other similar laws affecting or relating to enforcement of
creditors' rights generally or general principles of equity.

     5.3  Consents and Approvals; No Violation. 
          ------------------------------------ 

          (a) Except for obtaining the Seller Required Consents and as otherwise
set forth in Schedule 1.1(a)(53), and other than obtaining the Seller Required
Regulatory Approvals and the Buyer Required Regulatory Approvals, neither the
execution and delivery of this Agreement or the Ancillary Agreements by the
Sellers nor the sale by the Sellers of the Purchased Assets 

                                      24
<PAGE>
 
pursuant to this Agreement or the performance by each Seller of its respective
other obligations under this Agreement and the Ancillary Agreements to which
such Seller is a party will (i) conflict with or result in any breach of any
provision of the Articles of Incorporation or Bylaws of any Seller, each as
amended or restated; (ii) result in a default (or give rise to any right of
termination, cancellation or acceleration) under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, license, agreement or other
instrument or obligation to which any Seller is a party or by which any Seller
or any of the Purchased Assets may be bound, except for such defaults (or rights
of termination, cancellation or acceleration) as to which requisite waivers or
consents have been or by the Closing Date will be obtained or which, in the
aggregate, would not have a Material Adverse Effect; or (iii) require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental or regulatory authority or other Person, except where the
failure to fulfill such requirement would not result in a Material Adverse
Effect; or (iv) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to any Seller, or any of its assets, which violation would
have a Material Adverse Effect.

          (b) Except as set forth in Schedule 5.12 and except for (i) any
approvals under the Federal Power Act required to convey the Purchased Assets to
Buyer and to reassign the MEPCO Reservation to Buyer in accordance with the
MEPCO Confirmation Agreement, (ii) any approvals required under Title 35-A of
the Maine Revised Statutes or otherwise from the MPUC, (iii) the approval, if
required, of the SEC pursuant to the Holding Company Act, (iv) the filings by
the Sellers and the Buyer required by the HSR Act and the expiration or earlier
termination of all waiting periods under the HSR Act, and (v) any approval
required of the Maine Department of Environmental Protection ("MDEP"), the
United States Environmental Protection Agency ("EPA"), or other governmental
agency pursuant to any Environmental Law (the filings and approvals referred to
in Schedule 5.12 and clauses (i) through (v) are collectively referred to as the
"Seller Required Regulatory Approvals"), no declaration, filing or registration
with, or notice to, or authorization, consent or approval of any governmental or
regulatory body or authority is necessary for the execution and delivery of this
Agreement by the Sellers or the consummation by the Sellers of the transactions
contemplated hereby or by the Ancillary Agreements, other than such
declarations, filings, registrations, notices, authorizations, consents or
approvals (x) which become applicable to the Sellers or the Purchased Assets as
a result of the specific regulatory status of the Buyer (or any of its
Affiliates) or as a result of any other facts that specifically relate to the
business or activities in which the Buyer (or any of its Affiliates) is or
proposes to be engaged or which are identified herein as Buyer Required
Regulatory Approvals or (y) which, if not obtained or made, will not,
individually or in the aggregate, have a Material Adverse Effect.

     5.4  Title and Related Matters.  Except as set forth in Schedule 5.4 and
          ------------------------- 
except for those Permitted Encumbrances which are permitted by definition to
survive the Closing Date, (i) BHE shall have, and shall convey to Buyer, good,
valid and marketable record title, insurable as such by the Title Insurance
Company at Buyer's sole cost and expense, to each of the Purchased Assets
constituting Real Estate as specified in the Title Commitments, and (ii) each
Seller shall have, and shall convey to Buyer, good, valid and marketable title
to the other Purchased Assets which it purports to own (other than those which
have been disposed of since the date hereof in the ordinary course of business),
free and clear of all Encumbrances. Except as set forth in Schedule 5.4, BHE is
in possession of each of the Purchased Assets constituting Real Estate and

                                      25
<PAGE>
 
there are no third party licensees or tenants at the sites of the Real Estate.
Sellers have valid and subsisting leasehold estates and the right to quiet
enjoyment of the Real Estate subject to real property leases for the full term
thereof and each such lease is a legal, valid and binding agreement, enforceable
against the respective Seller in accordance with its terms and there is no
default of Sellers (or any condition or event which, after notice or lapse of
time or both, would constitute a default of Sellers) thereunder.

     5.5  Environmental Matters.  Except as disclosed in Schedule 5.5:
          --------------------- 

          (a) The Sellers hold, and are in compliance with, all permits,
     licenses and governmental authorizations ("Environmental Permits") required
     for Sellers to conduct, as now conducted, the Business with respect to the
     Purchased Assets under applicable Environmental Laws, and the Sellers have
     not received any written notice (or otherwise have Knowledge) of any
     violation of any Environmental Law that is presently applicable to the
     Purchased Assets or the related Business.

          (b) The Sellers have not received any written request for information,
     or been notified (or otherwise have Knowledge) that any Seller is a
     potentially responsible party, under CERCLA or any similar state law with
     respect to any on-site location included within the Purchased Assets or in
     connection with any off-site location used by Sellers in connection with
     any Purchased Asset.

          (c) The Sellers have not entered into or agreed to any consent decree
     or order, and are not subject to any judgment, decree, or judicial order,
     with respect to any of the Purchased Assets or the related Business
     relating to compliance with any Environmental Law or to investigation or
     cleanup of Hazardous Substances under any Environmental Law.

          (d) To their Knowledge, Sellers have provided Buyer with (i) a list of
     all facilities that have been used during the course of the operations of
     any of the Purchased Assets for the treatment, storage, recycling or
     disposal of any Hazardous Substances; (ii) a list of all material
     environmental reports and/or audits which discuss the environmental
     conditions of the Purchased Assets; and (iii) a list of all underground
     storage tanks and/or surface impoundments located on the Purchased Assets
     which contain or have contained Hazardous Substances.

     5.6  Labor Matters.  The Collective Bargaining Agreement is the only
          ------------- 
collective bargaining agreement to which any Seller is a party or is subject and
which relates to the ownership, operation or maintenance of the Purchased
Assets. Solely (in each of the following clauses (a) through (f)) with respect
to the business or operations of the Purchased Assets or the Purchased Assets
Employees, except to the extent set forth in Schedule 5.6 (except for such
matters as will not have a Material Adverse Effect or are not included in the
Assumed Liabilities), (a) the Sellers are in compliance with the Collective
Bargaining Agreement and all applicable laws respecting employment and
employment practices, terms and conditions of employment, collective bargaining
and wages and hours; (b) the Sellers have not received written notice (or
otherwise have Knowledge) of any unfair labor practice complaint against any
Seller pending before the National Labor Relations Board; (c) there is no labor
strike, slowdown

                                      26
<PAGE>
 
or stoppage actually pending or, to Sellers' Knowledge, threatened against or
affecting any Seller or the Purchased Assets; (d) the Sellers have not received
notice (or otherwise have Knowledge) that a representation petition respecting
the employees of any Seller has been filed with the National Labor Relations
Board; (e) no arbitration proceeding arising out of or under the Collective
Bargaining Agreement is pending against any Seller; and (f) there are no
administrative charges or court complaints against the Sellers concerning
alleged employment discrimination or other employment related matters pending
or, to Sellers' Knowledge, threatened before the U.S. Equal Employment
Opportunity Commission or any other governmental or regulatory body or
authority. The Sellers are not in violation of the WARN Act.

     5.7  ERISA; Benefit Plans.  Schedule 5.7 provides summary descriptions of
          -------------------- 
all deferred compensation, pension, profit-sharing, incentive and retirement
plans, and all material bonus and other employee benefit or fringe benefit
plans, maintained or with respect to which the Sellers have provided
compensation and/or benefits to the Purchased Assets Employees. As to all
qualified plans which Sellers maintain:

          (a) they are qualified under Code Sections 401(a) and 501(a) and have
     current Internal Revenue Service determination letters;

          (b) they are currently in compliance in form and operation with Code
     and Treasury Regulation requirements;

          (c) all required contributions have been made in a timely manner and
     funding is adequate for terminations resulting from the sale of the
     Purchased Assets;

          (d) there are no pending or, to Sellers' Knowledge, threatened claims
     against any such plans or Sellers or otherwise, which allege violations of
     law which could result in liability on the part of the Buyer; and as to all
     terminated qualified retirement plans which a Seller has maintained,
     participants' rights have been fully satisfied; and

          (e) neither of the Sellers nor any entity required to be aggregated
     therewith pursuant to Section 414(b) or (c) of the Code and/or Section
     4001(b) of ERISA has incurred or could reasonably be expected to incur any
     material liability under Title IV of ERISA and/or Section 412 of the Code
     (other than for the payment of benefits or Pension Benefit Guaranty
     Corporation insurance premiums, in each case payable in the ordinary
     course).

     5.8  Real Estate.  Schedule 5.8 identifies the deeds or other instruments
          ----------- 
evidencing BHE's title to the real property rights owned or leased by BHE as
lessor or as lessee (or as to which BHE holds easements or other rights) and
included in the Purchased Assets (other than the 345 Line ROWs, as to which
Annex I to Schedule 5.8 references the relevant tax parcels), as well as certain
real property owned by BHE which on the date hereof is associated with certain
of the Hydroelectric Facilities but is not included within the Purchased Assets.
The portions of the real property rights, including rights to flood and flow,
described in such deeds and other instruments that constitute Purchased Assets
and the 345 Line ROWs are collectively referred to herein as the "Real Estate."
Schedule 5.8 also describes certain Encumbrances on the Real

                                      27
<PAGE>
 
Estate of which Sellers have Knowledge. Subject to change in applicable law or
regulation, or interpretation thereof, and events beyond the control of Sellers,
no fee ownership, lease, right of way, easement, license or other right in real
property, other than the Real Estate, is necessary for the Buyer to own, operate
or maintain the Purchased Assets substantially as historically owned, operated
and maintained by the Sellers. To Sellers' Knowledge, none of the improvements
on any of the Real Estate, including, without limitation the Easements, nor any
appurtenances thereto or equipment therein nor the operation or maintenance
thereof, violate any restrictive covenant or the terms, conditions or
restrictions of any easement. All Real Estate (other than the 345 Line ROWs)
will have access, directly or indirectly through an easement under which Buyer
shall have adequate rights, to a public road. To the extent that zoning laws
apply, each parcel of Real Estate (other than the 345 Line ROWs) is zoned for
its current use. Copies of all surveys, title insurance policies or real estate
leases in the possession of the Sellers related to the Real Estate have been
delivered or made available to the Buyer.

     5.9  Condemnation.  Except as set forth in Schedule 5.9, BHE has received
          ------------ 
no written notice or otherwise has Knowledge that any part of the Real Estate or
any other real property or rights leased, used or occupied by BHE in connection
with the ownership, operation or maintenance of the Purchased Assets is subject
to any pending or threatened suit for condemnation or other taking by any public
authority.

     5.10 Certain Contracts and Arrangements.
          ---------------------------------- 

          (a) Except (i) as listed in Schedule 5.10 and (ii) for agreements
entered into with Buyer's consent under Section 7.1, the Sellers are not a party
to any contract, agreement, personal property lease, commitment, understanding
or instrument which relates to the Purchased Assets or the ownership, operation
or maintenance of the Purchased Assets and which is included in the Assumed
Liabilities.  Complete and accurate copies of all Sellers' Agreements, together
with all amendments and supplements, have been delivered or made available to
the Buyer prior to the execution of this Agreement.

          (b) Except in set forth in Schedule 5.10, each Sellers' Agreement (i)
constitutes a valid and binding obligation of each Seller which is a party
thereto enforceable against such Seller in accordance with its terms,  (ii) is
in full force and effect, and (iii) except as disclosed in Schedule 5.10 may be
transferred to the Buyer pursuant to this Agreement without breaching the terms
thereof or resulting in the forfeiture or impairment of any rights thereunder.

          (c) Except as set forth in Schedule 5.10, there is not, under any of
the Sellers' Agreements, any default or event which, with notice or lapse of
time or both, would constitute a default on the part of a Seller or, to Sellers'
Knowledge, any other party thereto, except such events of default and other
events as to which requisite waivers or consents have been obtained, or which
would not, in the aggregate, have a Material Adverse Effect.

          (d) The Purchased Assets are, and as of the Closing Date will be,
inclusive of all facilities and equipment in such condition as will be
sufficient for Buyer to comply with its obligations under the Interconnection
Agreement after giving effect to the Separation Document.

                                      28
<PAGE>
 
     5.11  Legal Proceedings.  Except as set forth in Schedule 5.11 and except
           ----------------- 
for matters which are Excluded Liabilities, there are no claims, actions,
proceedings or investigations pending or, to Sellers' Knowledge, threatened
against or relating to the Sellers and pertaining to the Purchased Assets before
any court, governmental or regulatory authority or body acting in an
adjudicative capacity. Except as set forth in Schedule 5.11 and except for
matters which are Excluded Liabilities, no Seller is subject to any outstanding
judgment, rule, order, writ, injunction or decree of any court, governmental or
regulatory authority pertaining to the Purchased Assets or the related Business.

     5.12  Permits.  
           ------- 

           (a) "Permits" means all material permits, licenses, franchises and
other governmental authorizations, consents and approvals relating to the
Purchased Assets or the ownership, operation or maintenance of the Purchased
Assets, other than those permits required pursuant to Environmental Laws.
Except as set forth in Schedule 5.12, the Sellers have all Permits necessary to
own, operate and maintain the Purchased Assets as presently owned, and operated,
except where the failure to have any such permit would not have a Material
Adverse Effect.  Except as set forth in Schedule 5.12, the Sellers have not
received any written notification that any Seller is in violation of any of such
Permit, or any law, statute, order, rule, regulation, ordinance or judgment of
any governmental or regulatory body or authority applicable to it and pertaining
to the Purchased Assets or the related Business.  Except as set forth in
Schedule 5.12, to their Knowledge, the Sellers are in compliance with all
Permits, laws, statutes, orders, rules, regulations, ordinances, or judgments of
any governmental or regulatory body or authority applicable to them or the
Purchased Assets or the related Business except for violations which,
individually or in the aggregate, do not have a Material Adverse Effect.

           (b) Schedule 5.12 sets forth all Permits and Environmental Permits
including Permits and Environmental Permits which, if not held or maintained
(individually or in the aggregate) could reasonably be expected to impair the
Buyer's conduct of the Business with respect to the Purchased Assets.  Copies of
all such permits listed on Schedule 5.12 have been provided or made available to
the Buyer prior to the execution of this Agreement.

     5.13  Taxes.
           ----- 

           (a) With respect to the Purchased Assets and the business of the
Sellers associated therewith, (i) all Tax Returns of Sellers required to be
filed have been timely filed and are true, correct and complete, and (ii) all
Taxes, including those shown to be due on such Tax Returns, have been timely
paid.  Except as set forth in Schedule 5.13, (i) no notice of deficiency or
assessment has been received from any taxing authority with respect to
liabilities for Taxes of the Sellers in respect of the Purchased Assets and the
business of the Sellers associated therewith (nor has any such taxing authority
threatened to issue such notice or assessment), that have not been fully paid or
finally settled, and any such deficiency shown in such Schedule 5.13 is being
contested in good faith through appropriate proceedings, (ii) there are no
outstanding agreements or waivers extending the applicable statutory periods of
limitation for Taxes of the Sellers associated with the Purchased Assets for any
period, (iii) none of the Purchased Assets is "tax-exempt use property" within
the meaning of Section 168(h) of the Code or tax-exempt bond financed property
within the meaning of Section 168(g)(5) of the Code and none of the 

                                      29
<PAGE>
 
Purchased Assets is subject to any lease made pursuant to Section 168(f)(8) of
the Code and (iv) there are no Encumbrances for Taxes on the Purchased Assets
that are not Permitted Encumbrances. There are no proceedings pending for the
reduction of, and Sellers have no Knowledge of any contemplated increase in, the
assessed valuation of the Real Estate or the other Purchased Assets.

          (b) With respect to Bangor-Pacific:

              (i)    all Tax Returns have been timely filed, and are true,
     correct and complete in all material respects;

              (ii)   all Taxes, including those shown to be due on such Tax
     Returns have been paid;

              (iii)  all Taxes that Bangor-Pacific is required by law to
     withhold and collect have been withheld and collected and timely paid over
     to the appropriate governmental authorities;

              (iv)   except to the extent set forth in Schedule 5.13, no Tax
     audits or other administrative proceedings are presently pending or
     proposed or to Sellers' Knowledge threatened (in each case in writing) with
     regard to any Taxes or Tax Returns of Bangor-Pacific;

              (v)    except to the extent set forth in Schedule 5.13, there are
     no Encumbrances for Taxes on any property or assets of Bangor-Pacific other
     than Permitted Encumbrances;

              (vi)   all deficiencies of Taxes asserted in writing or otherwise
     asserted with respect to Bangor-Pacific as a result of an audit,
     examination, investigation or similar proceeding have been paid or are
     being contested in good faith through appropriate proceedings, with
     adequate reserves booked for any adverse determination;

              (vii)  there are no powers of attorney in effect relating to
     Taxes of Bangor-Pacific that relate to Taxes for any post-Closing period;

              (viii) except as set forth in Schedule 5.13, there are no
     outstanding agreements or waivers extending the statutory period of
     limitation applicable to any items of Tax of Bangor-Pacific, and Bangor-
     Pacific has not requested any extension of time within which to file any
     Tax Return that has not yet been filed;

              (ix)   Bangor-Pacific is and has been since its date of inception
     properly treated as a partnership, and not as an association taxable as a
     corporation, for United States federal income and applicable state and
     local tax purposes; and

              (x)    there are no agreements now, and there have been no
     agreements in the past, providing for allocations of income or losses,
     distributions of cash, of Bangor-Pacific other than as set forth in the
     West Enfield Joint Venture Agreement.

                                      30
<PAGE>
 
               (xi) there are no proceedings pending for the reduction of, and
     Sellers have no Knowledge of any contemplated increase in, the assessed
     valuation of the real property or the other assets of Bangor-Pacific.

     5.14  Representations Regarding Bangor-Pacific.
           ---------------------------------------- 

           (a) PHC is a wholly-owned subsidiary of BHE.

           (b) PHC owns a 50% partnership interest (the "Bangor-Pacific
Interest") in Bangor-Pacific Hydro Associates ("Bangor-Pacific," which term, for
purposes of Sections 5.13 and 5.14 and as the context contemplates, shall
include Bangor Pacific Operating Co.). Bangor-Pacific is the owner of (i) the
West Enfield Hydro Project and the Power Purchase Agreement dated June 9, 1986
between BHE and Bangor-Pacific (as successor to West Enfield Associates) and
(ii) 100% of the issued and outstanding stock of Bangor-Pacific Operating Co.,
Inc., a Maine corporation and the operator of the West Enfield Hydro Project
("Bangor-Pacific Operating Co."). The Bangor-Pacific Interest and the 50%
partnership interest held by Ogden Power Corporation represent all of the
outstanding partnership interests in Bangor-Pacific. Except as set forth in
Schedule 5.14, there are no outstanding options, rights, agreements, convertible
or exchangeable securities or other commitments (other than this Agreement) (i)
pursuant to which Bangor-Pacific, PHC or BHE is or may become obligated to
issue, sell, purchase, return or redeem any partnership interests in Bangor-
Pacific or (ii) that give any person the right to receive any benefits or rights
similar to holders of partnership interests in Bangor-Pacific.

           Sellers have made available to the Buyer, with respect to Bangor-
Pacific, an audited balance sheet for the period ending December 31, 1997 and an
unaudited balance sheet for the period ended June 30, 1998; such balance sheets
present fairly in all material respects the financial position of Bangor-Pacific
as at such dates in accordance with generally accepted accounting principles.

           Except to the extent disclosed in the balance sheet described above,
Bangor-Pacific has no liability, debt, commitment or obligation of any kind
which, in accordance with generally accepted accounting principles, should be
provided for or disclosed in a footnote to such balance sheet.

           Except (i) as set forth in Schedule 5.14 and (ii) as otherwise
contemplated by this Agreement, since the date of the June 30, 1998 balance
sheet for Bangor-Pacific, there has not been (a) any material adverse change in
or effect on the business or operations of Bangor-Pacific; (b) any damage,
destruction or casualty loss which is material to the business or operations of
Bangor-Pacific; or (c) any entry into any agreement, commitment or transaction
(including, without limitation, any borrowing, capital expenditure or capital
financing) which relates to the business or operations of Bangor-Pacific or its
assets, except agreements, commitments or transactions in the ordinary course of
business and cancellable upon 30 days' notice without premium or penalty or as
contemplated herein.

           (c) Except as set forth in Schedule 5.14 (which items disclosed
therein, to the Knowledge of Sellers, do not render title to the Purchased
Assets unmarketable or prevent adequate access to the Purchased Assets to which
they relate, or materially interfere with the 

                                      31
<PAGE>
 
continuing ownership, use, operation or maintenance of such assets consistent
with historical practice or materially detract from the Business) and except for
Permitted Encumbrances, (i) Bangor-Pacific has good and marketable record title
to the real estate purported to be owned by it, and to the other assets which it
purports to own (other than those which have been disposed of since the date
hereof in the ordinary course of business), free and clear of all Encumbrances,
and (ii) neither the whole nor any part of the real estate owned, leased, used
or occupied by Bangor-Pacific is subject to any pending suit for condemnation or
other taking by any public authority and, to Sellers' Knowledge, no such
condemnation or other taking has been threatened.

          (d) Schedule 5.14 lists all real property leases to which Bangor-
Pacific is a lessee or lessor and which provide for annual payments of more than
$100,000 or are otherwise material to the business or operations of Bangor-
Pacific.  Except as set forth in Schedule 5.14, all such leases are valid,
binding and enforceable in accordance with their terms, are in full force and
effect and there are no existing defaults by Bangor-Pacific or any other party
thereto thereunder.

          (e) Except as set forth in Schedule 5.14, (i) Bangor-Pacific holds all
Environmental Permits required for Bangor-Pacific to conduct, as now conducted,
the business and operations of Bangor-Pacific under applicable Environmental
Laws, and, to the Knowledge of Sellers, Bangor-Pacific has not received any
written notice (nor do Sellers otherwise have Knowledge) of any violation by
Bangor-Pacific of any Environmental Law, (ii) Bangor-Pacific has not received
any written request for information, or been notified (nor do Sellers otherwise
have Knowledge) that Bangor-Pacific is a potentially responsible party, under
CERCLA or any similar state law with respect to any on-site location of Bangor-
Pacific included within the Purchased Assets, and (iii) Bangor-Pacific has not
entered into or agreed to any consent decree or order, nor is Bangor-Pacific
subject to any judgment, decree, or judicial order with respect to any of its
assets or relating to compliance with any Environmental Law or to investigation
or cleanup of Hazardous Substances under any Environmental Law.

          (f) Except as set forth in Schedule 5.14, Bangor-Pacific has no
employees and Bangor-Pacific has no or has had no "employee pension benefit
plan" (as defined in Section 3(2) of ERISA) or "employee welfare benefit plans"
(as defined in Section 3(l) of ERISA) or any post-retirement benefit plans.

          (g) Except (i) as listed in Schedule 5.14, (ii) for contracts,
agreements, personal property leases, commitments, understandings or instruments
which will expire prior to the Closing Date or (iii) for agreements with
suppliers entered into in the ordinary course of business, Bangor-Pacific is not
a party to any written contract, agreement, personal property lease, commitment,
understanding or instrument which relates to the ownership or operation of
Bangor-Pacific or its assets.  Each agreement referenced in this Section 5.14(g)
to which Bangor-Pacific is a party and which is material to the Purchased Assets
(i) constitutes a valid and binding obligation of Bangor-Pacific and (ii) is, or
at the Closing will be, in full force and effect.  Except as set forth in
Schedule 5.14, there is not, under any of the agreements listed in such
Schedule, any default or event which, with notice or lapse of time or both,
would constitute a default on the part of Bangor-Pacific or, to Sellers'
Knowledge, any other party thereto except such events of default and other
events as to which requisite waivers or consent have been obtained, or which
would not, in the aggregate, have a Material Adverse Effect.

                                      32
<PAGE>
 
          (h) Except as set forth in Schedule 5.14 and except for matters which
are Excluded Liabilities, there are no claims, actions, proceedings or
investigations pending or, to Sellers' Knowledge, threatened against or relating
to the business or operations of Bangor-Pacific or its assets before any court,
governmental or regulatory authority or body acting in an adjudicative capacity.
Except as set forth in Schedule 5.14 and except for matters which are Excluded
Liabilities, neither Bangor-Pacific nor its assets is subject to any outstanding
judgment, rule, order, writ, injunction or decree of any court, governmental or
regulatory authority.

          (i) Bangor-Pacific has all permits, licenses, franchises and other
governmental authorizations, consents and approvals (other than those permits
required pursuant to Environmental Laws) (collectively "BP Permits") necessary
to own and operate its business as presently owned and operated, except where
the failure to have any such permit would not have a Material Adverse Effect.
Except as set forth in Schedule 5.14, (i) Bangor-Pacific has not received any
written notification that it is in violation of any of such BP Permit, or any
law, statute, order, rule, regulation, ordinance or judgment of any governmental
or regulatory body or authority applicable to it, (ii) to Sellers' Knowledge,
Bangor-Pacific is in compliance with all BP Permits, laws, statutes, orders,
rules, regulations, ordinances, or judgment of any governmental or regulatory
body or authority applicable to it and (iii) the validity of the BP Permits will
not be affected by the execution of this Agreement or the Ancillary Agreements
or the consummation of the transactions contemplated hereby or thereby.
Schedule 5.12 sets forth all Permits and Environmental Permits held by Bangor-
Pacific, which, if not held or maintained (individually or in the aggregate)
could reasonably be expected to have a Material Adverse Effect, copies of all of
which have been provided or made available to the Buyer prior to the execution
of this Agreement.

     5.15 Representations Regarding Wyman Unit No. 4.  BHE is the record and
          ------------------------------------------ 
beneficial owner of an 8.33% joint ownership interest in common (the "Wyman 4
Interest") in Wyman Unit No. 4, free and clear of all Encumbrances except
Permitted Encumbrances. BHE has provided to the Buyer a copy of the governing
documents related to the Wyman 4 Interest, each of which is listed on Schedule
5.10. There are no outstanding options, rights, agreements, convertible or
exchangeable securities or other commitments (other than this Agreement) (i)
pursuant to which BHE is or may become obligated to sell or purchase any joint
ownership interests in Wyman Unit No. 4 or (ii) that give any person other than
BHE the right to receive any of the benefits or rights of the Wyman 4 Interest.

     5.16 Insurance.  Except as set forth in Schedule 5.16, all policies of
          --------- 
fire, liability, worker's compensation and other forms of insurance owned or
held by Sellers and insuring the Purchased Assets or the Business are in full
force and effect, all premiums with respect thereto covering all periods up to
and including the date as of which this representation is being made have been
paid (other than retroactive premiums which may be payable with respect to
comprehensive general liability and worker's compensation insurance policies),
and no notice of cancellation or termination has been received with respect to
any such policy which was not replaced on substantially similar terms prior to
the date of such cancellation. Except as set forth in Schedule 5.16, Sellers
have not been refused any insurance with respect to the Purchased Assets or the
Business nor has their coverage been limited by any insurance carrier to which
they have applied for any such insurance or with which they have carried
insurance during the last twelve months.

                                      33
<PAGE>
 
     5.17  Personal Property Included in Purchased Assets.  No personal property
           ---------------------------------------------- 
of Sellers used or held for use in connection with any Purchased Asset as of the
Bid Date but not included in the Purchased Assets or transferred to Buyer at
Closing is necessary for Buyer to own, operate or maintain the Purchased Assets
substantially as historically owned, operated and maintained by the Sellers.

     5.18  Intellectual Property Rights.  Schedule 5.18 discloses all trade
           ---------------------------- 
secrets, patents and patentable rights used or held for use or necessary in
connection with the Purchased Assets and the related Business ("Intellectual
Property"), all of which Sellers either have all right, title and interest in or
a valid and binding irrevocable, non-royalty bearing, right under contract to
use without limitation. There are no trademarks, tradenames, service marks,
service names, inventions, copyrights, or rights related to any of the
foregoing, know-how or applications for and registrations of patents,
trademarks, service marks and copyrights ("Other Intellectual Property") used,
held for use or necessary in connection with the Purchased Assets and the
related Business. Sellers have not received notice (or otherwise have Knowledge)
that Sellers are infringing upon any Intellectual Property or Other Intellectual
Property of any other Person in connection with the Purchased Assets or the
related Business.

     5.19  Financial Statements.  BHE has made available to the Buyer its
           -------------------- 
audited consolidated balance sheet as of December 31, 1997 (the "Audited Balance
Sheet"), and its unaudited consolidated balance sheet as of June 30, 1998 (the
"Unaudited Balance Sheet"). The Audited Balance Sheet (including the related
notes thereto) presents fairly, in all material respects, the consolidated
financial position of the Sellers as of its date in conformity with generally
accepted accounting principles applied on a consistent basis, except as
otherwise noted therein. The Unaudited Balance Sheet (including the notes
thereto) presents fairly, in all material respects, the consolidated financial
position of the Sellers as of its date in conformity with generally accepted
accounting principles applied on a consistent basis except as otherwise noted
therein.

     EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES EXPRESSLY SET FORTH IN THIS
ARTICLE V, THE PURCHASED ASSETS ARE BEING SOLD AND TRANSFERRED "AS IS, WHERE
IS", AND THE SELLERS ARE NOT MAKING ANY OTHER REPRESENTATIONS OR WARRANTIES,
WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED, CONCERNING SUCH PURCHASED
ASSETS, INCLUDING, IN PARTICULAR, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE, ALL OF WHICH ARE HEREBY EXPRESSLY EXCLUDED AND DISCLAIMED.

                                  ARTICLE VI

                  REPRESENTATIONS AND WARRANTIES OF THE BUYER
                  -------------------------------------------

     The Buyer represents and warrants to the Sellers, as of the date hereof and
as of the Closing Date, as follows:

     6.1   Organization.  The Buyer is a corporation duly organized, validly
           ------------ 
existing and in good standing under the laws of the Commonwealth of Pennsylvania
and has all requisite

                                      34
<PAGE>
 
corporate power and authority to own, lease, and operate its properties and to
carry on its business as is now being conducted. The Buyer has heretofore
delivered to BHE complete and correct copies of its Certificate of Incorporation
and Bylaws (or other similar governing documents), and any amendments thereto,
as currently in effect.

     6.2  Authority Relative to This Agreement.  The Buyer has full corporate
          ------------------------------------ 
power and authority to execute and deliver this Agreement and the Ancillary
Agreements and to consummate the transactions contemplated hereby and thereby.
The execution and delivery of this Agreement and the Ancillary Agreements and
the consummation of the transactions contemplated hereby and thereby have been
duly and validly authorized by all necessary corporate action on the part of the
Buyer, and no other corporate proceedings on the part of the Buyer are necessary
to authorize this Agreement or to consummate the transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by the
Buyer, and assuming the accuracy of Sellers' representations and warranties
contained in Section 5.2, and subject to the receipt of the Buyer Required
Regulatory Approvals, the Seller Required Consents and the Seller Required
Regulatory Approvals, this Agreement constitutes a valid and binding agreement
of the Buyer, enforceable against the Buyer in accordance with its terms, except
that such enforceability may be limited by applicable bankruptcy, insolvency,
moratorium or other similar laws affecting or relating to enforcement of
creditors' rights generally or general principles of equity. The Ancillary
Agreements, when executed, will, assuming the accuracy of Sellers'
representations and warranties contained in Section 5.2, and subject to the
receipt of the Buyer Required Regulatory Approvals, the Seller Required Consents
and the Seller Required Regulatory Approvals, constitute valid and binding
agreements of Buyer, enforceable against the Buyer in accordance with their
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, moratorium or other similar laws affecting or relating to
enforcement of creditors' rights generally or general principles of equity.

     6.3  Consents and Approvals; No Violation.  
          ------------------------------------ 

          (a) Except as set forth in Schedule 6.3, and other than obtaining the
Buyer Required Regulatory Approvals, the Seller Required Consents and the Seller
Required Regulatory Approvals, neither the execution and delivery of this
Agreement or the Ancillary Agreements by the Buyer nor the purchase by the Buyer
of the Purchased Assets pursuant to this Agreement and the Ancillary Agreements
will (i) conflict with or result in any breach of any provision of the
Certificate of Incorporation or Bylaws (or other similar governing documents) of
the Buyer, (ii) require any consent, approval, authorization or permit of, or
filing with or notification to, any governmental or regulatory authority, or
(iii) result in a default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms, conditions or provisions
of any note, bond, mortgage, indenture, license, agreement, lease or other
instrument or obligation to which the Buyer or any of its subsidiaries is a
party or by which any of its assets may be bound, except for such defaults (or
rights of termination, cancellation or acceleration) as to which requisite
waivers or consents have been obtained, or (iv) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to Buyer, and any
assets of Buyer.

          (b) Except for (i) authorizations under Part II of the Federal Power
Act required (A) to implement sales under any wholesale sales agreements to be
assigned to the Buyer, (B) to acquire, own and operate the jurisdictional
Purchased Assets and (C) to sell electricity from the 

                                      35
<PAGE>
 
Purchased Assets at wholesale market-based rates, (ii) approval by the FERC,
under Part I of the Federal Power Act, of the transfer of the FERC project
licenses related to, and necessary to operate, the Hydroelectric Assets, (iii)
any MPUC approval necessary for the Sellers to transfer the Purchased Assets in
Maine and/or for the Buyer to purchase the Purchased Assets in Maine, and to
obtain exempt wholesale generator certification with respect to the Purchased
Assets, (iv) the filing by the Buyer and the Sellers required by the HSR Act and
the expiration or earlier termination of all waiting periods under the HSR Act,
(v) any approval required of the MDEP, the EPA, or other governmental agency
pursuant to any Environmental Law, (vi) the acceptance/approval by FERC of the
Interconnection Agreement and the Transitional Power Sales Agreement, (vii)
certification of Buyer as an exempt wholesale generator pursuant to Section 32
of the Holding Company Act with respect to the Purchased Assets (excluding
approvals for sales to Affiliates), (viii) any authorizations or approvals of
FERC required to be obtained by Buyer in connection with the HQ Agreements, and
(ix) any authorizations or approvals of the SEC or FERC required for Buyer to
acquire, own and operate the Purchased Assets without causing Buyer's parent,
PP&L Resources, Inc., to become subject to registration under the Holding
Company Act (the filings and approvals referred to in clauses (i) through (ix)
are collectively referred to as the "Buyer Required Regulatory Approvals"), no
declaration, filing or registration with, or notice to, or authorization,
consent or approval of any governmental or regulatory body or authority is
necessary for the consummation by the Buyer of the transactions contemplated
hereby or by the Ancillary Agreements.

     6.4  Regulation as a Utility.  The Buyer is not and, except as a
          ----------------------- 
consequence of the transactions and regulatory approvals contemplated by this
Agreement, at the Closing Date will not be, subject to regulation as a public
utility or public service company (or similar designation) by the United States,
any state of the United States, any foreign country or any municipality or any
political subdivision of the foregoing. The Buyer is an Affiliate of a public
utility holding company exempt from registration under the Holding Company Act.

     6.5  Availability of Funds.  The Buyer has sufficient funds available to it
          --------------------- 
to pay the Purchase Price on the Closing Date in accordance with Section 4.2.

     6.6  Litigation.  There is no pending or, to Buyer's Knowledge, threatened
          -----------
action, by any governmental authority, arbitration panel or third Person which
is likely to result, or has resulted, in (a) the institution of legal
proceedings to prohibit or restrain the performance of this Agreement, the
Equity Contribution Agreement, or any of the Ancillary Agreements, or the
consummation of the transactions contemplated thereby in any material respect,
or (b) a claim for damages as a result of this Agreement, the Equity
Contribution Agreement, or any of the Ancillary Agreements, or the consummation
of the transactions contemplated thereby. There is no pending or, to Buyer's
Knowledge, threatened litigation or proceeding, private or governmental, against
Buyer which is likely to have a material adverse effect on Buyer.

     6.7  Qualified Buyer.  To Buyer's Knowledge, Buyer is not ineligible under
          ----------------
applicable law or regulation from obtaining any Permits necessary for the Buyer
to own and operate the Purchased Assets as of the Closing to the extent such
operation is either required by any Ancillary Agreement or is contemplated by
the Buyer.

                                      36
<PAGE>
 
     6.8  Title Policy Commitment.  Within one hundred and twenty (120) days
          ------------------------
after the date of this Agreement, the Buyer shall, at its own cost and expense,
obtain and provide the Sellers with copies of, title policy commitments (the
"Title Commitments") issued by the Title Insurance Company with respect to the
Real Estate.

     6.9  "AS IS" Sale.  Buyer acknowledges that the representations and
          -------------
warranties set forth in this Agreement, the Ancillary Agreements and any
certificates delivered by Sellers in connection herewith or therewith constitute
the sole and exclusive representations and warranties of the Seller in
connection with the transactions contemplated hereby. There are no
representations, warranties, covenants, understandings or agreements among the
parties regarding the Purchased Assets or their transfer other than those
incorporated or referred to in this Agreement or the Ancillary Agreements.
Except for the representations and warranties set forth in this Agreement, the
Ancillary Agreements and any certificates delivered by Sellers in connection
herewith or therewith, Buyer disclaims reliance on any representations,
warranties or guarantees, either express or implied, by Sellers.

     6.10 Buyer's Affiliate.  If Buyer elects to use one or more Affiliates to
          ------------------
hold title to any or all of the Purchased Assets, Buyer shall be deemed to have
made the representations and warranties in this Article VI on behalf of itself
and any such Affiliates as if the Affiliates were a signatory to this Agreement.

                                  ARTICLE VII

                           COVENANTS OF THE PARTIES
                           ------------------------

     7.1  Conduct of Business of the Sellers.
          ---------------------------------- 

          (a) Except as described in Schedule 7.1, from the date hereof to the
Closing Date, the Sellers will conduct the Business related to the Purchased
Assets (to the extent the Sellers have the legal right and authority to do so)
according to their ordinary and usual course of business consistent with Good
Utility Practice.  Without limiting the generality of the foregoing, and, except
as contemplated in this Agreement or as described in Schedule 7.1, prior to the
Closing Date, without the prior written consent of the Buyer (which consent
shall not be unreasonably withheld), the Sellers will not with respect to the
Purchased Assets or the related Business:

              (i)   create any Encumbrance (except Permitted Encumbrances) on
     the Purchased Assets, except in the ordinary course of Sellers' business or
     as required under Sellers' debt instruments and as will be removed on or
     prior to the Closing Date;

              (ii)  make any material change in the levels of fuel inventory and
     stores inventory customarily maintained by the Sellers with respect to the
     Purchased Assets, except for such changes which are consistent with Good
     Utility Practice;

              (iii) enter into any commitment for the purchase or sale of fuel
     having a term greater than six months and not terminable on or before the
     Closing Date either (i) automatically, or (ii) by option of BHE (or, after
     the Closing, by Buyer) in its sole 

                                      37
<PAGE>
 
     discretion, if the aggregate payment under such commitment and all other
     outstanding commitments not previously approved by the Buyer would be
     expected to exceed $1 million;

               (iv)   sell, lease (as lessor), transfer or otherwise dispose of
     any of the Purchased Assets, other than assets used, consumed or replaced
     in the ordinary course of business consistent with Good Utility Practice;

               (v)    amend, terminate or grant any waiver or consent with
     respect to any of the Sellers' Agreements other than in the ordinary and
     usual course of business, or take any action, or permit PHC to take any
     action, to dissolve Bangor-Pacific;

               (vi)   enter into or amend any material real or personal property
     Tax agreement, treaty or settlement;

               (vii)  make or approve any increase in the compensation payable
     by Sellers to any of the Employees (including, without limitation, salary,
     bonuses and benefits) except for increases consistent with past practices
     as heretofore disclosed to the Buyer; provided, however, that the foregoing
     shall not restrict the granting by the Sellers of voluntary early
     retirement and severance packages in accordance with the Employee
     Transition Plan solely at the Sellers' expense;

               (viii) enter into any oral or written contracts, agreements,
     commitments or arrangements (A) to do any of the foregoing matters, or (B)
     with respect to the Purchased Assets, in excess of $500,000 which have a
     term in excess of six (6) months, unless it is terminable by the Sellers
     and their assignee without penalty or premium upon not more than 30 days'
     notice, or (C) outside the ordinary course of business.

          (b)  Without limiting the generality of the first sentence of Section
7.1, prior to the Closing Date, except with the prior written consent of the
Buyer, the Sellers will, with respect to the Purchased Assets:

               (i)    consult with the Buyer as to the making of any material
     decisions or the taking of any material actions in matters other than in
     the ordinary course of business;

               (ii)   consult with the Buyer as to the making of any material
     decisions or the taking of any material actions involving environmental
     decisions;

               (iii)  maintain the Purchased Assets in customary repair, working
     order and condition (reasonable wear and tear excepted) and, except as
     contemplated by Section 7.10, repair or replace any Purchased Assets
     damaged or destroyed by fire or other casualty;

               (iv)   keep in force at not less than their present limits all
     policies of insurance to the extent reasonably practicable in light of the
     prevailing market conditions in the insurance industry and promptly notify
     Buyer of the cancellation of any such policy or any material modification
     thereto; and

                                      38
<PAGE>
 
               (v) maintain their customary business relationships with any
     lessor, licensor, customer or supplier of any Seller, and maintain their
     relationship with Purchased Assets Employees consistent with historical
     practice (subject to renegotiation of the Collective Bargaining Agreement).

          (c)  Notwithstanding anything in Section 7.1(a) or (b) to the
contrary, the Sellers may, in their sole discretion (i) make Maintenance
Expenditures and Capital Expenditures up to but not to exceed the Maintenance
and Capital Expenditures Amount, (ii) make, at the Sellers' expense, such other
maintenance and capital expenditures as the Sellers deem necessary, and (iii)
take any action in respect of the Purchased Assets (not otherwise described in
(a) or (b)) that does not adversely affect the Purchased Assets or the Assumed
Liabilities.

     7.2  Access to Information.
          --------------------- 

          (a)  Between the date of this Agreement and the Closing Date, the
Sellers will, during ordinary business hours and upon reasonable notice (i) give
the Buyer and the Buyer Representatives reasonable access to all books, records,
plants, offices and other facilities and properties constituting the Purchased
Assets or related to the Business or the Assumed Liabilities unless such access
would violate applicable law; (ii) permit the Buyer and its representatives to
make such reasonable inspections thereof as the Buyer may reasonably request;
(iii) furnish the Buyer with such financial and operating data and other
information with respect to the Purchased Assets, the related Business and the
Assumed Liabilities as the Buyer may from time to time reasonably request; and
(iv) furnish the Buyer a copy of each report, Schedule or other document filed
or received by them with respect to the Purchased Assets or the related Business
with the SEC, MPUC, MDEP, FERC, DOE, EPA or other relevant regulatory agency;
provided, however, that (A) any such investigation shall be conducted in such a
manner as not to interfere unreasonably with the operation of the Purchased
Assets, (B) the Sellers shall not be required to take any action which would
constitute a waiver of the attorney-client privilege and (C) the Sellers need
not supply the Buyer with any information which the Sellers, in their reasonable
judgment, are under a legal obligation not to supply, provided that Sellers
describe, to the extent permissible, the nature of the information withheld.
Notwithstanding anything in this Section 7.2 to the contrary, (i) the Sellers
will only furnish or provide such access to personnel and medical records as is
required by law, and (ii) the Buyer shall not have the right to perform or
conduct any environmental sampling or testing at, in, on, or underneath or
adjacent to the Purchased Assets.

          (b)  All information furnished to or obtained by the Buyer and the
Buyer Representatives pursuant to this Section 7.2 shall be "Information" for
purposes of Section 7.11 hereof.

          (c)  Subject to the last two sentences of this paragraph (c), for a
period of ten years after the Closing Date, the Sellers and their
representatives shall have reasonable access to all of the books and records of
the Purchased Assets transferred to the Buyer hereunder to the extent that such
access may reasonably be required by the Sellers in connection with matters
relating to or affected by the operation of the Purchased Assets prior to the
Closing Date.  Such access shall be afforded by the Buyer upon receipt of
reasonable advance notice and during normal business hours.  The Sellers shall
be solely responsible for any costs or expenses incurred 

                                      39
<PAGE>
 
by them pursuant to this Section 7.2(c). If the Buyer shall desire to dispose of
any such books and records prior to the expiration of such ten-year period, the
Buyer shall, prior to such disposition, give the Sellers a reasonable
opportunity, at the Sellers' expense, to segregate and remove such books and
records as the Sellers may select.

          (d) Subject to the last two sentences of this paragraph (d), for a
period of ten years after the Closing Date, the Buyer and Buyer Representatives
shall have reasonable access to all of the books and records of the Purchased
Assets retained by the Sellers to the extent that such access may reasonably be
required by the Buyer in connection with matters relating to or affected by the
operation of the Purchased Assets subsequent to the Closing Date; provided,
however, that Sellers shall not be required to provide access to personnel or
medical records except as required by law.  Such access shall be afforded by the
Sellers upon receipt of reasonable advance notice and during normal business
hours.  In addition, the Sellers will cooperate in the defense of any action
brought against the Buyer by a former employee of the Sellers.  The Buyer shall
be solely responsible for any costs or expenses incurred by it pursuant to this
Section 7.2(d).  If any Seller shall desire to dispose of any such books and
records prior to the expiration of such ten-year period, such Seller shall,
prior to such disposition, give the Buyer a reasonable opportunity at the
Buyer's expense, to segregate and remove such books and records as the Buyer may
select; provided, however, that the Sellers will use best efforts to preserve
all employment and medical records of those employees who are hired by the Buyer
as of the Closing Date, for a period of not less than ten (10) years from the
Closing Date.

          (e) If within ten years after the Closing Date the MPUC shall commence
an investigation of the reasonableness of any term or condition of this
Agreement, Buyer shall fully cooperate with the Sellers in providing any
information or testimony which may be helpful to Sellers in establishing the
reasonableness of the terms and conditions of the Agreement.  Sellers shall be
responsible for any costs or expenses incurred by Buyer pursuant to this Section
7.2(e).

     7.3  Expenses.  Except to the extent specifically provided herein, whether
          -------- 
or not the transactions contemplated hereby are consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be borne by the party incurring such costs and
expenses, including, without limitation, any expenses associated with litigation
arising out of this Agreement or any of the transactions contemplated hereunder.
Notwithstanding anything to the contrary herein, the Buyer will be responsible
for (a) all costs and expenses associated with the obtaining of any title
insurance policy and all endorsements thereto that the Buyer elects to obtain,
and (b) all filing fees of Buyer as an acquiring person under the HSR Act.
Sellers and Buyer each represent and warrant to the other, respectively, that,
except for Reed Consulting Group, Inc., which is acting for and at the expense
of the Sellers, no broker, finder or other person is entitled to any brokerage
fees, commissions or finder's fees in connection with the transactions
contemplated hereby by reason of any action taken by the party making such
representation. The Sellers and Buyer will pay to the other, or otherwise
discharge, and will indemnify and hold the other harmless from and against, any
and all claims or liabilities for all brokerage fees, commissions, and finders'
fees (other than as described above) incurred by reason of any action taken by
the indemnifying party.

                                      40
<PAGE>
 
     7.4  Further Assurances.
          ------------------ 

          (a) Each of the parties hereto will use its reasonable best efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the sale of the Purchased Assets pursuant to this
Agreement.  From time to time after the Closing Date, without further
consideration, the Sellers will reasonably cooperate with the Buyer in its
efforts to maximize any tax benefits associated with the Purchased Assets with
respect to periods following the Closing Date and to minimize the tax costs
associated with the transactions contemplated hereby, and will, at their own
expense, execute and deliver such documents to the Buyer as the Buyer may
reasonably request in order to more effectively vest in the Buyer the Sellers'
title to the Purchased Assets.  From time to time after the Closing Date, the
Buyer will reasonably cooperate with the Sellers in their efforts to maximize
any tax benefits associated with the Purchased Assets with respect to periods
prior to the Closing Date and to minimize the tax costs associated with the
transactions contemplated hereby, and will, at its own expense, execute and
deliver such documents to the Sellers as the Sellers may reasonably request in
order to more effectively consummate the sale of the Purchased Assets pursuant
to this Agreement.

          (b) Subject to Section 3.5, in the event that any Purchased Asset
shall not have been conveyed to the Buyer at the Closing, the Sellers shall,
subject to Section 7.4(c), use their best efforts to convey such asset to the
Buyer as promptly as is practicable after the Closing.  In the event that any
Easement shall not have been retained by a Seller after the Closing, the Buyer
shall use its best efforts to grant such Easement to such Seller as promptly as
is practicable after the Closing.  Nothing contained herein shall require the
Sellers or the Buyer to institute any litigation or to pay or agree to pay any
sum of money to convey such asset or grant such easement.

          (c) To the extent that the Sellers' rights under any Sellers'
Agreement may not be assigned without the consent of another Person which
consent has not been obtained, this Agreement shall not constitute an agreement
to assign the same if an attempted assignment would constitute a breach thereof
or be unlawful, and the Sellers, at their expense, shall use their best efforts
to obtain any such required consent(s) as promptly as possible.  The Sellers and
the Buyer agree that if any consent to an assignment of any Sellers' Agreement
shall not be obtained or if any attempted assignment would be ineffective or
would impair the Buyer's rights and obligations under the Sellers' Agreement in
question so that the Buyer would not in effect acquire the benefit of all such
rights and obligations, the Sellers, to the maximum extent permitted by law and
such Sellers' Agreement, shall with respect to any such Sellers' Agreement,
appoint the Buyer to be the Sellers' agent with respect to such Sellers'
Agreement, and enter into such reasonable arrangements with the Buyer as are
necessary to provide the Buyer with the benefits and obligations of such
Sellers' Agreement.  Schedule 1.1(a)(53) identifies those agreements that will
be assigned to the Buyer and those agreements which will be governed by the
preceding sentence.

          (d) Sellers and Buyer covenant and agree to negotiate and enter into
in good faith such further agreements as may be necessary for operating the
Purchased Assets after the Closing Date.

                                      41
<PAGE>
 
          (e) The parties agree and acknowledge that certain of the Permits
issued by the FERC include assets included in the Purchased Assets as well as
other assets of the Sellers which are not to be conveyed to the Buyer pursuant
to this Agreement.  In connection with the parties' performance of their
obligations under Section 7.4(a) hereof, the parties agree to take all action
necessary in order that any such Permit, when transferred to the Buyer, will be
modified appropriately to reflect the retention by the Sellers of the assets to
be retained by them and the retention by the Sellers of any necessary Permit
with respect to such retained assets.

          (f) BHE agrees to consult with Buyer in connection with any matter on
which the participants in NEPOOL are entitled to vote or give consent or approve
and which could affect the Purchased Assets in any material respect.

     7.5  Public Statements.  Between the date of this Agreement and the Closing
          ----------------- 
Date, the Sellers and the Buyer agree that they will consult with each other in
advance of making any public announcement or press release, or otherwise
disclosing any information, relating to the execution of this Agreement or any
transactions contemplated hereby, or otherwise relating to the Purchased Assets,
and will negotiate in good faith with respect to the form, content and timing
thereof and shall not issue any such release without the prior approval of the
other party; provided, however, that each party reserves the right to make such
statements to regulatory authorities in the ordinary course of business or as
are required, in the opinion of its counsel, by applicable law.

     7.6  Consents and Approvals. 
          ---------------------- 

          (a) The Sellers and the Buyer shall each file or cause to be filed
with the Federal Trade Commission and the United States Department of Justice
any notifications required to be filed under the HSR Act and the rules and
regulations promulgated thereunder with respect to the transactions contemplated
hereby.  The parties shall consult with each other as to the appropriate time of
filing such notifications and shall use their best efforts to make such filings
at the agreed upon time, to respond promptly to any requests for additional
information made by either of such agencies, and to cause the waiting periods
under the HSR Act to terminate or expire at the earliest possible date after the
date of filing.  Buyer will pay all filing fees of Buyer as an acquiring person
under the HSR Act in accordance with Section 7.3, and each of the parties shall
bear its own costs of the preparation of any filing.

          (b) The Sellers and the Buyer shall cooperate with each other and (i)
promptly prepare and file all necessary documents, (ii) effect all necessary
applications, notices, petitions and filings and execute all agreements and
documents, (iii) use their respective best efforts to obtain the transfer or
reissuance to the Buyer of all necessary Permits, Environmental Permits,
consents, approvals and authorizations of all governmental bodies, including
without limitation Permits related to the 345 Line, and (iv) use their
respective best efforts to obtain all necessary consents, approvals and
authorizations of all other parties, in the case of each of the foregoing
clauses (i), (ii), (iii) and (iv), necessary or advisable to consummate the
transactions contemplated by this Agreement (including, without limitation, the
Seller Required Regulatory Approvals, the Seller Required Consents and the Buyer
Required Regulatory Approvals) or for the Buyer to own, operate or maintain, on
and after the Closing Date, the Purchased Assets substantially as such assets
have been historically owned, operated and maintained by the Sellers 

                                      42
<PAGE>
 
prior to the date of this Agreement, or required by the terms of any note, bond,
mortgage, indenture, deed of trust, license, franchise, permit, concession,
contract, lease or other instrument to which any Seller or the Buyer is a party
or by which either of them is bound. Each of the Sellers and the Buyer shall
have the right to review in advance all characterizations of the information
relating to the transactions contemplated by this Agreement which appear in any
filing made in connection with the transactions contemplated hereby.

          (c) The Sellers shall use their best efforts prior to and, if
necessary, after the Closing Date to obtain the Seller Required Consents, and
the Buyer shall use its best efforts prior to and, if necessary, after the
Closing Date to obtain the Buyer Required Regulatory Approvals. If any such
consent or approval is not obtained, the Sellers and the Buyer agree to
cooperate in any reasonable arrangements (which may include, in the case of
leased property, a sublease thereof) designed to provide for the Buyer all of
the benefits (and to assure that the Sellers will be effectively relieved from
related liabilities) under such contract, agreement, lease, commitment or right,
including enforcement for the benefit of the Buyer, at the Sellers' expense, of
any and all rights of the Sellers against the other party or parties thereto.
Nothing in this Agreement shall be construed as an attempt or agreement to
assign (i) any contract which is nonassignable without the consent of the other
party or parties thereto unless such consent shall have been given, or (ii) any
contract or claim as to which all the remedies for the enforcement thereof would
not pass to the Buyer as an incident of the assignments provided for by this
Agreement.

          (d) Each of Buyer and the Sellers mutually agree for the benefit of
the other that, between the date of this Agreement and the Closing Date, neither
Buyer, Sellers nor any of their respective controlled Affiliates will enter into
any agreement, commitment or undertaking which would reasonably be expected to
impair the ability of Buyer and Sellers to complete the purchase and sale of the
Purchased Assets at the earliest time that the conditions set forth in Article
VIII are satisfied.

     7.7  Tax Matters.
          ----------- 

          (a) All transfer and sales or use taxes incurred in connection with
this Agreement and the transactions contemplated hereby shall be borne by the
Buyer, whether imposed on the Buyer or the Sellers, and the Buyer, at its own
expense, will file, to the extent required by applicable law, all necessary Tax
Returns and other documentation with respect to all such transfer or sales
taxes, and, if required by applicable law, the Sellers will join in the
execution of any such Tax Returns or other documentation and will take such
positions therein as are reasonably requested by the Buyer.  Sellers shall be
responsible for the payment of all their respective Taxes payable with respect
to any period or portion thereof prior to the Closing Date.

          (b) With respect to Taxes to be prorated in accordance with Section
3.4 of this Agreement only, the Buyer shall prepare and timely file all Tax
Returns required to be filed with respect to the Purchased Assets, if any, and
shall duly and timely pay all such Taxes, whether imposed on the Buyer or the
Sellers, shown to be due on such Tax Returns.  The Buyer's preparation of any
such Tax Returns shall be subject to the Sellers' approval, which approval shall
not be unreasonably withheld.  The Buyer shall make such Tax Returns available
for the Sellers' review and approval no later than fifteen (15) Business Days
prior to the due date for 

                                      43
<PAGE>
 
filing such Tax Return. Within ten (10) Business Days after receipt of such Tax
Return, the Sellers shall pay to the Buyer the Sellers' proportionate share of
the amount shown as due on such Tax Returns determined in accordance with
Section 3.4 of this Agreement to the extent Sellers are liable therefor pursuant
thereto and to the extent not already paid or accrued as a liability on Sellers'
balance sheets as of June 30, 1998.

          (c) After the Closing Date, Buyer and Sellers shall provide each other
with such cooperation and information relating to each other as either party
reasonably may request in (A) filing any Tax Return, amended Tax Return or claim
for Tax refund, (B) determining any Tax liability or a right to refund of Taxes,
(C) conducting or defending any audit or other proceeding in respect of Taxes or
(D) effectuating the terms of this Agreement.  The parties shall retain all Tax
Returns, schedules and work papers, and all material records and other documents
relating thereto, until the expiration of the statute of limitation (and, to the
extent notified by any party, any extensions thereof) of the taxable years to
which such returns and other documents relate and, unless such Tax returns and
other documents are offered and delivered to Sellers or Buyer, as applicable,
until the final determination of any Tax in respect of such years.  Any
information obtained under this Section 7.7(c) shall be kept confidential,
except as may be otherwise necessary in connection with filing any Tax Return,
amended Tax Return, or claim for Tax refund, determining any Tax liability or
right to refund of Taxes, or in conducting or defending any audit or other
proceeding in respect of Taxes.  Notwithstanding the foregoing, neither Seller
nor Buyer, nor any of their Affiliates, shall be required unreasonably to
prepare any document, or determine any information not then in its possession,
in response to a request under this Section 7.7(c).

          (d) (i) Sellers shall use reasonable efforts to cause to be prepared
and filed all Tax Returns of Bangor-Pacific for all taxable periods ending on or
prior to the Closing Date and cause to be paid all Taxes relating to such Tax
Returns.

          Upon request of Buyer, PHC shall cooperate with Buyer in making a Code
Section 754 election by Bangor-Pacific with respect to obtaining an adjustment
to the basis of Bangor-Pacific's assets under Code Section 743.  For purposes of
the allocations pursuant to Code Sections 755 and 1060 with respect to the Code
Section 754 elections, Buyer and PHC mutually agree that property, plant and
equipment may be assigned a value equal to fair market value and receivables may
be assigned a value equal to the face amount thereof net of any bad debts for
purposes of any such election.  If a Code Section 754 election is to be made,
Buyer shall prepare and submit within one hundred eighty (180) days after the
Closing Date an allocation consistent with the allocation described above to
Sellers for their review and approval, which shall not be unreasonably withheld.
Provided that the other partners in Bangor-Pacific have agreed to cooperate with
Buyer in causing Bangor-Pacific to make a Code Section 754 election, at the
election of Buyer, Buyer and PHC shall timely complete and file the statement
required by Treasury Regulation 1.743-1 and IRS Form 8594 consistent with such
allocation, shall provide a copy of such form to the other party hereto and
shall file a copy of such form with its federal income tax return for the period
that includes the Closing Date.  Sellers agree not to take any action to rescind
any such Code Section 754 election now or hereafter in effect with respect to
the assets of Bangor-Pacific.

                                      44
<PAGE>
 
               (ii)   Sellers shall have the right, at Sellers' sole expense, to
     represent the interests of Bangor-Pacific in any Tax audit or
     administrative or court proceeding relating to Tax Returns described in
     Section 7.7(d)(i) with respect to which any Seller may be liable for Taxes
     (including any such proceedings relating to Bangor-Pacific); provided,
                                                                  -------- 
     however, that Buyer shall have the right to participate in any such audit
     -------                                                                  
     or proceeding to the extent that any such audit or proceeding may affect
     the Tax liability of Buyer, any of its Affiliates, or Bangor-Pacific for
     any period ending after the Closing Date (with the right to consent to any
     settlement which may affect the Tax liability of Buyer, which consent shall
     not be unreasonably withheld) and to employ counsel of its choice at its
     own expense for purposes of such participation.

               (iii)  Buyer shall notify Sellers in writing, as promptly as
     practicable, upon receipt by Buyer, any Affiliate of Buyer, or Bangor-
     Pacific of notice of any pending or threatened Tax audits or assessments
     relating to the income, properties or operations of any Seller or Bangor-
     Pacific, in each case for Pre-Closing Periods only, so long as Pre-Closing
     Periods remain open; provided, however, that failure by Buyer to comply
                          --------  -------                                 
     with this Section 7.7(d)(iii) shall not affect Buyer's right to
     indemnification relating to Taxes if such failure does not prejudice the
     rights of Sellers. Sellers shall notify Buyer in writing as promptly as
     practicable upon receipt by Sellers or any Affiliate of Sellers of notice
     of any pending or threatened Tax audits or assessments relating to the
     income, properties or operations of Bangor-Pacific.

          (e)  The obligations of the Buyer and Sellers under this Section 7.7
shall survive the Closing and shall continue until the expiration of the
applicable statute of limitations.

     7.8  Supplements to Schedules. Prior to the Closing Date, the Sellers shall
          ------------------------
supplement or amend the Schedules required by this Agreement with respect to any
matter relating to the Purchased Assets hereafter arising which, if existing or
occurring at the date of this Agreement, would have been required to be set
forth or described in such Schedules. No supplement or amendment of any Schedule
made pursuant to this Section shall be deemed to cure any breach of any
representation or warranty made in this Agreement unless the parties agree
thereto in writing.

     7.9  Employees.
          --------- 

          (a)  During the period beginning on the date of this Agreement and
ending on the Window Expiration Date ("Buyer's Window"), the Buyer may offer
employment, effective as of the Closing Date, to employees of BHE who are
presently employed principally in connection with the ownership and operation of
the Purchased Assets and whose names and titles are listed individually in a
list previously provided by BHE to the Buyer (all such employees hereinafter
referred to as "Employees"). Notwithstanding the foregoing, any such individual
who, following the date hereof, changes job position of his/her own volition
pursuant to BHE's existing internal job posting procedures and, as a result of
such change, ceases to be employed principally in connection with the ownership
and operation of the Purchased Assets shall not be considered an Employee for
purposes of this Section 7.9, provided, that Buyer may offer employment during
the Buyer's Window to replacement individuals who in general perform the
functions and duties of such departed individual, in which case the Buyer's
Window will extend for an additional 30

                                      45
<PAGE>
 
days in respect of such replacement individual (and any such replacement
individual shall be considered an Employee for the purposes of this Section
7.9). To the extent permitted by law, BHE will provide reasonable access to
information (excepting personnel and medical records) and individuals reasonably
necessary to the Buyer in connection with Buyer's consideration of such offers.

          All such offers of employment shall be made in accordance with all
applicable laws and regulations. Each person who becomes employed by the Buyer
pursuant to this Section 7.9 shall be referred to herein as a "Transferred
Employee." Any changes in the terms and conditions of employment of any
Transferred Employee shall be made in accordance with the applicable provisions
of Chapter 32 of Title 35-A ("An Act to Restructure the State's Electric
Industry") (the "Maine Restructuring Law") including 35-A M.R.S.A. (S)3216 and
any rules adopted by the MPUC implementing those statutory requirements,
including Chapter 303.

          Subject to any and all applicable provisions of the Collective
Bargaining Agreement, during the Buyer's Window, Sellers will refrain from
offering post-Closing employment to any of the Employees without the prior
consent of the Buyer, other than those Employees whom the Buyer indicates in
writing it does not intend to hire. Without the prior written consent of BHE,
the Buyer shall not solicit, directly or indirectly, for employment any
employees of BHE or any of its Affiliates at any time beginning on the date
hereof and up to and including the second anniversary of the Closing Date, other
than offers to Employees made during the Buyer's Window.

          Subject to any and all applicable provisions of the Collective
Bargaining Agreement, Sellers shall not, without the prior written consent of
the Buyer, solicit for employment any Employee to whom the Buyer makes an offer
within the Buyer's Window and who becomes a Transferred Employee, at any time
beginning at the end of the Buyer's Window and ending on the second anniversary
of the Closing Date.

          With respect to any Employee who does not become a Transferred
Employee, Sellers shall be responsible for providing such Employee with any
benefits to which such Employee shall become entitled under the Sellers'
Employee Transition Plan, as well as any other termination or severance benefits
to which such Employee may be entitled.

          (b)  The Buyer acknowledges that the Collective Bargaining Agreement
expires on December 31, 1998, and that BHE is obligated to bargain in good faith
with Local 1837 with respect to a replacement or extension of such Agreement,
and Buyer hereby agrees to assume BHE's obligations under the Collective
Bargaining Agreement with respect to any union Transferred Employees as now in
effect and as it may be amended by such replacement or extension. BHE agrees to
keep the Buyer regularly informed of the progress of negotiations with Local
1837 with respect to the amendment or extension of the Collective Bargaining
Agreement. To the extent consistent with its obligation to bargain in good
faith, BHE will use its best efforts to limit the extension of the term of the
Collective Bargaining Agreement as it may apply to Employees in the bargaining
unit to a date not later than December 1, 1999, unless Buyer consents to a later
date, and to limit changes in the Collective Bargaining Agreement that are
applicable to Employees and are adverse to the employer.

                                      46
<PAGE>
 
          (c)  For the period commencing on the Closing Date and ending December
31, 2001, the Buyer shall provide all Transferred Employees with total
compensation (including, without limitation, base salary and overtime, bonuses,
and benefits contained in the employee benefit plans, programs and fringe
benefit arrangements of Buyer) which the Buyer in good faith believes is, in the
aggregate, substantially equivalent in value to the total compensation provided
to such employees by BHE immediately prior to the Closing Date (except that
Buyer shall not be required to provide compensation to such employees
corresponding to any bonuses or other incentive compensation paid by BHE).
Nothing herein shall be deemed to guarantee a Transferred Employee continued
employment with the Buyer for any definite period of time.

          (d)  As of the Closing Date, all Transferred Employees shall cease to
participate in the employee welfare benefit plans (as such term is defined in
ERISA) maintained or sponsored by BHE (the "Prior Welfare Plans") and shall, if
applicable, commence to participate in welfare benefit plans of the Buyer or its
Affiliates (the "Replacement Welfare Plans"). The Buyer shall (i) waive all
limitations as to pre-existing condition exclusions and waiting periods with
respect to Transferred Employees under the Replacement Welfare Plans, other
than, but only to the extent of, limitations or waiting periods that were in
effect with respect to such employees under the Prior Welfare Plans and that
have not been satisfied as of the Closing Date, and (ii) provide each
Transferred Employee with credit for any co-payments and deductibles paid prior
to the Closing Date in satisfying any deductible or out-of-pocket requirements
under the Replacement Welfare Plans (on a pro-rata basis in the event of a
difference in plan years).

          (e)  The Buyer shall take any and all necessary action to cause the
trustee of a tax-qualified defined contribution plan of the Buyer or one of its
Affiliates, if requested to do so by a Transferred Employee, to accept a direct
"rollover" of all or a portion of said employee's distribution from any defined
contribution retirement plan of BHE.

          (f)  Buyer shall pay to each Transferred Employee whose employment is
involuntarily terminated by the Buyer or any of its Affiliates subsequent to the
Closing Date and prior to December 31, 2001, except where such employment is
terminated for cause, unless such cause is beyond the control of the Transferred
Employee as in the case of a layoff for lack of work, the "Benefits Required By
Legislative Mandate" (as defined in the Employee Transition Plan of BHE prepared
pursuant to the Maine Restructuring Law (the "Employee Transition Plan")) that
would have been provided to such individual upon such termination by BHE under
the Employee Transition Plan, had such employee remained continuously employed
by BHE and had such individual been eligible under, and covered by, such plan on
the date of such termination; provided however, that no such benefit shall be
required to be paid by the Buyer to any such employee who either received the
Benefits Required By Legislative Mandate or elected to receive the "Enhanced &
Unreduced Accrued Benefit Option" from BHE under (and as defined in) the
Employee Transition Plan.

          (g)  Sellers agree to timely perform and discharge all requirements
under the WARN Act, if any, and under applicable state and local laws and
regulations for the notification of their employees arising from the sale of the
Purchased Assets to the Buyer. After the Closing Date, the Buyer shall be
responsible for performing and discharging all requirements under the WARN Act,
if any, and under applicable state and local laws and regulations for the
notification of its employees with respect to the Purchased Assets.

                                      47
<PAGE>
 
          (h)  Subject to the other provisions of this Section 7.9, and except
as specifically provided to the contrary in this Agreement:

               (1)  The Sellers, and not the Buyer, shall be responsible and
          shall assume any and all liability for all compensation, benefits, and
          perquisites of any kind due any Transferred Employee on account of
          employment by the Sellers before the Closing Date, or the termination
          of employment by the Sellers, including, but not limited to,
          continuation of health care coverage pursuant to the health
          continuation coverage provisions of the Consolidated Omnibus Budget
          Reconciliation Act of 1986, as amended ("COBRA") and compliance with
          the Health Insurance Portability and Accountability Act of 1996, as
          amended ("HIPAA"); and

               (2)  The Buyer, and not the Sellers, shall be responsible and
          shall assume any and all liability for all compensation, benefits, and
          perquisites of any kind due any Transferred Employee on account of
          employment by the Buyer on and after the Closing Date, or the
          termination of employment by the Buyer, including, but not limited to,
          continuation of health care coverage pursuant to COBRA and compliance
          with HIPAA.

     7.10 Risk of Loss.
          ------------ 

          (a)  From the date hereof through the Closing Date, all risk of loss
or damage to the property included in the Purchased Assets shall be borne by the
Sellers.

          (b)  If, before the Closing Date, all or any portion of the Purchased
Assets is taken by eminent domain (or is the subject of a pending or (to the
Knowledge of the Sellers) contemplated taking which has not been consummated),
the Sellers shall notify the Buyer promptly in writing of such fact, and Buyer
shall have the option to elect (A) to eliminate the affected Purchased Asset or
group of Purchased Assets and proceed with the Closing with the Purchase Price
being decreased by an amount equal to the aggregate value of the eliminated
Purchased Asset or group of Purchased Assets, (B) to retain the affected
Purchased Asset or group of Purchased Assets and negotiate an adjustment to the
Purchase Price, in which event the Buyer and the Sellers shall negotiate in good
faith to settle the loss resulting from such taking (including, without
limitation, by making a fair and equitable adjustment to the Purchase Price)
and, upon such settlement, proceed with the Closing pursuant to the terms of
this Agreement, or (C) if the aggregate value of the Purchased Asset or group of
Purchased Assets taken by eminent domain exceeds 10% or more of the Purchase
Price, to terminate this Agreement pursuant to Section 10.1(d); provided,
however, that, subject to Section 3.5, Buyer shall not be entitled to terminate
this Agreement if the affected Purchased Asset is solely (1) the Veazie Hydro
Project, or (2) the Bangor-Pacific Interest.

          (c)  If, before the Closing Date, all or any portion of the Purchased
Assets is damaged or destroyed by fire or other casualty, the Sellers shall
notify the Buyer promptly in writing of such fact and, if the Sellers have not
notified the Buyer within thirty (30) days after the occurrence of such damage,
destruction or loss of their intention to cure such damage, destruction or loss
prior to Closing Date (and unless such cure is so effected prior to the Closing

                                      48
<PAGE>
 
Date), Buyer shall have the option to elect (A) to eliminate the affected
Purchased Asset or group of Purchased Assets and proceed with the Closing with
the Purchase Price being decreased by an amount equal to the aggregate value of
the eliminated Purchased Asset or group of Purchased Assets, (B) to retain the
affected Purchased Asset or group of Purchased Assets and negotiate an
adjustment to the Purchase Price, in which event the Buyer and the Sellers shall
negotiate in good faith to settle the loss resulting therefrom (including,
without limitation, by making a fair and equitable adjustment to the Purchase
Price), and, upon such settlement, proceed with the Closing pursuant to the
terms of this Agreement, or (C) if the aggregate value of the Purchased Asset or
group of Purchased Assets damaged or destroyed exceeds 10% or more of the
Purchase Price, to terminate this Agreement pursuant to Section 10.1(d);
provided, however, that, subject to Section 3.5, Buyer shall not be entitled to
terminate this Agreement if the affected Purchased Asset is solely (1) the
Veazie Hydro Project, or (2) the Bangor-Pacific Interest.

           (d)  In the case of an adjustment to the Purchase Price pursuant to
paragraph (b) or (c) hereof due to the taking of or damage to a Purchased Asset,
the Maintenance and Capital Expenditure Amount shall be reduced by the amounts
thereof attributable to such assets.

     7.11  Confidential Information.
           ------------------------ 

           (a) All oral and written information (collectively "Information")
disclosed by any party or its representatives, whether before or after the date
hereof, in connection with the transactions contemplated by or the discussions
and negotiations preceding this Agreement, to any other party or its directors,
officers and employees and representatives of its advisors (the persons to whom
such disclosure is permissible being collectively called "Representatives"),
shall (i) be kept confidential by other party and its Representatives, and shall
not be disclosed by such other party and its Representatives except as otherwise
provided in this Agreement, (ii) not be used by any such other persons except as
contemplated by this Agreement, and (iii) be treated with the same degree of
care used in protecting its own confidential and proprietary information.

           (b) Each party hereto will inform its Representatives of the
confidential nature of the other party's Information and will be responsible for
any breach of this Section 7.11 by its Representatives.

           (c) If any party is requested or required (by the terms of a
subpoena, order, civil investigative demand or other similar process or other
written request issued by a court of competent jurisdiction or by a Federal,
state or local governmental body or agency) to disclose any Information of the
other party (or any of the terms, conditions or other facts with respect to the
transactions contemplated by this Agreement), the obligated party shall (i)
provide the other party with prompt notice of such request(s) and the documents
requested so that the other party may seek an appropriate protective order
and/or waive the obligated party's compliance with the provisions of this
Section 7.11, and (ii) take such legally available steps as the other party may
reasonably request, to resist or narrow such request. If, in the absence of a
protective order or the receipt of a waiver hereunder the obligated party is
nonetheless, in the reasonable opinion of its legal counsel, compelled to
disclose Information of the other party pursuant to any regulatory or judicial
proceeding, the obligated party may disclose such Information to such tribunal
without liability hereunder; provided, however, that the obligated party shall
give the other party written notice of Information to be so disclosed as far in
advance of its disclosure as is

                                      49
<PAGE>
 
practicable, shall furnish only that portion of the Information which is legally
required, and shall request an order or other reliable assurance that
confidential treatment will be accorded to such portions of the Information
required to be disclosed as the affected party designates.

           (d) The term "Information" does not include any information which (i)
becomes generally available to and known by the public (other than as a result
of a unilateral disclosure directly or indirectly made by the recipient party or
its Representatives), (ii) becomes available to the recipient party on a non-
confidential basis from a source other than the disclosing party or its
Representatives, provided that such source is not and was not bound by a
confidentiality agreement with or other obligation of secrecy to the disclosing
party, or (iii) which in the opinion of counsel to the disclosing party is
required to be disclosed by federal securities laws, provided that the
disclosing party shall consult with the other parties hereto as to the content
of any such disclosure prior to its occurrence.

           (e) From the date hereof through the Closing Date, Buyer shall have
the right to disclose Information of Sellers with respect to the Purchased
Assets to financing parties and their respective representatives in connection
with financing the transactions contemplated by this Agreement and to third
parties in connection with planning for operations of the Purchased Assets
following the Closing Date, provided that any such disclosure is made pursuant
to confidentiality obligations equivalent to those provided in this Section
7.11. The Buyer shall be responsible for any breach of this Section 7.11(e) by
any such third party.

           (f) If this Agreement is terminated in accordance with its terms, the
recipient party will return promptly to the disclosing party all copies,
extracts or other reproductions in whole or in part of the disclosing party's
Information in the recipient party's possession or in the possession of its
Representatives, and the recipient party will destroy all copies of any
memoranda, notes, analyses, compilations, studies or other documents prepared by
the recipient party or for the recipient party's use based on, containing or
reflecting any Information. Such destruction shall, if requested, be certified
in writing to the disclosing party by an authorized officer of the recipient
party supervising such destruction.

           (g) The parties agree that each shall be entitled to equitable
relief, including injunction and specific performance, in the event of any
breach of the provisions of this Section 7.11, in addition to all other remedies
available to such party at law or in equity.

           (h) This Section 7.11 supersedes the correlative provisions of the
Confidentiality Agreement, which agreement is of no further force and effect,
provided that Information disclosed by one party to the other party hereto prior
to the date hereof shall be Information for all purposes of this Section 7.11.

     7.12  Observation, Inspection and Participation.
           ----------------------------------------- 

           (a) Between the date of this Agreement and the Closing Date, the
Buyer shall be entitled to have a reasonable number of representatives, all of
whom shall be employees of the Buyer or its Affiliates unless otherwise agreed
by BHE in each instance ("Site Representatives") at any of the Purchased Assets,
on a full or part time basis (whether on site or off site), as determined by the
Buyer; provided, however, that (A) the presence and activities of the Site

                                      50
<PAGE>
 
Representatives shall be conducted in a manner as not to interfere unreasonably
with the operation of the Purchased Assets, or with the activities of the
Sellers not related to the Purchased Assets and (B) the Site Representatives
shall not have access to any information that is unavailable pursuant to Section
7.2. Reasonable office space and facilities shall be made available by the
Sellers to such Site Representatives. Each Site Representative shall have the
right to review budgets and expenditures, audit records (except for personnel
and medical records unless required by law), inspect equipment, advise on
repairs required for equipment, review permits, review the progress of outages,
review maintenance and operating practices and otherwise observe all activities
at the above mentioned facilities in each case to the extent related to the
Purchased Assets or the conduct of the Business and subject to the limitations
contained in Section 7.12(b).

           (b) Between the date of this Agreement and the Closing Date, the
Sellers shall exercise their reasonable best efforts to invite Site
Representatives to attend meetings (whether internal or with third parties) in
which the Sellers participate and which relate specifically to the physical
operation or maintenance of the Purchased Assets or the conduct of the Business;
provided, however, that such obligation shall not extend to (i) meetings of the
boards of directors, or any committees thereof, of any of the Sellers or their
Affiliates, (ii) meetings with governmental or regulatory authorities which are
not open to the public, provided that promptly following each such a meeting
Sellers shall inform the Buyer of the discussions at such meeting as they relate
to the Purchased Assets, (iii) meetings as to which any participant not
affiliated with any of the Sellers (or any of their Affiliates), at its own
initiative, requests that Site Representatives not attend, provided that
promptly following each such meeting Sellers shall inform the Buyer of the
discussions at such meeting as they relate to the Purchased Assets, (iv)
meetings of employees of the Sellers relating to the preparation of the
Separation Document, (v) meetings with counsel, or (vi) meetings the subject
matter of which, in the Sellers' reasonable judgment, if disclosed to the Buyer,
would likely be detrimental to the Sellers (including, without limitation,
information relating to the Sellers' proposed business activities following the
Closing Date or to contractual or other matters as to which the interests of the
Sellers and the Buyer may diverge). Site Representatives shall also be entitled
to consult with the Sellers and make recommendations as to all activities
relating to the management, operation, maintenance, construction, renewal,
addition, replacement, modification and disposal of the Purchased Assets or the
conduct of the Business, including, without limitation, applications for
authorizations, permits and licenses, and fuel procurement and transportation.

           (c) The Buyer shall exercise its reasonable best efforts to invite
designated representatives of the Sellers to attend all meetings between the
date of this Agreement and the Closing Date with third parties in which the
Buyer participates and which relate specifically to any proceedings before the
FERC with respect to this Agreement, the Interconnection Agreement or the
Transitional Power Sales Agreement or the transactions contemplated hereby or
thereby.

     7.13  Delivery of Books and Records, etc.; Removal of Property. On or prior
           --------------------------------------------------------
to the Closing Date, Sellers will deliver or make available to Buyer at the
locations of the Purchased Assets all of the books and records and other such
assets constituting a part of the Purchased Assets as are in Sellers' possession
at other locations and, if at any time after the Closing Date, Sellers discover
in their possession or under their control any other such books and records,

                                      51
<PAGE>
 
Sellers will promptly delivery such books and records to the Buyer. Within a
reasonable time after the Closing Date and subject to the Easements and except
as contemplated by the Separation Document, Sellers shall remove all assets not
being sold to the Buyer pursuant to this Agreement from the Real Estate. Such
removal shall be at the sole cost and risk of Sellers, including risk of loss
and damage to such assets and to the Purchased Assets conveyed to the Buyer
pursuant to this Agreement.

     7.14  Millenium Compliance. Sellers shall use their best efforts to assure
           -------------------- 
that no later than October 1, 1999, all proprietary technology and third party
proprietary technology which comprise a part of the Purchased Assets (technology
so utilized is collectively referred to as "Technology") is made "Century Date
Compliant." Any such Technology is deemed to be Century Date Compliant if:

           (a) the functions, calculations, and other computing processes of the
Technology (collectively "Processes") perform in a consistent manner and
correctly track and account for dates and passage of time, regardless of the
date in time on which the Processes are actually performed and regardless of the
date on which data was input into the product, whether before, on, or after
January 1, 2000  and whether or not the dates are affected by leap years;

           (b) the Technology accepts, calculates, compares, sorts, extracts,
sequences, and otherwise processes date inputs and date values, and returns and
displays date values in a consistent manner and correctly tracks and accounts
for dates and the passage of time, regardless of the dates used, whether before,
on or after January 1, 2000;

           (c) the Technology functions without interruptions caused by the date
in time on which the Processes are actually performed or by the date input to
the system, whether before, on or after January 1, 2000;

           (d) the Technology accepts and responds to year input in a manner
that resolves any ambiguities as to century in a defined and predetermined and
appropriate manner; and

           (e) the Technology stores and displays date information in ways that
are unambiguous as to the determination of the century.

     If, after October 1, 1999, any such Technology is discovered not to be
Century Date Compliant, Sellers shall reimburse Buyer for all reasonable costs
associated with making the Technology Century Date Compliant and shall indemnify
Buyer for all reasonably demonstrable damages of Buyer caused by the failure of
such Technology to be Century Date Compliant.

                                 ARTICLE VIII

                              CLOSING CONDITIONS
                              ------------------

     8.1   Conditions to Each Party's Obligations to Effect the Transactions.
           ----------------------------------------------------------------- 
The respective obligations of each party to effect the purchase and sale of the
Purchased Assets shall be subject to the fulfillment at or prior to the Closing
Date of the following conditions (any of which may be waived jointly by Buyer
and Sellers):

                                      52
<PAGE>
 
           (a) The waiting period under the HSR Act applicable to the
     consummation of the sale of the Purchased Assets contemplated hereby shall
     have expired or been terminated;

           (b) No preliminary or permanent injunction or other order or decree
     by any Federal or state court which prevents the consummation of the sale
     of the Purchased Assets contemplated hereby shall have been issued and
     remain in effect (each party agreeing to use its best efforts to have any
     such injunction, order or decree lifted) and no statute, rule or regulation
     shall have been enacted by any state or Federal government or governmental
     agency in the United States which prohibits the consummation of the sale of
     the Purchased Assets;

           (c) All Federal, state and local government consents and approvals
     (including but not limited to legislative and administrative consents and
     approvals and, in the case of clause (ii) below, any approval required to
     transfer, or issue or reissue in the name of Buyer, a Permit or
     Environmental Permit) required for (i) the consummation of the sale of the
     Purchased Assets and the other transactions contemplated hereby, (ii) the
     ownership, operation and maintenance by the Buyer of the Purchased Assets
     in a manner substantially consistent with the Sellers' historical
     ownership, operation and maintenance thereof, and (iii) the execution,
     delivery and performance by the parties thereto of the Ancillary
     Agreements, including, without limitation, the Seller Required Regulatory
     Approvals and the Buyer Required Regulatory Approvals, shall have been
     obtained, unless the failure to obtain such consent or approval would not
     result in a Material Adverse Effect, and shall be Final ("Final" means a
     final order that has not been stayed, enjoined, appealed, set aside or
     suspended, with respect to which any required waiting or appeal period has
     expired or has been waived, and as to which all conditions to effectiveness
     prescribed therein or otherwise by law have been satisfied); and

           (d) The Seller Required Consents and all other consents and approvals
     for the consummation of the sale of the Purchased Assets and the other
     transactions contemplated hereby shall have been obtained, other than those
     which if not obtained, would not, in the aggregate, have a Material Adverse
     Effect.

     8.2   Conditions to Obligations of the Buyer. The obligation of the Buyer
           -------------------------------------- 
to effect the purchase of the Purchased Assets contemplated by this Agreement
shall be subject to the fulfillment at or prior to the Closing Date of the
following additional conditions (all or any of which may be waived in whole or
in part by the Buyer in its sole discretion):

           (a) There shall not have occurred and be continuing a Material
     Adverse Effect, provided, that, subject to Section 3.5, the absence of a
                     --------
     Material Adverse Effect which solely affects either the Veazie Hydro
     Project or the Bangor-Pacific Interest shall not be a condition to the
     obligation of the Buyer to effect the purchase of the remaining Purchased
     Assets;

           (b) (i) The representations and warranties of the Sellers set forth
     in this Agreement shall be true and correct in all material respects as of
     the date of this Agreement and as of the Closing Date as though repeated at
     and as of the Closing Date, and (ii) the Sellers shall have performed and
     complied with in all material respects the

                                      53
<PAGE>
 
     covenants and agreements contained in this Agreement that are required to
     be performed and complied with by the Sellers on or prior to the Closing
     Date;

           (c) The Purchased Assets shall be free and clear of Encumbrances
     except those Permitted Encumbrances which by definition are permitted to
     survive the Closing Date;

           (d) The Buyer shall have received certificates from authorized
     officers of the Sellers, dated the Closing Date, to the effect that, to the
     best of such officers' Knowledge, the conditions set forth in Sections
     8.2(a), (b) and (c) have been satisfied;

           (e) The consents and approvals required to be obtained pursuant to
     Section 8.1(c) or (d) hereof shall not contain or be granted subject to
     terms or conditions which could reasonably be expected to have a Material
     Adverse Effect when compared to the terms and conditions presently
     applicable to the Purchased Assets;

           (f) Within the earlier to occur of forty-five (45) days after Buyer's
     receipt of the Title Commitments or one hundred and fifty (150) days after
     the date of this Agreement, Buyer shall not have notified the Seller in
     writing that such Title Commitments contain non-customary exceptions or
     qualifications that could reasonably be expected to have a Material Adverse
     Effect;

           (g) BHE and Buyer shall have entered into a memorandum of
     understanding with respect to the potential future development of the 345
     Line and/or the Basin Mills Hydroelectric Project pursuant to which, upon
     the election of Buyer in its sole discretion to proceed with either of such
     development projects, (i) BHE shall be afforded the right to acquire for no
     additional consideration a 50% equity interest in the project to be
     developed, and BHE and Buyer shall negotiate in good faith a joint venture
     agreement with respect to such project which shall obligate BHE to pay 50%
     of project development costs, and (ii) if BHE declines to exercise such
     right, BHE shall, upon request of Buyer, enter into a consulting agreement
     with Buyer to assist Buyer in the development of such project, which
     agreement shall provide for reimbursement on a current basis of BHE's costs
     incurred under such agreement and, if the project proceeds to financial
     closing, a success fee of not less than 5% of the total budgeted costs for
     such project net of any consulting costs reimbursed to BHE by Buyer as
     provided above.

           (h) The Buyer shall have received an opinion from New York and Maine
     counsel to Sellers, as applicable, reasonably satisfactory to Buyer, dated
     the Closing Date, substantially to the effect that:

               (1) each Seller is a corporation organized, existing and in good
          standing under the laws of its state of incorporation and each state
          or other jurisdiction in which it is qualified to do business as a
          foreign corporation by virtue of owning the Purchased Assets or
          conducting the related Business, and each Seller has the corporate
          power and authority to execute and deliver this Agreement and the
          Ancillary Agreements and to consummate the transactions contemplated
          hereby and thereby; and the execution and delivery of this Agreement
          and the Ancillary Agreements and the consummation of the sale of the
          Purchased Assets

                                      54
<PAGE>
 
          contemplated hereby have been duly authorized by all requisite
          corporate action taken on the part of the Sellers;

              (2) this Agreement and the Ancillary Agreements have been duly
          executed and delivered by the Sellers and (assuming that the Seller
          Required Regulatory Approvals, the Seller Required Consents and the
          Buyer Required Regulatory Approvals are obtained) are valid and
          binding obligations of the Sellers, enforceable against the Sellers in
          accordance with their terms, except (A) that such enforcement may be
          subject to bankruptcy, insolvency, reorganization, moratorium or other
          similar laws now or hereafter in effect relating to creditors' rights,
          and (B) that the remedy of specific performance and injunctive and
          other forms of equitable relief may be subject to certain equitable
          defenses and to the discretion of the court before which any
          proceeding therefor may be brought;

              (3) the execution, delivery and performance of this Agreement and
          the Ancillary Agreements by the Sellers will not constitute a
          violation of the Articles of Incorporation or Bylaws, as currently in
          effect, of any Seller;

              (4) the Bill of Sale and other documents described in Section 4.3
          are in proper form to transfer to the Buyer title to the Purchased
          Assets; and

              (5) no declaration, filing or registration with, or notice to, or
          authorization, consent or approval of any governmental authority is
          necessary for the consummation by the Sellers of the Closing other
          than (i) the Seller Required Regulatory Approvals, all of which have
          been obtained and are Final, (ii) such declarations, filings,
          registrations, notices, authorizations, consents or approvals which if
          not obtained or made, would not, in the aggregate, have a Material
          Adverse Effect and (iii) the Seller Required Consents, all of which
          have been obtained.

          As to any matter contained in such opinion which involves the laws of
     any jurisdiction other than the Federal laws of the United States or the
     laws of the State of Maine, such counsel may rely upon opinions of counsel
     admitted in such other jurisdictions.  Any opinions relied upon by such
     counsel as aforesaid shall be delivered together with the opinion of such
     counsel.  Such opinion may expressly rely as to matters of fact upon
     certificates furnished by the Sellers and appropriate officers and
     directors of the Sellers and by public officials;

          (i) All corporate and other proceedings to be taken by the Sellers in
     connection with the transactions contemplated hereby and all documents
     incident thereto shall be reasonably satisfactory in form and substance to
     the Buyer and its counsel, and the Buyer and its counsel shall have
     received all such certified or other copies of such documents as it or they
     may reasonably request; and

          (j) Sellers shall have delivered to the Buyer duly executed
     counterparts of each document or agreement contemplated to be delivered by
     Sellers under Section 4.3 of this 

                                      55
<PAGE>
 
     Agreement and the conditions to effectiveness of each such agreement (the
     Effective Date, if any, as defined therein) shall have been satisfied.

     8.3  Conditions to Obligations of the Sellers. The obligation of the
          ---------------------------------------- 
Sellers to effect the sale of the Purchased Assets contemplated by this
Agreement shall be subject to the fulfillment (all or any of which may be waived
by Seller) at or prior to the Closing Date of the following additional
conditions:

          (a) The Sellers shall have received the Preliminary Purchase Price
     from Buyer;

          (b) (i) The representations and warranties of the Buyer set forth in
     this Agreement shall be true and correct in all material respects as of the
     date of this Agreement and as of the Closing Date as though repeated at and
     as of the Closing Date, and (ii) the Buyer shall have performed and
     complied in all material respects with its covenants and agreements
     contained in this Agreement which are required to be performed on or prior
     to the Closing Date;

          (c) The Sellers shall have received a certificate from an authorized
     officer of the Buyer, dated the Closing Date, to the effect that, to the
     best of such officer's Knowledge, the conditions set forth in Sections
     8.3(a) and (b) have been satisfied;

          (d) The consents and approvals required to be obtained pursuant to
     Section 8.1(c) hereof shall not contain, or be granted subject to, terms or
     conditions which, from the Sellers' perspective, materially and adversely
     affect the benefits to the Sellers under this Agreement or the transactions
     contemplated hereby;

          (e) All corporate and other proceedings to be taken by the Buyer in
     connection with the transactions contemplated hereby and all documents
     incident thereto shall be reasonably satisfactory in form and substance to
     the Sellers and their counsel, and the Sellers and their counsel shall have
     received all such certified or other copies of such documents as it or they
     may reasonably request; and

          (f) The Sellers shall have received an opinion from counsel for Buyer
     reasonably satisfactory to Sellers, dated the Closing Date, to the effect
     that:

              (1) Buyer is a corporation organized, existing and in good
          standing under the laws of the Commonwealth of Pennsylvania, and has
          the corporate power and authority to execute and deliver this
          Agreement and the Ancillary Agreements and to consummate the
          transactions contemplated hereby and thereby; and the execution and
          delivery of this Agreement and the Ancillary Agreements and the
          consummation of the sale and purchase of the Purchased Assets
          contemplated hereby have been duly authorized by all requisite
          corporate action taken on the part of the Buyer;

              (2) this Agreement and the Ancillary Agreements have been duly
          executed and delivered by the Buyer and (assuming that the Seller
          Required Regulatory Approvals, the Seller Required Consents and the
          Buyer Required Regulatory Approvals are obtained) are valid and
          binding obligations of the Buyer, 

                                      56
<PAGE>
 
          enforceable against the Buyer in accordance with their respective
          terms, except (A) that such enforcement may be subject to bankruptcy,
          insolvency, reorganization, moratorium or other similar laws now or
          hereafter in effect relating to the creditors' rights and (B) that the
          remedy of specific performance and injunctive and other forms of
          equitable relief may be subject to certain equitable defenses and to
          the discretion of the court before which any proceeding therefor may
          be brought;

              (3) the execution, delivery and performance of this Agreement and
          the Ancillary Agreements by the Buyer will not constitute a violation
          of the Certificate of Incorporation or by-laws (or other similar
          governing documents), as currently in effect, of the Buyer;

              (4) the Assignment and Assumption Agreement and other instruments
          described in Section 4.4 are in proper form and are effective for the
          Buyer to assume the Assumed Liabilities; and

              (5) no declaration, filing or registration with, or notice to, or
          authorization, consent or approval of any governmental authority is
          necessary for the consummation by the Buyer of the Closing other than
          (i) the Buyer Required Regulatory Approvals, all of which have been
          obtained and are Final, and (ii) any other declarations, filings,
          registrations, notices, authorizations, comments or approvals which if
          not obtained would not prevent the payment by Buyer of the Purchase
          Price.

          As to any matter contained in such opinion which involves the laws of
     any jurisdiction other than the Federal laws of the United States, the
     Commonwealth of Pennsylvania or the State of Maine, such counsel may rely
     upon opinions of counsel admitted to practice in such other jurisdictions.
     Any opinions relied upon by such counsel as aforesaid shall be delivered
     together with the opinion of such counsel.  Such opinion may expressly rely
     as to matters of fact upon certificates furnished by appropriate officers
     and directors of the Buyer and its respective Affiliates and by public
     officials; and

          (g) Buyer shall have delivered to Sellers the documents and agreements
     contemplated to be delivered by the Buyer in Section 4.4 or elsewhere in
     this Agreement.

                                  ARTICLE IX

                                INDEMNIFICATION
                                ---------------

     9.1  Indemnification.
          --------------- 

          (a) Sellers will indemnify, defend and hold harmless the Buyer and its
affiliates and their respective directors, officers, employees, agents and
representatives ("Buyer Group") from and against any and all claims, demands or
suits (by any Person), losses, liabilities, damages (but excluding, except to
the extent claimed by third parties, any consequential, special, 

                                      57
<PAGE>
 
indirect, punitive or incidental damages, including without limitation lost
profits), obligations, payments, costs and expenses (including, without
limitation, the costs and expenses of any and all actions, suits, proceedings,
assessments, penalties, fines, judgments, settlements and compromises relating
thereto, reasonable disbursements in connection therewith, reasonable attorneys'
and consultants' fees, investigation, removal or response cleanup and remedial
costs) (each, an "Indemnifiable Loss"), asserted against or suffered by the
Buyer Group relating to, resulting from or arising out of (i) any breach of any
representation or warranty (without regard to any qualifications with respect to
Material Adverse Effect contained therein) of the Sellers contained in this
Agreement or any schedule hereto, or any certificate delivered by or on behalf
of Sellers in connection herewith, (ii) any covenant or agreement of Sellers set
forth in Sections 7.1, 7.2(a), 7.5, 7.6(a), 7.6(d), 7.8, 7.10 or 7.12, (iii) any
breach of any other covenant or agreement of the Sellers contained in this
Agreement, any schedule hereto, or any certificate delivered by or on behalf of
Sellers in connection herewith, or (iv) the Excluded Liabilities, provided,
                                                                  -------- 
however, that, in the case of any Indemnifiable Loss arising under clause (i) or
- -------                                                                         
(ii) of this Section 9.1(a) ("Certain Indemnifiable Losses"), (W) such
indemnification shall be effective only with respect to claims written notice of
which is received by Sellers no later than eighteen months after the Closing
Date, (X) no amounts shall be due and payable to the extent that the sum of
Certain Indemnifiable Losses plus all Seller Indemnified Environmental Losses
(as defined below) is equal to $500,000 or less, (Y) in no event shall the
aggregate amount of all payments made by the Sellers with respect to Certain
Indemnifiable Losses exceed ten percent (10%) of the Purchase Price, and (Z) the
foregoing limitations on Sellers' indemnity shall not apply to the extent the
Certain Indemnifiable Loss results from any successor liability of Buyer arising
out of a failure of Bangor-Pacific to file any Tax Return required to be filed
by it prior to the Closing, or the failure of Sellers to file any Tax Return or
pay any Tax required to be filed or paid by them under this Agreement, and
provided, further, that in the case of any Indemnifiable Loss relating to the
- --------  -------                                                            
Excluded Liabilities of Sellers described in Section 2.4(vi) (hereinafter,
"Seller Indemnified Environmental Losses"), (1) such indemnification shall be
effective only with respect to claims written notice of which is received by
Sellers no later than the third anniversary of the Closing Date, (2) no amounts
shall be due and payable to the extent that the sum of such Seller Indemnified
Environmental Losses plus the Certain Indemnifiable Losses is equal to $500,000
or less and (3) in no event shall the aggregate amount of all payments made by
the Sellers with respect to such Seller Indemnified Environmental Losses exceed
$20 million.

          (b) The Buyer will indemnify, defend and hold harmless the Sellers and
their affiliates and their respective directors, officers, employees, agents and
representatives ("Sellers Group") from and against any and all Indemnifiable
Losses asserted against or suffered by the Sellers Group relating to, resulting
from or arising out of (i) any breach of any representation or warranty of the
Buyer contained in this Agreement, any schedule hereto, or any certificate
delivered by or on behalf of Buyer in connection herewith, (ii) any covenant or
agreement of the Buyer set forth in Sections 7.5, 7.6(a), 7.6(d), 7.10 or 7.12,
(iii) any breach of any other covenant or agreement of the Buyer contained in
this Agreement, any schedule hereto, or any certificate delivered by or on
behalf of Buyer in connection herewith, or (iv) the Assumed Liabilities,
provided, however, that in the case of any Indemnifiable Loss arising under
- --------  -------                                                          
clause (i) or (ii) of this Section 9.1(b), (X) such indemnification shall remain
in effect only with respect to claims written notice of which is received by
Buyer no later than eighteen months after the Closing Date, (Y) no amounts shall
be due and payable to the extent that the aggregate amount of such Indemnifiable
Losses is equal to $500,000 or less and (Z) in no event shall the aggregate
amount 

                                      58
<PAGE>
 
of all payments made by the Buyer with respect to such Indemnifiable Losses
exceed ten percent (10%) of the Purchase Price.

          (c) Any Person entitled to receive indemnification under this
Agreement (an "Indemnitee") having a claim under these indemnification
provisions shall make a good faith effort to recover all losses, damages, costs
and expenses from insurers of such Indemnitee under applicable insurance
policies so as to reduce the amount of any Indemnifiable Loss hereunder. The
amount of any Indemnifiable Loss shall be reduced (i) to the extent that the
Indemnitee receives any insurance proceeds with respect to an Indemnifiable Loss
and (ii) to take into account any net Tax benefit recognized by the Indemnitee
arising from the recognition of the Indemnifiable Loss and any payment actually
received with respect to an Indemnifiable Loss.

          (d) The expiration, termination or extinguishment of any
representation, warranty, covenant or agreement shall not affect the parties'
obligations under this Section 9.1 if the Indemnitee provided the person
required to provide indemnification under this Agreement (the "Indemnifying
Party") with proper notice of the claim or event for which indemnification is
sought prior to such expiration, termination or extinguishment.

          (e) Other than as provided in Section 10.2 hereof, the rights and
remedies of the Sellers and the Buyer under this Article IX are exclusive and in
lieu of any and all other rights and remedies which the Sellers and the Buyer
may have under this Agreement or otherwise for monetary relief with respect to
(i) any breach or failure to perform any representation, warranty, covenant or
agreement set forth in this Agreement, any schedule hereto, or any certificate
delivered by or on behalf of Sellers or Buyer in connection herewith or (ii) the
Assumed Liabilities or the Excluded Liabilities, as the case may be.

          The rights and obligations of indemnification under this Section 9.1
shall not be limited or subject to set-off based on any violation or alleged
violation of any obligation under this Agreement or otherwise, including but not
limited to breach or alleged breach by the Indemnitee of any representation,
warranty, covenant or agreement contained in this Agreement.

     9.2  Defense of Claims.
          ----------------- 

          (a) If any Indemnitee receives notice of the assertion of any claim or
of the commencement of any claim, action, or proceeding made or brought by any
Person who is not a party to this Agreement or any Affiliate of a party to this
Agreement (a "Third Party Claim") with respect to which indemnification is to be
sought from an Indemnifying Party, the Indemnitee will give such Indemnifying
Party prompt written notice thereof, but in any event not later than twenty (20)
days after the Indemnitee's receipt of notice of such Third Party Claim.  Such
notice shall describe the nature of the Third Party Claim in reasonable detail
(including a copy of the Third Party Claim if made in writing) and will indicate
the estimated amount, if practicable, of the Indemnifiable Loss that has been or
may be sustained by the Indemnitee.  The Indemnifying Party will have the right,
by giving written notice to the Indemnitee as provided below, to elect to assume
the defense of any Third Party Claim at such Indemnifying Party's own expense
and by such Indemnifying Party's own counsel, by all appropriate proceedings,
which proceedings will be diligently prosecuted, and the Indemnitee will upon
request of an Indemnifying Party cooperate in good faith in such defense at the
Indemnifying Party's expense.  

                                      59
<PAGE>
 
If the Indemnifying Party assumes the defense of any Third Party Claim, the
Indemnified Party is hereby authorized (but not obligated), at the expense of
the Indemnified Party, to file any motion, answer or other pleading and to take
any other action which the Indemnified Party deems necessary or appropriate to
protect the Indemnified Party's interests, provided that such action is not
prejudicial to the Indemnifying Party's defense in any material respect.
Notwithstanding the assumption of defense by the Indemnifying Party, the
Indemnitee may take over the control of the defense or settlement of a Third
Party Claim at any time if it irrevocably waives its right to indemnity with
respect to such Third Party Claim.

          (b) The Indemnifying Party will have a period of fifteen (15) days
after an Indemnitee provides written notice to the Indemnifying Party of any
Third Party Claim within which to notify the Indemnitee in writing that (i) the
Indemnifying Party disputes liability to the Indemnitee hereunder with respect
to the Third Party Claim and, if so, the basis for the dispute, and (ii) if the
Indemnifying Party does not dispute liability, whether or not the Indemnifying
Party has elected to assume the defense of such Third Party Claim as provided in
the last sentence of Section 9.2(a).  If the Indemnifying Party has assumed the
defense, it will not be liable for any legal expenses subsequently incurred by
the Indemnitee in connection with the defense thereof.  Without the prior
written consent of the Indemnitee in its sole discretion, the Indemnifying Party
will not enter into any settlement of any Third Party Claim which would lead to
liability or create any financial or other obligation on the part of the
Indemnitee for which the Indemnitee does not simultaneously receive full
indemnification or which would fail to result in the Indemnitee receiving a
release of the Indemnitee reasonably satisfactory to it.  If the Indemnifying
Party fails to assume the defense, assumes the defense but fails to diligently
prosecute it, or fails to give any notice when required hereunder, then the
Indemnitee will have the right to defend against such Third Party Claim, at the
sole cost and expense of the Indemnifying Party, and, if requested by the
Indemnitee, the Indemnifying Party will at the sole cost and expense of the
Indemnifying Party, cooperate with the Indemnitee and its counsel in such
defense.  If the Indemnifying Party disputes its liability for any portion of
such Third Party Claim, the Indemnitee will be free to seek enforcement of its
rights, if any, to indemnification under this Agreement.

          (c) Any claim by an Indemnitee on account of an Indemnifiable Loss
which does not result from a Third Party Claim (a "Direct Claim") will be
asserted by giving the Indemnifying Party written notice thereof prior to the
expiration of the indemnification notice period, stating the nature of such
claim in reasonable detail and indicating the estimated amount, if practicable,
but in any event not later than twenty (20) days after the Indemnitee becomes
aware of such Direct Claim, and the Indemnifying Party will have a period of
thirty (30) days within which to respond to such Direct Claim, specifying the
portion of the Direct Claim that is disputed and the basis for such position.
If Indemnifying Party does not respond within such thirty (30) day period the
Indemnifying Party will be deemed to have accepted such claim.  If the
Indemnifying Party responds within such thirty (30) day period, the Indemnifying
Party will be deemed to have accepted and be liable for payment of the
undisputed portion of such claim, if any, on demand.  If the Indemnifying Party
rejects any portion of such claim, the Indemnitee will be free to seek
enforcement of its rights to indemnification under this Agreement.

          (d) If the amount of any Indemnifiable Loss, at any time subsequent to
the making of an indemnity payment in respect thereof, is reduced by recovery,
settlement or 

                                      60
<PAGE>
 
otherwise under or pursuant to any insurance coverage, or pursuant to any claim,
recovery, settlement or payment by or against any other entity, the amount of
such reduction, less any costs, expenses or premiums incurred in connection
therewith, will promptly be repaid by the Indemnitee to the Indemnifying Party.
Upon making any indemnity payment, the Indemnifying Party will, to the extent of
such indemnity payment, be subrogated to all rights of the Indemnitee against
any third party in respect of the Indemnifiable Loss to which the indemnity
payment relates; provided, however, that (i) the Indemnifying Party will then be
in compliance with its obligations under this Agreement in respect of such
Indemnifiable Loss and (ii) until the Indemnitee recovers full payment of its
Indemnifiable Loss, any and all claims of the Indemnifying Party against any
such third party on account of said indemnity payment is hereby made expressly
subordinated and subjected in right of payment to the Indemnitee's rights
against such third party. Without limiting the generality or effect of any other
provision hereof, each such Indemnitee and Indemnifying Party will duly execute
upon request all instruments reasonably necessary to evidence and perfect the
above-described subrogation and subordination rights. Nothing in this Section
9.2(d) shall be construed to require any party hereto to obtain or maintain any
insurance coverage. The rights contained herein shall not be duplicative of any
reductions effected pursuant to Section 9.1(c) hereof.

          (e) Subject to clauses (X) and (1) of the provisos to Section 9.1(a)
and clause (X) of the proviso to Section 9.1(b) hereof, a failure to give timely
notice as provided in this Section 9.2 will not affect the rights or obligations
of any party hereunder except if, and only to the extent that, as a result of
such failure, the party which was entitled to receive such notice was actually
prejudiced as a result of such failure.

          (f) During the three-year period following the Closing Date, if the
Buyer acquires Knowledge of an event, condition or circumstance described in
Sections 2.3(a)(v), 2.4(v) or 2.4(vi) of this Agreement, including, without
limitation, any event, act, omission, loss, circumstance, injury, damage,
Release or occurrence (an "Environmental Condition"), the Buyer shall give
prompt written notice to BHE of such Environmental Condition regardless of
whether it is a matter for which Buyer is indemnified by Sellers under this
Agreement (provided that subsection (e) of this Section shall apply to such
notice).  Excluded from this notice requirement are Environmental Conditions
existing as of the date of this Agreement that have been disclosed to the Buyer
by the Sellers.  Such notice shall describe the Environmental Condition in
reasonable detail and include a copy of any written documentation in Buyer's (or
its agents') possession regarding the Environmental Condition.  Until Sellers
shall no longer have any indemnification obligations with respect to Seller
Indemnified Environmental Losses under Section 9.1(a) hereof, if either (i) the
notice states that such Environmental Condition is a matter with respect to
which Buyer or any member of the Buyer Group is seeking or may seek
indemnification from Sellers hereunder, or (ii) BHE otherwise reasonably
concludes that the existence of or the potential remediation of such
Environmental Condition could result in a Seller Indemnified Environmental Loss,
then, in addition to the rights set forth elsewhere in this Section 9.2, BHE
shall have the right, at its sole cost and expense, to conduct and control any
investigation and/or remediation ("Remediation") relating to or arising out of
the Environmental Condition.

          If Sellers conduct the Remediation,

                                      61
<PAGE>
 
          (1) Buyer shall have the right to participate in the planning and
     design of any such Remediation and the right to participate in any meetings
     with, hearings before or other sessions with any governmental body
     regarding the Remediation;

          (2) Sellers will coordinate the schedule of the Remediation with Buyer
     so that disruptions of operation of the affected facilities will be
     minimized;

          (3) Buyer will cooperate with Sellers to enable them to conduct the
     Remediation in a reasonably timely manner, including without limitation
     affording Sellers and their agents reasonable access to the property to be
     remediated, provided that such cooperation need not include the payment of
     money or any other financial accommodation;

          (4) in case clause (ii) of this subsection (f) is applicable, Sellers
     will obtain the prior written approval of the Buyer, which consent will not
     be withheld unreasonably, for any consultant or contract or retained by
     Sellers to design or implement the Remediation;

          (5) Sellers will conduct the Remediation in compliance with all
     applicable Environmental Laws;

          (6) Sellers will use their reasonable efforts to complete such
     Remediation in a timely and professional manner;

          (7) in case clause (ii) of this subsection (f) is applicable, Sellers
     will not agree to or select any Remediation plan without the consent of
     Buyer to such plan, which shall not be withheld unreasonably or delayed;

          (8) Sellers will not agree to or select any Remediation plan that
     imposes any additional obligations on Buyer, including the obligation to
     sign manifests or obtain permits, without the prior written consent of the
     Buyer.  If Buyer agrees in writing to a Remediation that imposes additional
     obligations on Buyer, and Sellers then fail, in the reasonable opinion of
     Buyer after notice from Buyer, to implement the Remediation in a manner
     which will complete the Remediation in a reasonably timely manner and in
     accordance with Environmental Laws, the Buyer may give written notice of
     such failure to the Sellers and, if after giving such notice, Sellers shall
     not have addressed Buyer's concerns in a satisfactory manner within thirty
     (30) days, Buyer may assume control of the Remediation and implement and
     complete such Remediation at the expense of the Sellers (subject to the
     ultimate determination under this Article IX of responsibility for such
     expenses).  Sellers shall provide the Buyer copies of any study, plan or
     report associated with the Remediation at least thirty (30) days before it
     is submitted to any governmental body and shall provide Buyer copies of all
     reports, plans and correspondence submitted to a governmental body.  In
     addition, Sellers shall provide Buyer seven days' notice (or shall provide
     Buyer notice as soon as practical if seven days' notice is not practical)
     of any meetings with, hearings before or other sessions with any
     governmental body with respect to the Remediation; and

          (9) Sellers shall be responsible for any violation or alleged
     violation of Environmental Law, and any loss of life, injury to persons or
     property or damage to natural resources caused (or allegedly caused), by
     (i) negligent acts or omissions by the 

                                      62
<PAGE>
 
     Sellers in connection with Remediation conducted by Sellers at any of the
     Purchased Assets; (ii) acts or omissions by the Sellers at any of the
     Purchased Assets in connection with Remediation conducted by Sellers which
     cause a condition not in violation of Environmental Law or not in need of
     remediation under Environmental Law to be in violation of Environmental Law
     or in need of remediation under Environmental Law (including, without
     limitation, the Release or destabilization of Hazardous Substances which
     are in a stable or contained state and are in compliance with all
     applicable Environmental Laws) in connection with Remediation conducted by
     Sellers; or (iii) negligent acts or omissions by the Sellers in connection
     with Remediation conducted by Sellers at any of the Purchased Assets that
     exacerbate or aggravate any condition in violation of Environmental Law or
     in need of remediation under Environmental Law, to the extent of any such
     negligent exacerbation or aggravation; provided, that the mere discovery or
     failure to discover in connection with Remediation conducted by Sellers by
     the Sellers of a violation of Environmental Law or a condition in need of
     remediation under Environmental Law shall not in and of itself subject
     Sellers to liability under this subsection (9).

          Buyer acknowledges that BHE has requested that the MDEP review the
Milford Project pursuant to the Voluntary Response Action Program ("VRAP"), 38
M.R.S.A. (S)343-E and agrees that BHE shall have the right to continue to
prosecute such VRAP application after the Closing.  BHE agrees to indemnify and
hold harmless Buyer from any costs, expenses or liabilities which may arise from
the completion of the VRAP process.

                                   ARTICLE X

                                  TERMINATION
                                  -----------

     10.1  Termination.  (a)  This Agreement may be terminated at any time prior
           ----------- 
to the Closing Date by mutual written consent of the Sellers and the Buyer.

           (b) This Agreement may be terminated by the Sellers or the Buyer if
the Closing contemplated hereby shall not have occurred on or before the date
twelve months after the date of this Agreement (the date the Sellers or the
Buyer becomes entitled to terminate this Agreement pursuant to this Section
10.1(b) is referred to as the "Termination Date"); provided that the right to
                                                   --------                  
terminate this Agreement under this Section 10.1(b) shall not be available to
any party whose failure to fulfill any obligations under this Agreement has been
the cause of, or resulted in, the failure of the Closing to occur on or before
such date; and provided, further, that if on the date twelve months after this
               --------  -------                                              
Agreement the conditions to the Closing set forth in Section 8.1(c) shall not
have been fulfilled but all other conditions to the Closing shall be fulfilled
or shall be capable of being fulfilled, then the date referred to above shall be
the date which is eighteen months from the date of this Agreement.

           (c) This Agreement may be terminated by either the Sellers or the
Buyer if (i) any governmental or regulatory body, the consent of which is a
condition to the obligations of the Sellers and the Buyer to consummate the
Closing shall have determined not to grant its or their consent and all appeals
of such determination shall have been taken and have been unsuccessful, (ii) one
or more courts of competent jurisdiction in the United States or any state 

                                      63
<PAGE>
 
shall have issued an order, judgment or decree permanently restraining,
enjoining or otherwise prohibiting the Closing, and such order, judgment or
decree shall have become final and nonappealable or (iii) any statute, rule or
regulation shall have been enacted by any state or Federal government or
governmental agency in the United States which prohibits the consummation of the
Closing.

           (d) This Agreement may be terminated by the Buyer in accordance with
Section 3.5 or Section 7.10.

     10.2  Procedure and Effect of Termination.  In the event of termination of
           ----------------------------------- 
this Agreement and abandonment of the transactions contemplated hereby by either
or both of the parties pursuant to Section 10.1, written notice thereof shall
forthwith be given by the terminating party to the other party and this
Agreement shall terminate and the transactions contemplated hereby shall be
abandoned, without further action by any of the parties hereto. If this
Agreement is terminated as provided herein:

           (a) none of the parties hereto nor any of their respective trustees,
directors, officers or Affiliates, as the case may be, shall have any liability
or further obligation to the other party or any of their respective trustees,
directors, officers or Affiliates, as the case may be, pursuant to this
Agreement, except in each case as stated in this Section 10.2 and in Sections
7.2(b), 7.3 and 7.11; and

           (b) all filings, applications and other submissions made pursuant to
this Agreement, to the extent practicable, shall be withdrawn from the agency or
other person to which they were made.

     Notwithstanding any other term or provision of this Agreement or the other
documents delivered pursuant to this Agreement, each of the parties hereby
agrees that no officers, directors, employees, agents or attorneys of such party
shall be liable hereunder for any profit, loss of capital, consequential,
special, indirect, punitive or incidental damages that may be incurred by any
other party as a result of any action or inaction by any other party hereunder
or in connection with this Agreement or any agreement contemplated to be
executed in connection with this agreement, and hereby knowingly, voluntarily
and intentionally waives the right to seek any such damages.

                                  ARTICLE XI

                           MISCELLANEOUS PROVISIONS
                           ------------------------

     11.1  Amendment and Modification.  Subject to applicable law, this
           -------------------------- 
Agreement may be amended, modified or supplemented only by written agreement of
the Sellers and the Buyer.

     11.2  Waiver of Compliance; Consents.  Except as otherwise provided in this
           ------------------------------ 
Agreement, any failure of any of the parties to comply with any obligation,
covenant, agreement or condition herein may be waived by the party entitled to
the benefits thereof only by a written instrument signed by the party granting
such waiver, but such waiver or failure to insist upon

                                      64
<PAGE>
 
strict compliance with such obligation, covenant, agreement or condition shall
not operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.

     11.3  No Survival.  Subject to the provisions of Section 10.2, (i) each and
           ----------- 
every representation and warranty contained in this Agreement shall expire with,
and be terminated and extinguished by, the consummation of the sale of the
Purchased Assets and the transfer of the Assumed Liabilities pursuant to this
Agreement and such representations and warranties shall not survive the Closing
Date, except to the extent necessary to make effective a party's ability to make
an indemnity claim with respect to such representations and warranties during
the notice period and as otherwise provided in Section 9.1 and (ii) every
covenant and obligation contained in this Agreement shall survive the Closing
and the consummation of the sale of the Purchased Assets and the transfer of the
Assumed Liabilities, except to the extent a party's ability to make an indemnity
claim with respect to such covenants and obligations is expressly limited under
Section 9.1. None of the Sellers, the Buyer or any officer, director, trustee or
Affiliate of any of them shall be under any liability whatsoever with respect to
any such representation, warranty or covenant upon and after the termination or
expiration thereof.

     11.4  Notices.  All notices and other communications hereunder shall be in
           ------- 
writing and shall be deemed given if delivered personally or by facsimile
transmission, telexed or mailed by overnight courier or registered or certified
mail (return receipt requested), postage prepaid, to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice; provided that notices of a change of address shall be effective
                -------- 
only upon receipt thereof):

     If to the Sellers, to:

               Bangor Hydro-Electric Company
               33 State Street
               Bangor, ME 04401
               Attention:  President

     with a copy to:

               Winthrop, Stimson, Putnam & Roberts
               One Battery Park Plaza
               New York, NY 10004-1490
               Attention:  David P. Falck

     If to the Buyer, to:

               PP&L Global, Inc.
               11350 Random Hills Road, Suite 400
               Fairfax, Virginia 22030
               Attention:  Chief Counsel

                                      65
<PAGE>
 
     with a copy to:

               LeBoeuf, Lamb, Greene & MacRae
               125 West 55th Street
               New York, New York 10019-5389
               Attention:  Jeffrey Meyers

     11.5  Assignment.  This Agreement and all of the provisions hereof shall be
           ---------- 
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any party
hereto, including by operation of law, without the prior written consent of the
other party, nor is this Agreement intended to confer upon any other Person
except the parties hereto any rights or remedies hereunder; provided, however,
that the Buyer may assign, with the Sellers' consent, which shall not be
unreasonably withheld, any or all of its rights, interests and obligations
hereunder to one or more of its Affiliates or, without any consent by Sellers,
to one or more of the direct or indirect wholly-owned Subsidiaries of PP&L
Global, Inc. (in either which case the Buyer shall nonetheless remain jointly
and severally responsible for the performance of all such obligations) so long
as any such assignment does not adversely affect the availability or timing of
any Federal, state or local government consent or approval required for the
consummation of the sale of the Purchased Assets and so long as the Parent's
obligations under the Equity Contribution Agreement extend directly to such
Affiliate or wholly-owned subsidiary. Notwithstanding the foregoing, the rights
and obligations of the Sellers (or any of them) pursuant to this Agreement may,
with the Buyer's consent, which shall not be unreasonably withheld, delayed or
conditioned, be assigned to, and assumed by, such entity or entities to which
any or all of the Sellers or the Purchased Assets have been transferred
subsequent to the date of this Agreement pursuant to any corporate
reorganization, restructuring or similar transaction.

     11.6  Governing Law.  This Agreement shall be governed by and construed in
           ------------- 
accordance with the laws of the State of Maine (regardless of the laws that
might otherwise govern under applicable Maine principles of conflicts of law) as
to all matters, including but not limited to matters of validity, construction,
effect, performance and remedies. Any and all disputes arising out of or in
connection with this Agreement shall be adjudicated in the Federal or state
courts located in the State of Maine, to whose jurisdiction the parties hereby
irrevocably submit for such purposes. The parties agree to perform their duties
pursuant to this Agreement and the Ancillary Agreements in good faith and in a
commercially reasonable manner.

     11.7  Counterparts.  This Agreement may be executed in two or more
           ------------ 
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

     11.8  Interpretation.  The Article and Section headings contained in this
           -------------- 
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not in any way affect the meaning or interpretation of
this Agreement. Neither party shall be deemed to have been the drafter of this
Agreement, which is the product of detailed, arm's length negotiations between
the parties and their respective counsel.

                                      66
<PAGE>
 
     11.9  Schedules and Exhibits.  All Exhibits and Schedules referred to
           ---------------------- 
herein are intended to be and hereby are specifically made a part of this
Agreement. Any matters described or referred to in any Schedule shall be deemed
included in any other relevant Schedule, irrespective of whether any express
incorporation by reference is made therein to the extent it is readily apparent
that the matter to be disclosed should be included in the other schedule.

     11.10  Entire Agreement.  This Agreement including the Exhibits, Schedules,
            ---------------- 
documents, certificates and instruments referred to herein, embodies the entire
agreement and understanding of the parties hereto in respect of the transactions
contemplated by this Agreement and supersedes any and all prior oral or written
expressions, understandings or agreements between or among the parties with
respect thereto. There are no restrictions, promises, representations,
warranties, covenants or undertakings, other than those expressly set forth or
referred to herein or therein. It is expressly acknowledged and agreed that,
other than as expressly set forth in this Agreement, there are no restrictions,
promises, representations, warranties, covenants or undertakings contained in
any material made available to the Buyer pursuant to the terms of Section 7.11
(including without limitation the Offering Memorandum, dated April 1998, the
reference manuals relating to the Purchased Assets, any other supplemental
information or responses to data requests, or materials received from or
reviewed at the Sellers' document center, in each case made available to the
Buyer by the Sellers or Reed Consulting Group, Inc.).

     11.11  No Punitive or Consequential Damages.  Notwithstanding anything to
            ------------------------------------ 
the contrary contained in this Agreement in Article IX or otherwise, except to
the extent provided in Section 9.1(a) or (b) with respect to Indemnifiable
Losses consisting of claims of third parties, no party or its Affiliates shall
seek or be liable for any punitive or consequential damages, including, but not
limited to, loss of revenue or income, or loss of business reputation or
opportunity relating to any breach or alleged breach of this Agreement.

     11.12  Parties' Knowledge of Others' Breach.  Buyer shall not be entitled
            ------------------------------------ 
to assert that the condition to Buyer's obligation set forth in Section
8.2(b)(i) of this Agreement is not satisfied due to a breach by Sellers of any
of their representation and warranties of which Buyer solely has Knowledge.
Sellers shall not be entitled to assert that the condition to Sellers'
obligations set forth in Section 8.3(b)(i) of this Agreement is not satisfied
due to a breach by Buyer of any of its representation and warranties of which
Sellers solely have Knowledge.

                                      67
<PAGE>
 
     IN WITNESS WHEREOF, the Sellers and the Buyer have caused this agreement to
be signed by their respective duly authorized officers as of the date first
above written.

                              BANGOR HYDRO-ELECTRIC COMPANY


                              By: _________________________________
                                 Name:
                                 Title:


                              PENOBSCOT HYDRO CO., INC.


                              By: _________________________________
                                 Name:
                                 Title:


                              PP&L GLOBAL, INC.


                              By: _________________________________
                                 Name:
                                 Title:

                                      68
<PAGE>
 
     IN WITNESS WHEREOF, the Sellers and the Buyer have caused this agreement to
be signed by their respective duly authorized officers as of the date first
above written.

                              BANGOR HYDRO-ELECTRIC COMPANY


                              By: /s/ 
                                  ---------------------------------  
                                 Name:
                                 Title:


                              PENOBSCOT HYDRO CO., INC.


                              By: /s/ 
                                  ---------------------------------  
                                 Name:
                                 Title:


                              PP&L GLOBAL, INC.


                              By: /s/ 
                                  ---------------------------------  
                                 Name:
                                 Title:

<PAGE>
 
                                                                 Exhibit 10(q)-2

                         EQUITY CONTRIBUTION AGREEMENT

     EQUITY CONTRIBUTION AGREEMENT (this "Agreement") dated as of September 25,
1998 by and among PP&L GLOBAL, INC., a Pennsylvania corporation ("Purchaser"),
PP&L RESOURCES, INC., a Pennsylvania corporation ("Parent"), PENOBSCOT HYDRO
CO., INC., a Maine corporation ("PHC") and BANGOR HYDRO-ELECTRIC COMPANY, a
Maine corporation ("BHE", and together with PHC the "Sellers").

                                R E C I T A L S

     WHEREAS, Purchaser and Sellers are parties to that certain Asset Purchase
Agreement dated as of September 25, 1998 ("Purchase Agreement");

     WHEREAS, Purchaser is directly wholly-owned by Parent;

     NOW, THEREFORE, in consideration of the premises and as an inducement for
Sellers to enter into the Purchase Agreement, the parties hereto agree as
follows:

     Section 1.  Definitions. Capitalized terms used herein and not otherwise
                 -----------                                                  
defined herein shall have the respective meanings given to them in the Purchase
Agreement.

     Section 2.  Equity Contribution.
                 ------------------- 

     (a)  Sellers may, in their sole discretion and without the concurrence of
Purchaser or any of its Affiliates, give written notice to Parent when all
conditions precedent to the obligations of Sellers and Purchaser to consummate
the Closing as set forth in Article VIII of the Purchase Agreement have been
satisfied (or waived by the party entitled to waive such a condition). Parent
hereby irrevocably promises and agrees that, upon receipt of such notice, Parent
will make or cause to be made within five business days a contribution in
immediately available funds to Purchaser in the amount of the Initial Payment.

     (b)  If the Purchaser breaches its obligations to effect the Closing as and
when required by the Purchase Agreement, and, if as a result thereof, Purchaser
is the subject of a final and binding order of a court (or other tribunal having
jurisdiction) obligating it to pay any damages, costs, and expenses incurred by
Sellers, other than certain damages as contemplated in Section 11.11 of the
Purchase Agreement (a "Liability"), Sellers may, in their sole discretion and
without the concurrence of Purchaser or any of its Affiliates, give written
notice to Parent that such Liability was incurred. Parent irrevocably promises
and agrees that it shall make or cause to be made a contribution in immediately
available funds to Purchaser within five business 
<PAGE>
 
days after receipt of such notice in an amount sufficient for Purchaser to fully
satisfy and discharge the Liability up to but not to exceed the amount of the
Initial Payment.

     (c)  If a court (or other tribunal having jurisdiction) enters a final and
binding order to the effect that Sellers were not entitled to give any notice
provided for in subsection (a) or (b) hereof, then Sellers shall be liable to
pay Parent, as liquidated damages and in full satisfaction of any claim of
Purchaser or any of its Affiliates arising out of such order insofar as such
order relates to Sellers' giving of such notice, an amount equal to the
documented out-of-pocket costs of Parent (including, without limitation,
Parent's cost of capital after giving effect to related income taxes) incurred
in connection with Parent's contribution to Purchaser as a result of such
wrongful notice by Sellers.

     (d)  Notwithstanding any other provision of this Agreement to the contrary,
Parent shall have no obligation to make any contribution to Purchaser under this
Agreement to the extent its aggregate contributions to Purchaser made as a
result of a notice given by Sellers hereunder or otherwise contributed (provided
such funds have been segregated in accordance with Section 4 hereunder) equal or
exceed the amount of the Initial Payment.

     (e)  Any payments made by Parent directly to Sellers in satisfaction of
Parent's obligations to make a contribution to Purchaser hereunder shall be
deemed to be on behalf of, and to satisfy the obligations of, Purchaser to
Sellers under the Purchase Agreement (to the extent of the amount paid by
Parent).

     (f)  If, prior to receipt of a notice from Sellers requesting a
contribution to Purchaser, Parent makes a contribution to Purchaser as
contemplated herein, it shall promptly notify Sellers in writing of such
contribution, which notice shall state that such contribution has been
segregated as provided in Section 4 herein.

     (g)  Upon written request of Sellers given to Purchaser at any time after
Parent has made a contribution to Purchaser contemplated herein, Purchaser
agrees to return such contribution to Parent.

     Section 3.  Representations and Warranties.
                 ------------------------------ 

     (a)  Parent and Purchaser represent and warrant to Sellers as follows:

     (i)  Each of Parent and Purchaser is a corporation, duly organized, validly
          existing and in good standing under the laws of the Commonwealth of
          Pennsylvania, and
<PAGE>
 
            has full corporate power and authority to enter into this Agreement
            and to perform its obligations hereunder.

     (ii)   The execution and delivery by each of Parent and Purchaser of this
            Agreement, and the performance of its obligations hereunder, have
            been duly authorized by all necessary corporate action on the part
            of Parent and Purchaser, as the case may be.

     (iii)  Each of Parent and Purchaser has duly executed and delivered this
            Agreement. Assuming due authorization, execution and delivery of
            this Agreement by Sellers, this Agreement constitutes the valid and
            binding obligation of each of Parent and Purchaser, enforceable in
            accordance with its terms, except as such enforceability may be
            limited by bankruptcy, insolvency, reorganization, moratorium or
            other similar laws of general applicability affecting the
            enforcement of creditors' rights and the application of general
            principles of equity.

     (iv)   All consents, authorizations and other approvals of any governmental
            authority which are necessary for the execution and delivery by each
            of Parent and Purchaser of this Agreement and the performance by it
            of its obligations hereunder have been obtained and are in full
            force and effect, are final and not subject to any appeal.

     (v)    Execution, delivery and performance by Parent of this Agreement will
            not conflict with or result in a violation or default under any
            contract, agreement or order of any court or regulatory authority
            binding upon Parent or any of its Affiliates.

     (b)    Sellers represent and warrant to Parent as follows:

     (i)    Sellers are corporations, duly organized, validly existing and in
            good standing under the laws of the State of Maine, and have full
            corporate power and authority to enter into this Agreement and to
            perform their obligations hereunder.

     (ii)   The execution and delivery by Sellers of this Agreement, and the
            performance of their obligations hereunder, have been duly
            authorized by all necessary corporate action on the part of Sellers.

     (iii)  Sellers have duly executed and delivered this Agreement. Assuming
            due authorization, execution and delivery of this Agreement by
            Purchaser and Parent,
<PAGE>
 
            this Agreement constitutes the valid and binding obligation of
            Sellers, enforceable in accordance with its terms, except as such
            enforceability may be limited by bankruptcy, insolvency,
            reorganization, moratorium or other similar laws of general
            applicability affecting the enforcement of creditors' rights and the
            application of general principles of equity.

     (iv)   All consents, authorizations and other approvals of any governmental
            authority which are necessary for the execution and delivery of
            Sellers of this Agreement and the performance by them of their
            obligations hereunder have been obtained and are in full force and
            effect, are final and not subject to any appeal.

     (v)    Execution, delivery and performance by Sellers of this Agreement
            will not conflict with or result in a violation or default under any
            contract, agreement or order of any court or regulatory authority
            binding upon Sellers or any of their Affiliates.

     Section 4.  Restriction on Use. Purchaser shall segregate from its general
                 ------------------                                      
funds any contributions made by Parent hereunder and shall use such funds for
the purpose, and only for the purpose, of satisfying its obligations to Sellers
under the Purchase Agreement. Such contribution shall be placed in a segregated
account at an independent financial institution, the name of which account makes
reference to the restrictions contained herein.

     Section 5.  Termination. The obligation of Parent under this Agreement 
                 -----------                                                
shall terminate upon the earliest to occur of:

     (a)    contribution by Parent to Purchaser of an amount equal to or
exceeding the amount of the Initial Payment in response to a notice given by
Sellers hereunder or otherwise contributed (provided such funds have been
segregated in accordance with Section 4 and any necessary notice has been given
pursuant to Section 2(f));

     (b)    five business days after notice of termination of the Purchase
Agreement is given pursuant to Article X thereof, unless prior to the close of
business on the fifth business day after such notice Parent receives written
notice from Purchaser or Sellers that either of them in good faith believes that
the Purchase Agreement is still in full force and effect or has been improperly
terminated, and that Sellers are actively pursuing a Liability claim, in which
case this Agreement 
<PAGE>
 
shall terminate upon the settlement or other determination of such claim in
accordance with Section 2(b) hereof and the making of the required contribution
by Parent; or

     (c)  the occurrence of the Closing under the Purchase Agreement.

     Section 6.  Miscellaneous.
                 ------------- 

     (a)  This Agreement shall be binding upon, shall inure to the benefit of,
and shall be enforceable by, the parties hereto and their respective successors
and permitted assigns. In the event that Purchaser assigns its rights under the
Purchase Agreement to a special purpose corporation, then the term "Purchaser"
herein shall refer to such special purpose corporation, and Parent shall make
its required contribution hereunder directly to such special purpose
corporation. Sellers shall be entitled to enforce the obligations of Parent
hereunder without the concurrence of Purchaser and regardless of any claims by
Purchaser against Sellers, including any claims under, or the satisfaction or
non-satisfaction of any obligations of Seller under, the Purchase Agreement.
Neither this Agreement nor any right hereunder may be assigned by any party
without the prior written consent of the other parties hereto, which consent
(except in the case of a transfer by Parent of its obligations hereunder) shall
not be unreasonably withheld.

     (b)  This Agreement contains the entire understanding of the parties with
respect to the matters herein and supersedes all prior agreements and
understandings between the parties with respect to the subject matter hereof.

     (c)  All notices and other communications required or permitted by this
Agreement or by law to be served upon or given to a party hereto by any other
party hereto shall be addressed as provided in the Purchase Agreement.

     (d)  This Agreement may not be amended or otherwise modified except by a
written agreement signed by each party hereto.

     (e)  THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY,
THE LAWS OF THE STATE OF MAINE, EXCLUDING ITS CONFLICTS OF LAWS PROVISIONS.

     (f)  If any provision of this Agreement shall be determined to be
unenforceable, void or otherwise contrary to law, such provision shall in no
manner operate to render any other provision of the Agreement unenforceable,
invalid or contrary to law, and this Agreement shall 
<PAGE>
 
continue to be operative and enforceable in accordance with the remaining terms
and provisions hereof.

     (g)  The terms, conditions, covenants, representations and warranties
hereof may be waived only by a written instrument executed by the party waiving
compliance. The failure of a party at any time or from time to time to require
performance of any provisions hereof shall in no manner affect its rights at a
later time to enforce the same. No waiver by a party of any condition or any
breach of any term, covenant, representation or warranty contained in this
Agreement in any one or more instances shall be deemed to be, or be construed
as, a further or continuing waiver of any such condition or breach of any other
term, covenant, representation or warranty.

     (h)  No person other than the parties hereto, or their successors or
permitted assigns shall have any rights hereunder.

     (i)  This Agreement may be signed in counterparts, each of which shall be
deemed an original and all of which together shall constitute one and the same
Agreement.
<PAGE>
 
     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.

                                   PURCHASER:

                                             PP&L GLOBAL, INC.


                                             By:________________________________
                                             Name:
                                             Its:


                                   PARENT:

                                             PP&L RESOURCES, INC.


                                             By:________________________________
                                             Name:
                                             Its:


                                   SELLERS:


                                             PENOBSCOT HYDRO CO., INC.


                                             By:________________________________
                                             Name:
                                             Its:


                                             BANGOR HYDRO-ELECTRIC COMPANY


                                             By:________________________________
                                             Name:
                                             Its:

<PAGE>

 
                                                                   Exhibit 12(A)

                     PP&L RESOURCES, INC. AND SUBSIDIARIES

               COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

                             (Millions of Dollars)

<TABLE> 
<CAPTION> 
                                                       1998          1997          1996          1995          1994
                                                      ------        ------        ------        ------        ------
<S>                                                   <C>           <C>           <C>           <C>           <C> 
Fixed charges, as defined:
  Interest on long-term debt......................      $203          $196          $207          $213          $214
  Interest on short-term debt
     and other interest...........................        33            26            17            18            18
  Amortization of debt discount, expense
    and premium - net.............................         2             2             2             2             2
  Interest on capital lease
    obligations
      Charged to expense..........................         8             9            13            15            12
      Capitalized.................................         2             2             2             2             1
  Estimated interest component of
    operating rentals.............................        18            15             8             8             6
  Proportionate share of fixed charges
    of 50-percent-or-less-owned
    persons.......................................         1             1             1             1             1
                                                       ------       -------       -------       -------       -------

          Total fixed charges.....................      $267          $251          $250          $259          $254
                                                       ======       =======       =======       =======       =======

Earnings, as defined:
  Net income (a)..................................      $379          $296          $329          $323          $216
  Preferred and Preference Stock Dividend
    Requirements..................................        25            24            28            28            28
  Less undistributed income of less
    than 50-percent-owned persons.................         -             -             -             -             -
                                                       ------       -------       -------       -------       -------
                                                         404           320           357           351           244

Add (Deduct):
  Income taxes....................................       259           238           253           286           180
  Amortization of capitalized interest
     on capital leases............................         2             2             4             5             9

  Total fixed charges as above
    (excluding capitalized interest
    on capital lease obligations).................       265           248           248           257           253
                                                       ------       -------       -------       -------       -------

          Total earnings..........................      $930          $808          $862          $899          $686
                                                       ======       =======       =======       =======       =======

Ratio of earnings to fixed
  charges.........................................      3.48          3.22          3.45          3.47          2.70
                                                       ======       =======       =======       =======       =======
</TABLE> 

(a)  1998 net income excluding extraordinary items. 


<PAGE>
 
                                                                      Exhibit 23


                      CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 (No. 333-70101 and
No. 333-48781) of PP&L Resources, Inc. and in the Registration Statements on
Form S-8 (No. 33-50031 and No. 333-02003) of PP&L Resources, Inc. of our report
dated February 1, 1999 appearing on page 50 of this Form 10-K.


PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
March 3, 1999

<PAGE>
 
                                                                      EXHIBIT 24

                                RESOURCES, INC.
                                  PP&L, INC.

                              1998 ANNUAL REPORT
                   TO THE SECURITIES AND EXCHANGE COMMISSION
                                 ON FORM 10-K

                               POWER OF ATTORNEY
                               -----------------

         The undersigned directors of PP&L Resources, Inc. and PP&L, Inc., 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 1998 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.
<PAGE>
 
         IN WITNESS WHEREOF, the undersigned have hereunto set their hands and
seals this 26th day of February, 1999.


/s/ Frederick M. Bernthal     L.S.       /s/ Stuart Heydt           L.S.
- ------------------------------          ----------------------------
Frederick M. Bernthal                        Stuart Heydt



/s/ E. Allen Deaver          L.S.        /s/ Frank A. Long          L.S.  
- -----------------------------           ----------------------------
E. Allen Deaver                              Frank A. Long



/s/ William J. Flood          L.S.       /s/ Norman Robertson       L.S.
- ------------------------------          ----------------------------
William J. Flood                             Norman Robertson



/s/ Elmer D. Gates            L.S.       /s/ Marilyn Ware           L.S.
- ------------------------------          ----------------------------
Elmer D. Gates                               Marilyn Ware



/s/ William F. Hecht          L.S.
- ------------------------------    
William F. Hecht

<TABLE> <S> <C>

<PAGE>
<ARTICLE> UT
<CIK> 0000922224
<NAME> PP&L RESOURCES, INC.
<MULTIPLIER> 1,000,000
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1998
<PERIOD-END>                               DEC-31-1998
<BOOK-VALUE>                                  PER-BOOK
<TOTAL-NET-UTILITY-PLANT>                        4,457
<OTHER-PROPERTY-AND-INVEST>                        929
<TOTAL-CURRENT-ASSETS>                             948
<TOTAL-DEFERRED-CHARGES>                         3,273
<OTHER-ASSETS>                                       0
<TOTAL-ASSETS>                                   9,607
<COMMON>                                             2
<CAPITAL-SURPLUS-PAID-IN>                        1,416<F1>
<RETAINED-EARNINGS>                                372
<TOTAL-COMMON-STOCKHOLDERS-EQ>                   1,790
                               47
                                         50
<LONG-TERM-DEBT-NET>                             3,233
<SHORT-TERM-NOTES>                                   3
<LONG-TERM-NOTES-PAYABLE>                            0
<COMMERCIAL-PAPER-OBLIGATIONS>                     633
<LONG-TERM-DEBT-CURRENT-PORT>                        1
                            0
<CAPITAL-LEASE-OBLIGATIONS>                        109
<LEASES-CURRENT>                                    59
<OTHER-ITEMS-CAPITAL-AND-LIAB>                   3,682
<TOT-CAPITALIZATION-AND-LIAB>                    9,607
<GROSS-OPERATING-REVENUE>                        3,786
<INCOME-TAX-EXPENSE>                               259
<OTHER-OPERATING-EXPENSES>                       2,959
<TOTAL-OPERATING-EXPENSES>                       3,218
<OPERATING-INCOME-LOSS>                            568
<OTHER-INCOME-NET>                                  66
<INCOME-BEFORE-INTEREST-EXPEN>                     634
<TOTAL-INTEREST-EXPENSE>                           230
<NET-INCOME>                                     (544)<F2>
                         25
<EARNINGS-AVAILABLE-FOR-COMM>                    (569)
<COMMON-STOCK-DIVIDENDS>                           222
<TOTAL-INTEREST-ON-BONDS>                          188
<CASH-FLOW-OPERATIONS>                             637
<EPS-PRIMARY>                                   (3.46)
<EPS-DILUTED>                                   (3.46)

<FN>
<F1>NET OF $419 MILLION OF TREASURY STOCK
<F2>NET INCOME INCLUDES AN EXTRAORDINARY ITEM OF ($948) MILLION ($1,614 MILLION
NET OF $666 MILLION OF INCOME TAXES) REFLECTING THE EFFECTS OF A PENNSYLVANIA
PUBLIC UTILITY COMMISION RESTRUCTURING ORDER AND DEREGULATION PP&L'S ELECTRIC
GENERATON OPERATIONS.
</FN>
         

</TABLE>


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