UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended~~March 31,~~June 30, 2004
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _________ to ___________

Commission File
Number
Registrant; State of Incorporation;
Address and Telephone Number
IRS Employer
Identification No.
1-11459
PPL Corporation
(Exact name of Registrant as specified in its charter)
(Pennsylvania)
Two North Ninth Street
Allentown, PA 18101-1179
(610) 774-5151
23-2758192
333-74794
PPL Energy Supply, LLC
(Exact name of Registrant as specified in its charter)
(Delaware)
Two North Ninth Street
Allentown, PA 18101-1179
(610) 774-5151
23-3074920
1-905
PPL Electric Utilities Corporation
(Exact name of Registrant as specified in its charter)
(Pennsylvania)
Two North Ninth Street
Allentown, PA 18101-1179
(610) 774-5151
23-0959590

Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.

PPL Corporation
Yes X
No

PPL Energy Supply, LLC
Yes X
No

PPL Electric Utilities Corporation
Yes X
No

Indicate by check mark whether the Registrants are accelerated filers (as defined in Rule 12b-2 of the Act).

PPL Corporation
Yes X
No

PPL Energy Supply, LLC
Yes
No X

PPL Electric Utilities Corporation
Yes
No X

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

PPL Corporation
Common stock, $.01 par value, ~~177,820,831~~ 188,908,802
shares outstanding at ~~April~~July 30, 2004,
excluding ~~31,033,738~~31,034,493 shares held as treasury
stock

PPL Energy Supply, LLC
PPL Corporation indirectly holds all of the
member interests in PPL Energy Supply, LLC.

PPL Electric Utilities Corporation
Common stock, no par value, 78,029,863
shares outstanding and all held by PPL
Corporation at ~~April~~July 30, 2004, excluding
79,270,519 shares held as treasury stock

This document is available free of charge at the Investor Center on PPL's website at www.pplweb.com. However, information on this website does not constitute a part of this Form 10-Q.

PPL CORPORATION
PPL ENERGY SUPPLY, LLC
PPL ELECTRIC UTILITIES CORPORATION

FORM 10-Q
FOR THE QUARTER ENDED ~~MARCH 31,~~JUNE 30, 2004

Table of Contents

GLOSSARY OF TERMS AND ABBREVIATIONS

£ - British pounds sterling.

1945 First Mortgage Bond Indenture - PPL Electric's Mortgage and Deed of Trust, dated as of October 1, 1945, to Deutsche Bank Trust Company Americas, as trustee, as supplemented.

ANEEL - National Electric Energy Agency, Brazil's agency that regulates the transmission and distribution of electricity.

APA - Asset Purchase Agreement.

ARB - Accounting Research Bulletin.

ARO - asset retirement obligation.

Bcf - billion cubic feet.

CEMAR - Companhia Energética do Maranhão, a Brazilian electric distribution company in which PPL Global had a majority ownership interest until the transfer of this interest in April 2004.

CGE-Compañia General de Electricidad, S.A., a distributor of electricity and natural gas with other industrial segments in Chile and Argentina in which PPL Global had an 8.7% direct and indirect minority ownership interest until the sale of this interest in March 2004.

Clean Air Act - federal legislation enacted to address certain environmental issues related to air emissions including acid rain, ozone and toxic air emissions.

CTC - competitive transition charge on customer bills to recover allowable transition costs under the Customer Choice Act.

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

DelSur - Distribuidora de Electricidad Del Sur, S.A. de C.V., an electric distribution company in El Salvador, a majority of which is owned by EC.

DEP - Department of Environmental Protection, a state government agency.

Derivative - a financial instrument or other contract with all three of the following characteristics:

It has (1) one or more underlyings and (2) one or more notional amounts or payment provisions or both. Those terms determine the amount of the settlement or settlements, and, in some cases, whether or not a settlement is required.
It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors.
Its terms require or permit net settlement, it can readily be settled net by a means outside the contract, or it provides for delivery of an asset that puts the recipient in a position not substantially different from net settlement.

DIG - Derivatives Implementation Group.

EC - Electricidad de Centroamerica, S.A. de C.V., an El Salvadoran holding company and the majority owner of ~~DelSur and~~DelSur. EC was also the majority owner of El Salvador Telecom, S.A. de C.V. until the sale of this company in June 2004. PPL Global has 100% ownership of EC.

EITF - Emerging Issues Task Force, an organization that assists the FASB in improving financial reporting through the identification, discussion and resolution of financial issues within the framework of existing authoritative literature.

EMF - electric and magnetic fields.

EPA - Environmental Protection Agency, a U.S. government agency.

EPS - earnings per share.

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

FERC - Federal Energy Regulatory Commission, the federal agency that regulates interstate transmission and wholesale sales of electricity and related matters.

FIN - FASB Interpretation.

FSP - FASB Staff Position.

GAAP - generally accepted accounting principles.

GWh - gigawatt-hour, one million kilowatt-hours.

Hyder - Hyder Limited, a subsidiary of WPDL that was the previous owner of South Wales Electricity plc. In March 2001, South Wales Electricity plc was acquired by WPDH Limited and renamed WPD (South Wales).

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

ISO - Independent System Operator.

LIBOR - London Interbank Offered Rate.

Mirant - Mirant Corporation, a diversified energy company based in Atlanta. PPL Global and Mirant jointly owned WPD from 1996 until September 6, 2002.

Montana Power - The Montana Power Company, a Montana-based company that sold its generating assets to PPL Montana in December 1999. Through a series of transactions consummated during the first quarter of 2002, Montana Power sold its electricity delivery business to NorthWestern.

MW - megawatt, one thousand kilowatts.

MWh - megawatt-hour, one thousand kilowatt-hours.

NorthWestern - NorthWestern Energy Division, a Delaware corporation and a division of NorthWestern Corporation and successor in interest to Montana Power's electricity delivery business, including Montana Power's rights and obligations under contracts with PPL Montana.

NPDES - National Pollutant Discharge Elimination System.

NRC - Nuclear Regulatory Commission, the federal agency that regulates operation of nuclear power facilities.

NUGs (Non-Utility Generators) - generating plants not owned by public utilities, whose electrical output must be purchased by utilities under the PURPA if the plant meets certain criteria.

PCB - polychlorinated biphenyl, an additive to oil used in certain electrical equipment up to the late-1970s. Now classified as a hazardous chemical.

PEPS Units (Premium Equity Participating Security Units, or PEPS^SM Units) - securities issued by PPL and PPL Capital Funding Trust I, ~~consisting~~that consisted of a Preferred Security and a forward contract to purchase PPL common stock.

PEPS Units, Series B(Premium Equity Participating Security Units, or PEPS^SM Units, Series B) - securities issued by PPL and PPL Capital Funding, ~~consisting~~that consisted of an undivided interest in a debt security issued by PPL Capital Funding and guaranteed by PPL, and a forward contract to purchase PPL common stock.

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

PLR (Provider of Last Resort) - PPL Electric providing electricity to retail customers within its delivery territory who have chosen not to shop for electricity under the Customer Choice Act.

PP&E - property, plant and equipment.

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

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

PPL Capital Funding Trust I - a Delaware statutory business trust created to issue PEPS ~~Units, whose common securities are held by PPL.~~Units. This trust was terminated in June 2004.

PPL Electric - PPL Electric Utilities Corporation, a regulated utility subsidiary of PPL that transmits and distributes electricity in its service territory and provides electric supply to retail customers in this territory as a PLR.

PPL Energy Funding - PPL Energy Funding Corporation, a subsidiary of PPL and the parent company of PPL Energy Supply.

PPL EnergyPlus - PPL EnergyPlus, LLC, a subsidiary of PPL Energy Supply, which markets wholesale and retail electricity, and supplies energy and energy services in deregulated markets.

PPL Energy Supply - PPL Energy Supply, LLC, a subsidiary of PPL Energy Funding and the parent company of PPL Generation, PPL EnergyPlus, PPL Global and other subsidiaries.

PPL Gas Utilities - PPL Gas Utilities Corporation, a regulated utility subsidiary of PPL specializing in natural gas distribution, transmission and storage services, and the competitive sale of propane.

PPL Generation - PPL Generation, LLC, a subsidiary of PPL Energy Supply, which owns and operates U.S. generating facilities through various subsidiaries.

PPL Global - PPL Global, LLC, a subsidiary of PPL Energy Supply, which acquires and develops domestic generation projects and acquires and holds international energy projects that are primarily focused on the distribution of electricity.

PPL Martins Creek - PPL Martins Creek, LLC, a generating subsidiary of PPL Generation.

PPL Montana - PPL Montana, LLC, an indirect subsidiary of PPL Generation, which generates electricity for wholesale sales in Montana and the Pacific Northwest.

PPL Services - PPL Services Corporation, a subsidiary of PPL, which provides shared services for PPL and its subsidiaries.

PPL Susquehanna - PPL Susquehanna, LLC, the nuclear generating subsidiary of PPL Generation.

PPL Telcom - PPL Telcom, LLC, an indirect subsidiary of PPL Energy Funding, which delivers high bandwidth telecommunication services in the Northeast corridor from Washington, D.C., to New York City and to six metropolitan areas in central and eastern Pennsylvania.

PPL Transition Bond Company - PPL Transition Bond Company, LLC, a wholly-owned subsidiary of PPL Electric that was formed to issue transition bonds under the Customer Choice Act.

Preferred Securities - company-obligated mandatorily redeemable preferred securities issued by PPL Capital Funding Trust I, ~~holding~~which solely held debentures of PPL Capital Funding, and by SIUK Capital Trust I, ~~holding~~which solely holds debentures of WPD LLP.

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

PUC Final Order - final order issued by the PUC on August 27, 1998, approving the settlement of PPL Electric's restructuring proceeding.

PURPA - Public Utility Regulatory Policies Act of 1978, legislation passed by the U.S. Congress to encourage energy conservation, efficient use of resources and equitable rates.

PURTA - the Pennsylvania Public Utility Realty Tax Act.

SCR - selective catalytic reduction, a pollution control process.

SEC - Securities and Exchange Commission, a U.S. government agency.

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

SIUK Capital Trust I - a business trust created to issue preferred securities, whose common securities are held by WPD LLP.

Superfund - federal environmental legislation that addresses remediation of contaminated sites; states also have similar statutes.

Synfuel projects - production facilities that manufacture synthetic fuel from coal or coal byproducts. Favorable federal tax credits are available on qualified ~~synfuel~~synthetic fuel products.

WPD - refers collectively to WPDH Limited and WPDL. PPL Global purchased Mirant's 49% ownership interest in these entities on September 6, 2002, thereby achieving 100% ownership and operational control.

WPD LLP - Western Power Distribution LLP, a wholly-owned subsidiary of WPDH Limited, which owns WPD (South West) and WPD (South Wales).

WPD(South Wales) - Western Power Distribution (South Wales) plc, a British regional electric utility company.

WPD(South West) - Western Power Distribution (South West) plc, a British regional electric utility company.

WPDH Limited - Western Power Distribution Holdings Limited, an indirect wholly-owned subsidiary of PPL Global. WPDH Limited owns WPD LLP.

WPDL - WPD Investment Holdings Limited, an indirect wholly-owned subsidiary of PPL Global. WPDL owns 100% of the common shares of Hyder.

Forward-looking Information

Statements contained in this Form 10-Q concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical facts are "forward-looking statements" within the meaning of the federal securities laws. Although PPL, PPL Energy Supply and PPL Electric believe that the expectations and assumptions reflected in these statements are reasonable, there can be no assurance that these expectations will prove to be correct. These forward-looking statements involve a number of risks and uncertainties, and actual results may differ materially from the results discussed in the forward-looking statements. In addition to the specific factors discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations sections herein, the following are among the important factors that could cause actual results to differ materially from the forward-looking statements:

market demand and prices for energy, capacity and fuel;
weather ~~variations~~conditions affecting customer energy ~~usage;~~usage and operating costs;
competition in retail and wholesale power markets;
the outcome of pending rate cases in Pennsylvania and in the U.K.;
the effect of any business or industry restructuring;
the profitability and liquidity of PPL and its subsidiaries;
new accounting requirements or new interpretations or applications of existing requirements;
operation of existing facilities and operating costs;
environmental conditions and requirements;
transmission and distribution system conditions and operating costs;
development of new projects, markets and technologies;
performance of new ventures;
asset acquisitions and dispositions;
political, regulatory or economic conditions in states, regions or countries where PPL or its subsidiaries conduct business;
receipt of necessary governmental permits, approvals and rate relief;
impact of state or federal investigations applicable to PPL and its subsidiaries and the energy industry;
the outcome of litigation against PPL and its subsidiaries;
capital market conditions and decisions regarding capital structure;
stock price performance;
the market prices of equity securities and resultant cash funding requirements for defined benefit pension plans;
securities and credit ratings;
state and federal regulatory developments;
foreign exchange rates;
new state or federal legislation, including new tax legislation;
national or regional economic conditions, including any potential effects arising from ~~the September 11, 2001~~ terrorist attacks in the U.S., the situation in Iraq and any consequential hostilities or other hostilities; and
the commitments and liabilities of PPL and its subsidiaries.

Any such forward-looking statements should be considered in light of such important factors and in conjunction with other documents of PPL, PPL Energy Supply and PPL Electric on file with the SEC.

New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time to time, and it is not possible for PPL, PPL Energy Supply or PPL Electric 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 PPL, PPL Energy Supply and PPL Electric undertake no obligations to update the information contained in such statement to reflect subsequent developments or information.

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF INCOME
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, except per share data)

Three Months Ended
March 31,

2004

2003

Operating Revenues

Utility

$
1,085

$
1,019

Unregulated retail electric and gas

31

51

Wholesale energy marketing

278

298

Net energy trading margins

7

(7
)

Energy related businesses

119

127

Total

1,520

1,488

Operating Expenses

Operation

Fuel

203

197

Energy purchases

270

302

Other operation and maintenance

316

277

Amortization of recoverable transition costs

71

71

Depreciation

99

96

Taxes, other than income

57

65

Energy related businesses

138

121

Total

1,154

1,129

Operating Income

366

359

Other Income - net

12

8

Interest Expense

125

108

Income from Continuing Operations Before Income Taxes, Minority Interest
and Distributions on Preferred Securities

253

259

Income Taxes

72

69

Minority Interest

2

1

Distributions on Preferred Securities

1

13

Income from Continuing Operations

178

176

Loss from Discontinued Operations (net of income taxes)

1

Income Before Cumulative Effect of a Change in Accounting Principle

177

176

Cumulative Effect of a Change in Accounting Principle (net of income taxes)

63

Net Income

$
177

$
239

Earnings Per Share of Common Stock:

Income from Continuing Operations:

Basic

$
1.00

$
1.06

Diluted

$
0.99

$
1.06

Net income:

Basic

$
1.00

$
1.43

Diluted

$
0.99

$
1.43

Dividends Declared Per Share of Common Stock

$
0.41

$
0.385

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

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF INCOME
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, except per share data)
				Three Months Ended June 30,				Six Months Ended June 30,

				2004		2003		2004		2003

Operating Revenues
	Utility			$	907	$	862	$	1,992	$	1,881
	Unregulated retail electric and gas				29		33		60		84
	Wholesale energy marketing				294		303		572		601
	Net energy trading margins				5		12		12		5
	Energy related businesses				127		129		246		256

	Total				1,362		1,339		2,882		2,827

Operating Expenses
	Operation
		Fuel			172		135		375		332
		Energy purchases			217		251		487		553
		Other operation and maintenance			320		324		636		601
		Amortization of recoverable transition costs			57		56		128		127
	Depreciation				102		92		201		188
	Taxes, other than income				64		60		121		125
	Energy related businesses				132		135		270		256

	Total				1,064		1,053		2,218		2,182

Operating Income					298		286		664		645

Other Income - net					19		23		31		31

Interest Expense					140		128		265		236

Income from Continuing Operations Before Income Taxes, Minority Interest and Distributions on Preferred Securities					177		181		430		440

Income Taxes					26		49		98		118

Minority Interest					2		1		4		2

Distributions on Preferred Securities							14		1		27

Income from Continuing Operations					149		117		327		293

Loss from Discontinued Operations (net of income taxes)					1		1		2		1

Income Before Cumulative Effect of a Change in Accounting Principle					148		116		325		292

Cumulative Effect of a Change in Accounting Principle (net of income taxes)											63

Net Income				$	148	$	116	$	325	$	355


Earnings Per Share of Common Stock:
	Income from Continuing Operations:
			Basic	$	0.82	$	0.68	$	1.81	$	1.73
			Diluted		0.82		0.67		1.81		1.72
	Net income:
			Basic	$	0.81	$	0.68	$	1.80	$	2.10
			Diluted		0.81		0.67		1.80		2.09

Dividends Declared per Share of Common Stock				$	0.41	$	0.385	$	0.82	$	0.77

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

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS																	PPL Corporation and Subsidiaries
(Unaudited)	(Unaudited)								(Unaudited)
(Millions of Dollars)	(Millions of Dollars)								(Millions of Dollars)
											Six Months Ended June 30,
			Three Months Ended March 31,
											2004			2003
			2004			2003

Net Cash Provided by Operating Activities	Net Cash Provided by Operating Activities		$	318		$	154		Net Cash Provided by Operating Activities		$	628		$	498


Cash Flows from Investing Activities	Cash Flows from Investing Activities								Cash Flows from Investing Activities
	Expenditures for property, plant and equipment			(174	)		(170	)	Expenditures for property, plant and equipment			(345	)		(358	)
	Investment in generating assets and electric energy projects			(18	)				Investment in generating assets and electric energy projects			(30	)
	Proceeds from the sale of CGE			123					Proceeds from the sale of CGE			123
	Other investing activities - net			1			(2	)	Other investing activities - net			(15	)		6

		Net cash used in investing activities		(68	)		(172	)		Net cash used in investing activities		(267	)		(352	)


Cash Flows from Financing Activities	Cash Flows from Financing Activities								Cash Flows from Financing Activities
	Issuance of common stock			12			73		Issuance of common stock			589			411
	Issuance of long-term debt			14			90		Issuance of long-term debt			15			986
	Retirement of long-term debt			(107	)		(248	)	Retirement of long-term debt			(938	)		(404	)
	Payment of common dividends			(69	)		(59	)	Retirement of preferred stock						(10	)
	Payment of preferred distributions			(1	)		(13	)	Payment of common dividends			(141	)		(122	)
	Net increase (decrease) in short-term debt			(6	)		332		Payment of preferred distributions			(1	)		(23	)
	Other financing activities - net			(1	)		(4	)	Net increase (decrease) in short-term debt			4			(834	)
									Other financing activities - net			(7	)		(25	)
		Net cash provided by (used in) financing activities		(158	)		171
										Net cash used in financing activities		(479	)		(21	)

Effect of Exchange Rates on Cash and Cash Equivalents				4			(1	)


Net Increase in Cash and Cash Equivalents				96			152
Net Increase (Decrease) In Cash and Cash Equivalents									Net Increase (Decrease) In Cash and Cash Equivalents			(118	)		125
Cash and Cash Equivalents at Beginning of Period	Cash and Cash Equivalents at Beginning of Period			476			245		Cash and Cash Equivalents at Beginning of Period			476			245

Cash and Cash Equivalents at End of Period	Cash and Cash Equivalents at End of Period		$	572		$	397		Cash and Cash Equivalents at End of Period		$	358		$	370


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

CONDENSED CONSOLIDATED BALANCE SHEET													PPL Corporation and Subsidiaries
(Unaudited)	(Unaudited)						(Unaudited)
(Millions of Dollars)	(Millions of Dollars)						(Millions of Dollars)
			March 31, 2004		December 31, 2003				June 30, 2004		December 31, 2003

Assets	Assets						Assets

Current Assets	Current Assets						Current Assets
	Cash and cash equivalents		$	572	$	476	Cash and cash equivalents		$	358	$	476
	Accounts receivable (less reserve: 2004, $93; 2003, $93)			560		555	Accounts receivable (less reserve: 2004, $93; 2003, $93)			523		555
	Unbilled revenues			366		341	Unbilled revenues			353		341
	Fuel, materials and supplies - at average cost			243		256	Fuel, materials and supplies - at average cost			270		256
	Prepayments			160		54	Prepayments			124		54
	Deferred income taxes			116		105	Deferred income taxes			109		105
	Price risk management assets			131		90	Price risk management assets			148		90
	Other			125		143	Other			100		143

				2,273		2,020				1,985		2,020


Investments	Investments						Investments
	Investment in unconsolidated affiliates - at equity			209		230	Investment in unconsolidated affiliates - at equity			204		230
	Investment in unconsolidated affiliates - at cost					126	Investment in unconsolidated affiliates - at cost					126
	Nuclear plant decommissioning trust fund			370		357	Nuclear plant decommissioning trust fund			373		357
	Other			29		29	Other			18		29

				608		742				595		742


Property, Plant and Equipment - net	Property, Plant and Equipment - net						Property, Plant and Equipment - net
	Electric plant in service						Electric plant in service
		Transmission and distribution		5,714		5,456		Transmission and distribution		5,729		5,456
		Generation		3,348		3,362		Generation		3,893		3,362
		General		465		435		General		458		435

				9,527		9,253				10,080		9,253
	Construction work in progress			676		627	Construction work in progress			149		614
	Nuclear fuel			146		144	Nuclear fuel			138		144

		Electric plant		10,349		10,024		Electric plant		10,367		10,011
	Gas and oil plant			207		205	Gas and oil plant			209		205
	Other property			213		221	Other property			213		221

				10,769		10,450				10,789		10,437


Regulatory and Other Noncurrent Assets	Regulatory and Other Noncurrent Assets						Regulatory and Other Noncurrent Assets
	Recoverable transition costs			1,616		1,687	Recoverable transition costs			1,559		1,687
	Goodwill			1,137		1,068	Goodwill			1,079		1,068
	Other intangibles			229		230	Other intangibles			245		243
	Other			951		926	Other			982		926

				3,933		3,911				3,865		3,924


			$	17,583	$	17,123			$	17,234	$	17,123


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

CONDENSED CONSOLIDATED BALANCE SHEET															PPL Corporation and Subsidiaries
(Unaudited)	(Unaudited)							(Unaudited)
(Millions of Dollars)	(Millions of Dollars)							(Millions of Dollars)
		March 31, 2004			December 31, 2003				June 30, 2004			December 31, 2003

Liabilities and Equity	Liabilities and Equity							Liabilities and Equity

Current Liabilities	Current Liabilities							Current Liabilities
	Short-term debt	$	53		$	56		Short-term debt	$	65		$	56
	Long-term debt		550			395		Long-term debt		939			395
	Accounts payable		498			456		Accounts payable		433			456
	Above market NUG contracts		74			74		Above market NUG contracts		73			74
	Taxes		202			178		Taxes		139			178
	Interest		127			121		Interest		123			121
	Dividends		74			70		Dividends		79			70
	Price risk management liabilities		139			82		Price risk management liabilities		160			82
	Other		315			337		Other		334			337

			2,032			1,769				2,345			1,769


Long-term Debt (Note 6)	Long-term Debt (Note 6)		7,874			7,464		Long-term Debt (Note 6)		6,582			7,464


Long-term Debt with Affiliate Trusts (Note 6)	Long-term Debt with Affiliate Trusts (Note 6)		89			681		Long-term Debt with Affiliate Trusts (Note 6)		89			681


Deferred Credits and Other Noncurrent Liabilities	Deferred Credits and Other Noncurrent Liabilities							Deferred Credits and Other Noncurrent Liabilities
	Deferred income taxes and investment tax credits		2,282			2,205		Deferred income taxes and investment tax credits		2,286			2,205
	Above market NUG contracts		260			278		Above market NUG contracts		242			278
	Other		1,506			1,362		Other		1,530			1,362

			4,048			3,845				4,058			3,845


Commitments and Contingent Liabilities	Commitments and Contingent Liabilities							Commitments and Contingent Liabilities


Minority Interest	Minority Interest		57			54		Minority Interest		53			54


Preferred Stock without Sinking Fund Requirements	Preferred Stock without Sinking Fund Requirements		51			51		Preferred Stock without Sinking Fund Requirements		51			51


Shareowners' Common Equity	Shareowners' Common Equity							Shareowners' Common Equity
	Common stock		2			2		Common stock		2			2
	Capital in excess of par value		2,987			2,973		Capital in excess of par value		3,564			2,973
	Treasury stock		(837	)		(837	)	Treasury stock		(837	)		(837	)
	Earnings reinvested		1,582			1,478		Earnings reinvested		1,653			1,478
	Accumulated other comprehensive loss		(247	)		(297	)	Accumulated other comprehensive loss		(274	)		(297	)
	Capital stock expense and other		(55	)		(60	)	Capital stock expense and other		(52	)		(60	)

			3,432			3,259				4,056			3,259


		$	17,583		$	17,123			$	17,234		$	17,123


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

CONDENSED CONSOLIDATED STATEMENT OF INCOME	CONDENSED CONSOLIDATED STATEMENT OF INCOME							CONDENSED CONSOLIDATED STATEMENT OF INCOME
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)	(Unaudited)							(Unaudited)
(Millions of Dollars)	(Millions of Dollars)							(Millions of Dollars)
			Three Months Ended March 31,							Three Months Ended June 30,				Six Months Ended June 30,

			2004		2003					2004		2003		2004		2003

Operating Revenues	Operating Revenues							Operating Revenues
								Wholesale energy marketing		$	294	$	303	$	572	$	601
	Wholesale energy marketing		$	278	$	298		Wholesale energy marketing to affiliates			346		328		756		717
	Wholesale energy marketing to affiliates			410		389		Utility			255		236		534		477
	Utility			279		241		Unregulated retail electric and gas			29		33		60		84
	Unregulated retail electric and gas			31		51		Net energy trading margins			5		12		12		5
	Net energy trading margins			7		(7	)	Energy related businesses			122		126		236		251
	Energy related businesses			114		125
								Total			1,051		1,038		2,170		2,135
	Total			1,119		1,097

Operating Expenses	Operating Expenses							Operating Expenses
	Operation							Operation
		Fuel		158		153			Fuel		154		120		312		273
		Energy purchases		215		249			Energy purchases		163		199		378		448
		Energy purchases from affiliates		38		45			Energy purchases from affiliates		39		38		77		83
		Other operation and maintenance		236		208			Other operation and maintenance		232		242		468		450
	Depreciation			69		69		Depreciation			73		64		142		133
	Taxes, other than income			26		21		Taxes, other than income			24		22		50		43
	Energy related businesses			131		119		Energy related businesses			124		128		255		247

	Total			873		864		Total			809		813		1,682		1,677


Operating Income	Operating Income			246		233		Operating Income			242		225		488		458

Other Income - net	Other Income - net			11		16		Other Income - net			28		26		39		42

Interest Expense	Interest Expense			56		42		Interest Expense			77		60		133		102


Income from Continuing Operations Before Income Taxes, Minority Interest and Distributions on Preferred Securities	Income from Continuing Operations Before Income Taxes, Minority Interest and Distributions on Preferred Securities			201		207		Income from Continuing Operations Before Income Taxes, Minority Interest and Distributions on Preferred Securities			193		191		394		398

Income Taxes	Income Taxes			52		51		Income Taxes			33		55		85		106

Minority Interest	Minority Interest			2		1		Minority Interest			2		1		4		2

Distributions on Preferred Securities	Distributions on Preferred Securities					2		Distributions on Preferred Securities					2				4

Income from Continuing Operations	Income from Continuing Operations			147		153		Income from Continuing Operations			158		133		305		286

Loss from Discontinued Operations (net of income taxes)	Loss from Discontinued Operations (net of income taxes)			1				Loss from Discontinued Operations (net of income taxes)			1		1		2		1

Income Before Cumulative Effect of a Change in Accounting Principle	Income Before Cumulative Effect of a Change in Accounting Principle			146		153		Income Before Cumulative Effect of a Change in Accounting Principle			157		132		303		285

Cumulative Effect of a Change in Accounting Principle (net of income taxes)	Cumulative Effect of a Change in Accounting Principle (net of income taxes)					63		Cumulative Effect of a Change in Accounting Principle (net of income taxes)									63


Net Income	Net Income		$	146	$	216		Net Income		$	157	$	132	$	303	$	348


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

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS																	PPL Energy Supply, LLC and Subsidiaries
(Unaudited)	(Unaudited)								(Unaudited)
(Millions of Dollars)	(Millions of Dollars)								(Millions of Dollars)
			Three Months Ended March 31,								Six Months Ended June 30,

			2004			2003					2004			2003


Net Cash Provided by Operating Activities	Net Cash Provided by Operating Activities		$	272		$	120		Net Cash Provided by Operating Activities		$	438		$	322


Cash Flows from Investing Activities	Cash Flows from Investing Activities								Cash Flows from Investing Activities
	Expenditures for property, plant and equipment			(114	)		(109	)	Expenditures for property, plant and equipment			(234	)		(234	)
	Investment in generating assets and electric energy projects			(18	)				Investment in generating assets and electric energy projects			(30	)
	Proceeds from the sale of CGE			123					Proceeds from the sale of CGE			123
	Net (increase) decrease in notes receivable from affiliates			(4	)		33		Net decrease in notes receivable from affiliates						428
	Other investing activities - net			1					Other investing activities - net			(23	)		17

		Net cash used in investing activities		(12	)		(76	)		Net cash provided by (used in) investing activities		(164	)		211


Cash Flows from Financing Activities	Cash Flows from Financing Activities								Cash Flows from Financing Activities
	Contributions from Member			8					Issuance of long-term debt			15			797
	Distributions to Member			(63	)		(305	)	Retirement of long-term debt			(663	)		(53	)
	Issuance of long-term debt			14					Distributions to Member			(124	)		(650	)
	Retirement of long-term debt			(5	)		(8	)	Contributions from Member			58			262
	Net increase (decrease) in short-term debt			(51	)		210		Net decrease in short-term debt			(61	)		(819	)
	Net increase in short-term debt to affiliate						13		Net increase in note payable to affiliate			495
									Other financing activities - net			1			(12	)
		Net cash used in financing activities		(97	)		(90	)
										Net cash used in financing activities		(279	)		(475	)

Effect of Exchange Rates on Cash and Cash Equivalents				4			(1	)


Net Increase (Decrease) in Cash and Cash Equivalents				167			(47	)
Net Increase (Decrease) In Cash and Cash Equivalents									Net Increase (Decrease) In Cash and Cash Equivalents			(5	)		58
Cash and Cash Equivalents at Beginning of Period	Cash and Cash Equivalents at Beginning of Period			227			149		Cash and Cash Equivalents at Beginning of Period			227			149

Cash and Cash Equivalents at End of Period	Cash and Cash Equivalents at End of Period		$	394		$	102		Cash and Cash Equivalents at End of Period		$	222		$	207


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

CONDENSED CONSOLIDATED BALANCE SHEET													PPL Energy Supply, LLC and Subsidiaries
(Unaudited)	(Unaudited)						(Unaudited)
(Millions of Dollars)	(Millions of Dollars)						(Millions of Dollars)
			March 31, 2004		December 31, 2003				June 30, 2004		December 31, 2003

Assets	Assets						Assets

Current Assets	Current Assets						Current Assets
							Cash and cash equivalents		$	222	$	227
	Cash and cash equivalents		$	394	$	227	Accounts receivable (less reserve: 2004, $67; 2003, $68)			298		320
	Accounts receivable (less reserve: 2004, $68; 2003, $68)			314		320	Unbilled revenues			227		215
	Unbilled revenues			234		215	Accounts receivable from affiliates			129		71
	Accounts receivable from affiliates			105		71	Fuel, materials and supplies - at average cost			212		198
	Fuel, materials and supplies - at average cost			196		198	Price risk management assets			145		88
	Price risk management assets			126		88	Other			132		158
	Other			157		158
										1,365		1,277
				1,526		1,277

Investments	Investments						Investments
	Investment in unconsolidated affiliates - at equity			209		212	Investment in unconsolidated affiliates - at equity			204		212
	Investment in unconsolidated affiliates - at cost					126	Investment in unconsolidated affiliates - at cost					126
	Nuclear plant decommissioning trust fund			370		357	Nuclear plant decommissioning trust fund			373		357
	Other			6		5	Other			5		5

				585		700				582		700


Property, Plant and Equipment - net	Property, Plant and Equipment - net						Property, Plant and Equipment - net
	Electric plant in service						Electric plant in service
		Transmission and distribution		3,368		3,129		Transmission and distribution		3,355		3,129
		Generation		3,348		3,362		Generation		3,893		3,362
		General		234		204		General		229		204

				6,950		6,695				7,477		6,695
	Construction work in progress			635		593	Construction work in progress			117		580
	Nuclear fuel			146		144	Nuclear fuel			138		144

		Electric plant		7,731		7,432		Electric plant		7,732		7,419
	Gas and oil plant			21		21	Gas and oil plant			21		21
	Other property			155		163	Other property			152		163

				7,907		7,616				7,905		7,603


Other Noncurrent Assets	Other Noncurrent Assets						Other Noncurrent Assets
	Goodwill			1,081		1,013	Goodwill			1,024		1,013
	Other intangibles			95		96	Other intangibles			111		109
	Other			572		548	Other			610		548

				1,748		1,657				1,745		1,670

									$	11,597	$	11,250
			$	11,766	$	11,250


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

CONDENSED CONSOLIDATED BALANCE SHEET											PPL Energy Supply, LLC and Subsidiaries
(Unaudited)	(Unaudited)					(Unaudited)
(Millions of Dollars)	(Millions of Dollars)					(Millions of Dollars)
		March 31, 2004		December 31, 2003			June 30, 2004		December 31, 2003

Liabilities and Equity	Liabilities and Equity					Liabilities and Equity

Current Liabilities	Current Liabilities					Current Liabilities
	Short-term debt	$	8	$	56	Short-term debt			$	56
	Long-term debt		185		6	Long-term debt	$	184		6
	Accounts payable		429		381	Accounts payable		374		381
	Accounts payable to affiliates		62		53	Accounts payable to affiliates		41		53
	Above market NUG contracts		74		74	Above market NUG contracts		73		74
	Taxes		133		110	Taxes		104		110
	Interest		86		74	Interest		78		74
	Deferred revenue on PLR energy supply to affiliate		12		12	Deferred revenue on PLR energy supply to affiliate		12		12
	Price risk management liabilities		134		76	Price risk management liabilities		154		76
	Other		214		222	Other		227		222

			1,337		1,064			1,247		1,064


Long-term Debt	Long-term Debt		4,027		4,140	Long-term Debt		3,348		4,140

Note Payable to Affiliate						Note Payable to Affiliate		495

Long-term Debt with Affiliate Trust	Long-term Debt with Affiliate Trust		89		89	Long-term Debt with Affiliate Trust		89		89


Deferred Credits and Other Noncurrent Liabilities	Deferred Credits and Other Noncurrent Liabilities					Deferred Credits and Other Noncurrent Liabilities
						Deferred income taxes and investment tax credits		1,119		1,012
	Deferred income taxes and investment tax credits		1,097		1,012	Above market NUG contracts		242		278
	Above market NUG contracts		260		278	Deferred revenue on PLR energy supply to affiliate		52		58
	Deferred revenue on PLR energy supply to affiliate		55		58	Other		1,221		1,077
	Other		1,222		1,077
								2,634		2,425
			2,634		2,425


Commitments and Contingent Liabilities	Commitments and Contingent Liabilities					Commitments and Contingent Liabilities


Minority Interest	Minority Interest		57		54	Minority Interest		53		54


Member's Equity	Member's Equity		3,622		3,478	Member's Equity		3,731		3,478


		$	11,766	$	11,250		$	11,597	$	11,250


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

CONDENSED CONSOLIDATED STATEMENT OF INCOME																	PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)	(Unaudited)						(Unaudited)
(Millions of Dollars)	(Millions of Dollars)						(Millions of Dollars)
			Three Months Ended March 31,						Three Months Ended June 30,				Six Months Ended June 30,

			2004		2003				2004		2003		2004		2003

Operating Revenues	Operating Revenues						Operating Revenues
	Retail electric		$	732	$	706	Retail electric		$	622	$	593	$	1,354	$	1,299
	Wholesale electric			4		8	Wholesale electric					7		4		15
	Wholesale electric to affiliate			37		39	Wholesale electric to affiliate			39		37		76		76

	Total			773		753	Total			661		637		1,434		1,390


Operating Expenses	Operating Expenses						Operating Expenses
	Operation						Operation
		Energy purchases		55		53		Energy purchases		55		51		110		104
		Energy purchases from affiliate		410		387		Energy purchases from affiliate		346		327		756		714
		Other operation and maintenance		78		75		Other operation and maintenance		87		86		165		161
		Amortization of recoverable transition costs		71		71		Amortization of recoverable transition costs		57		56		128		127
	Depreciation			26		24	Depreciation			27		26		53		50
	Taxes, other than income			31		44	Taxes, other than income			38		37		69		81

	Total			671		654	Total			610		583		1,281		1,237


Operating Income	Operating Income			102		99	Operating Income			51		54		153		153

Other Income - net	Other Income - net			1		3	Other Income - net					1		1		4

Interest Expense	Interest Expense			49		56	Interest Expense			47		53		96		109


Income Before Income Taxes	Income Before Income Taxes			54		46	Income Before Income Taxes			4		2		58		48

Income Taxes	Income Taxes			20		16	Income Taxes			1		1		21		17


Income Before Distributions on Preferred Securities	Income Before Distributions on Preferred Securities			34		30	Income Before Distributions on Preferred Securities			3		1		37		31

Distributions on Preferred Securities	Distributions on Preferred Securities			1		1	Distributions on Preferred Securities					1		1		2


Income Available to PPL Corporation	Income Available to PPL Corporation		$	33	$	29	Income Available to PPL Corporation		$	3	$		$	36	$	29



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

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS																	PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)	(Unaudited)								(Unaudited)
(Millions of Dollars)	(Millions of Dollars)								(Millions of Dollars)
			Three Months Ended March 31,								Six Months Ended June 30,

			2004			2003					2004			2003


Net Cash Provided by Operating Activities	Net Cash Provided by Operating Activities		$	44		$	46		Net Cash Provided by Operating Activities		$	185		$	233


Cash Flows from Investing Activities	Cash Flows from Investing Activities								Cash Flows from Investing Activities
	Expenditures for property, plant and equipment			(54	)		(55	)	Expenditures for property, plant and equipment			(98	)		(113	)
	Net decrease in notes receivable from affiliates						90		Net increase in notes receivable from affiliates						(10	)
	Other investing activities - net			3			2		Other investing activities - net			7			1

		Net cash provided by (used in) investing activities		(51	)		37			Net cash used in investing activities		(91	)		(122	)


Cash Flows from Financing Activities	Cash Flows from Financing Activities								Cash Flows from Financing Activities
	Issuance of long-term debt						90		Issuance of long-term debt						190
	Retirement of long-term debt			(102	)		(178	)	Retirement of long-term debt			(271	)		(291	)
	Contribution from parent						75		Contribution from parent						75
	Payment of preferred distributions			(1	)		(1	)	Retirement of preferred stock						(10	)
	Payment of common dividends to PPL Corporation			(1	)		(2	)	Payment of preferred distributions			(1	)		(2	)
	Net increase in short-term debt			45			121		Payment of common dividends to PPL Corporation			(2	)		(19	)
	Other financing activities - net						(4	)	Net increase (decrease) in short-term debt			65			(15	)
									Other financing activities - net			(8	)		(8	)
		Net cash provided by (used in) financing activities		(59	)		101
										Net cash used in financing activities		(217	)		(80	)


Net Increase (Decrease) in Cash and Cash Equivalents	Net Increase (Decrease) in Cash and Cash Equivalents			(66	)		184		Net Increase (Decrease) in Cash and Cash Equivalents			(123	)		31
Cash and Cash Equivalents at Beginning of Period	Cash and Cash Equivalents at Beginning of Period			162			29		Cash and Cash Equivalents at Beginning of Period			162			29

Cash and Cash Equivalents at End of Period	Cash and Cash Equivalents at End of Period		$	96		$	213		Cash and Cash Equivalents at End of Period		$	39		$	60


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

CONDENSED CONSOLIDATED BALANCE SHEET													PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)	(Unaudited)						(Unaudited)
(Millions of Dollars)	(Millions of Dollars)						(Millions of Dollars)
			March 31, 2004		December 31, 2003				June 30, 2004		December 31, 2003

Assets	Assets						Assets

Current Assets	Current Assets						Current Assets
							Cash and cash equivalents		$	39	$	162
	Cash and cash equivalents		$	96	$	162	Accounts receivable (less reserve: 2004, $25; 2003, $24)			203		212
	Accounts receivable (less reserve: 2004, $24; 2003, $24)			216		212	Unbilled revenues			124		123
	Unbilled revenues			126		123	Accounts receivable from affiliates			13		27
	Accounts receivable from affiliates			20		27	Income tax receivable			35		35
	Income tax receivable			35		35	Materials and supplies - at average cost			32		30
	Prepayments			114		5	Prepayments			75		5
	Prepayment on PLR energy supply from affiliate			12		12	Prepayment on PLR energy supply from affiliate			12		12
	Deferred income taxes			40		45	Deferred income taxes			40		45
	Other			51		54	Other			17		24

				710		675				590		675


Property, Plant and Equipment - net	Property, Plant and Equipment - net						Property, Plant and Equipment - net
	Electric plant in service						Electric plant in service
		Transmission and distribution		2,345		2,327		Transmission and distribution		2,374		2,327
		General		226		226		General		225		226

				2,571		2,553				2,599		2,553
	Construction work in progress			38		31	Construction work in progress			29		31

		Electric plant		2,609		2,584		Electric plant		2,628		2,584
	Other property			5		5	Other property			4		5

				2,614		2,589				2,632		2,589


Regulatory and Other Noncurrent Assets	Regulatory and Other Noncurrent Assets						Regulatory and Other Noncurrent Assets
	Recoverable transition costs			1,616		1,687	Recoverable transition costs			1,559		1,687
	Intangibles			116		116	Intangibles			116		116
	Prepayment on PLR energy supply from affiliate			55		58	Prepayment on PLR energy supply from affiliate			52		58
	Other			341		344	Other			343		344

				2,128		2,205				2,070		2,205


			$	5,452	$	5,469			$	5,292	$	5,469


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

CONDENSED CONSOLIDATED BALANCE SHEET															PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)	(Unaudited)							(Unaudited)
(Millions of Dollars)	(Millions of Dollars)							(Millions of Dollars)
		March 31, 2004			December 31, 2003				June 30, 2004			December 31, 2003

Liabilities and Equity	Liabilities and Equity							Liabilities and Equity

Current Liabilities	Current Liabilities							Current Liabilities
	Short-term debt	$	45					Short-term debt	$	65
	Long-term debt		265		$	289		Long-term debt		334		$	289
	Accounts payable		42			44		Accounts payable		34			44
	Accounts payable to affiliates		135			92		Accounts payable to affiliates		125			92
	Taxes		70			86		Taxes		56			86
	Interest		17			32		Interest		29			32
	Other		78			83		Other		73			83

			652			626				716			626


Long-term Debt	Long-term Debt		2,570			2,648		Long-term Debt		2,333			2,648


Deferred Credits and Other Noncurrent Liabilities	Deferred Credits and Other Noncurrent Liabilities							Deferred Credits and Other Noncurrent Liabilities
	Deferred income taxes and investment tax credits		738			728		Deferred income taxes and investment tax credits		746			728
	Other		188			194		Other		191			194

			926			922				937			922



Commitments and Contingent Liabilities	Commitments and Contingent Liabilities							Commitments and Contingent Liabilities


Preferred Stock without Sinking Fund Requirements	Preferred Stock without Sinking Fund Requirements		51			51		Preferred Stock without Sinking Fund Requirements		51			51


Shareowner's Common Equity	Shareowner's Common Equity							Shareowner's Common Equity
	Common stock		1,476			1,476		Common stock		1,476			1,476
	Additional paid-in capital		361			361		Additional paid-in capital		361			361
	Treasury stock		(912	)		(912	)	Treasury stock		(912	)		(912	)
	Earnings reinvested		335			304		Earnings reinvested		337			304
	Capital stock expense and other		(7	)		(7	)	Capital stock expense and other		(7	)		(7	)

			1,253			1,222				1,255			1,222


		$	5,452		$	5,469			$	5,292		$	5,469


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

Combined Notes to Condensed Consolidated Financial Statements

Terms and abbreviations appearing in Combined Notes to Condensed Consolidated Financial Statements are explained in the glossary. Dollars are in millions, except per share data, unless otherwise noted.

Interim Financial Statements
(PPL, PPL Energy Supply and PPL Electric)
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, all adjustments (including normal, recurring accruals) considered necessary for a fair presentation in accordance with accounting principles generally accepted in the U.S. are reflected in the condensed consolidated financial statements. The Balance Sheet as of December 31, 2003, is derived from each Registrant's 2003 audited Balance Sheet. The financial statements and notes thereto should be read in conjunction with the financial statements and notes contained in each Registrant's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003. The results of operations for the three and six months ended ~~March 31,~~June 30, 2004, are not necessarily indicative of the results to be expected for the full year ending December 31, 2004, or other future periods, because results for interim periods can be disproportionately influenced by various factors and developments and seasonal variations.
Certain amounts in the ~~March 31,~~June 30, 2003, and December 31, 2003, financial statements have been reclassified to conform to the presentation in the ~~March 31,~~June 30, 2004, financial statements.

Summary of Significant Accounting Policies

The following accounting policy disclosures represent updates to the "Summary of Significant Accounting Policies" Note in each Registrant's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003.

~~Goodwill~~~~(PPL and PPL Energy Supply)~~

~~The change in the carrying amount of "Goodwill," as shown on the Balance Sheet, was due to the effect of foreign exchange rates.~~

Stock-Based Compensation(PPL, PPL Energy Supply and PPL Electric)

Stock-based compensation expense, including awards granted to employees and an allocation of costs of awards granted to employees of PPL Services, was insignificant to net income and EPS under both the intrinsic value and fair value methods of accounting for stock-based compensation for the three and six months ended ~~March 31,~~June 30, 2004 and 2003. Also, there would not have been a material impact on reported net income and EPS had the fair value method been used to account for all outstanding stock-based compensation awards in ~~both~~all periods.

New Accounting Standards(PPL, PPL Energy Supply and PPL Electric)

See Note 1516 for a discussion of new accounting standards adopted in 2004 or pending adoption.

Income Taxes

Reconciliations of effective income tax rates for PPL and PPL Energy Supply are as follows:

(PPL)

		Three Months Ended June 30,						Six Months Ended June 30,

		2004			2003			2004			2003

Reconciliation of Income Tax Expense

	Indicated federal income tax on pre-tax income before extraordinary item at statutory tax rate - 35%	$	62		$	63		$	151		$	154

Increase/(decrease) due to:

	State income taxes		(4	)		3						10

	Amortization of investment tax credit		(2	)		(2	)		(5	)		(5	)

	Difference related to income recognition of foreign affiliates (net of foreign income taxes)		(15	)		3			(18	)		(5	)

	Federal income tax credits		(15	)		(14	)		(29	)		(26	)

	Other					(4	)		(1	)		(10	)

			(36	)		(14	)		(53	)		(36	)

Total income tax expense		$	26		$	49		$	98		$	118

Effective income tax rate			14.7%			27.1%			22.8%			26.8%

(PPL Energy Supply)

		Three Months Ended June 30,						Six Months Ended June 30,

		2004			2003			2004			2003

Reconciliation of Income Tax Expense

	Indicated federal income tax on pre-tax income before extraordinary item at statutory tax rate - 35%	$	68		$	66		$	138		$	139

Increase/(decrease) due to:

	State income taxes		(2	)		2			(1	)		3

	Amortization of investment tax credit		(2	)		(2	)		(4	)		(4	)

	Difference related to income recognition of foreign affiliates (net of foreign income taxes)		(15	)		3			(18	)		(5	)

	Federal income tax credits		(15	)		(14	)		(29	)		(26	)

	Other		(1	)					(1	)		(1	)

			(35	)		(11	)		(53	)		(33	)

Total income tax expense		$	33		$	55		$	85		$	106

Effective income tax rate			17.1%			28.8%			21.6%			26.6%

Segment and Related Information

(PPL and PPL Energy Supply)

See the "Segment and Related Information" Note in each Registrant's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003, for a discussion of reportable segments.

Financial data for the segments are as follows:

PPL

PPL Energy Supply

Three Months
Ended March 31,

Three Months
Ended March 31,

2004

2003

2004

2003

Income Statement Data

Revenues from external customers

Supply

$
419

$
450

$
824

$
837

International

295

260

295

260

Delivery (a)

806

778

1,520

1,488

1,119

1,097

Intersegment revenues

Supply

410

389

Delivery

38

43

Net Income

Supply (b)

89

151

98

165

International (c)

48

51

48

51

Delivery (a)

40

37

$
177

$
239

$
146

$
216

PPL
PPL Energy Supply

March 31,
2004

December 31,
2003

March 31,
2004

December 31,
2003

Balance Sheet Data

Total assets

Supply

$
6,623

$
6,491

$
6,487

$
6,308

International

5,273

4,942

5,279

4,942

Delivery (a)

5,687

5,690

$
17,583

$
17,123

$
11,766

$
11,250

(PPL)

		Three Months Ended June 30,				Six Months Ended June 30,

		2004		2003		2004		2003

Income Statement Data

Revenues from external customers

	Supply	$	438	$	453	$	857	$	903

	International		271		259		565		519

	Delivery		653		627		1,460		1,405

			1,362		1,339		2,882		2,827

Intersegment revenues

	Supply		346		328		756		717

	Delivery		39		40		78		88

Net Income

	Supply (a)		80		90		169		241

	International		66		26		114		77

	Delivery		2				42		37

		$	148	$	116	$	325	$	355

		June 30, 2004		December 31, 2003

Balance Sheet Data

Total assets

	Supply	$	6,667	$	6,491

	International		5,093		4,942

	Delivery		5,474		5,690

		$	17,234	$	17,123

(PPL Energy Supply)

		Three Months Ended June 30,				Six Months Ended June 30,

		2004		2003		2004		2003

Income Statement Data

Revenues from external customers

	Supply	$	780	$	779	$	1,605	$	1,616

	International		271		259		565		519

			1,051		1,038		2,170		2,135

Net Income

	Supply (a)		91		106		189		271

	International		66		26		114		77

		$	157	$	132	$	303	$	348

		June 30, 2004		December 31, 2003

Balance Sheet Data

Total assets

	Supply	$	6,504	$	6,308

	International		5,093		4,942

		$	11,597	$	11,250

(a)		The ~~Delivery segment is not a component of PPL Energy Supply.~~
~~(b)~~		six months ended June 30, 2003, includes the "Cumulative Effect of a Change in Accounting Principle" recorded in January 2003. See Note ~~13 for additional information.~~
~~(c)~~		~~2004 includes the "Loss from Discontinued Operations." See Note 7~~14 for additional information.

Earnings Per Share

(PPL)

Basic EPS is calculated ~~by dividing "Net Income" on the Statement of Income by~~using the weighted-average number of common shares outstanding during the period. Diluted EPS is calculated ~~similarly, except that weighted-average~~using weighted average shares outstanding that are increased for additional shares that would be outstanding if potentially dilutive securities were converted to common stock. Potentially dilutive securities consist of:

•	stock options, restricted stock and restricted stock units granted under the incentive compensation ~~plans,~~plans;
•	stock units representing common stock granted under the directors compensation ~~programs,~~programs;
•	common stock purchase contracts that ~~are~~were a component of the PEPS Units and PEPS Units, Series B,B; and
•	convertible senior notes.

The basic and diluted EPS calculations, and the reconciliation of the shares (in thousands) used in the calculations, are shown below:

Three Months
Ended March 31,

2004

2003

Income (Numerator)

Income from continuing operations

$
178

$
176

Loss from discontinued operations (net of tax)

1

Cumulative effect of a change in accounting principle (net of tax)

63

Net Income

$
177

$
239

Shares (Denominator)

Shares for Basic EPS

177,150

166,506

Add: Incremental shares

Stock options and other share-based awards

607

510

Shares for Diluted EPS

177,757

167,016

Basic EPS

Income from continuing operations

$
1.00

$
1.06

Cumulative effect of a change in accounting principle (net of tax)

0.37

Net Income

$
1.00

$
1.43

Three Months
Ended March 31,

2004

2003

Diluted EPS

Income from continuing operations

$
0.99

$
1.06

Cumulative effect of a change in accounting principle (net of tax)

0.37

Net Income

$
0.99

$
1.43

		Three Months Ended June 30,				Six Months Ended June 30,

		2004		2003		2004		2003

Income (Numerator)

Income from continuing operations		$	149	$	117	$	327	$	293

	Loss from discontinued operations (net of tax)		1		1		2		1

	Cumulative effect of a change in accounting principle (net of tax)								63

Net Income		$	148	$	116	$	325	$	355

Shares (Denominator)

Shares for Basic EPS			182,962		171,892		180,437		169,482

Add: Incremental shares:

	Stock options and other share-based awards		562		649		585		579

Shares for Diluted EPS			183,524		172,541		181,022		170,061

Basic EPS

Income from continuing operations		$	0.82	$	0.68	$	1.81	$	1.73

	Loss from discontinued operations (net of tax)		0.01				0.01

	Cumulative effect of a change in accounting principle (net of tax)								0.37

Net Income		$	0.81	$	0.68	$	1.80	$	2.10

Diluted EPS

Income from continuing operations		$	0.82	$	0.67	$	1.81	$	1.72

	Loss from discontinued operations (net of tax)		0.01				0.01

	Cumulative effect of a change in accounting principle (net of tax)								0.37

Net Income		$	0.81	$	0.67	$	1.80	$	2.09

In May 2001, PPL and PPL Capital Funding Trust I issued 23 million PEPS Units that ~~contain~~contained a purchase contract component for PPL's common stock. The purchase contracts ~~will~~were only be dilutive if the average price of PPL's common stock ~~exceeds~~exceeded a threshold appreciation price, which iswas adjusted for cash distributions on PPL common stock. The threshold appreciation price was initially set at $65.03 and ~~has been~~was adjusted to $63.38 as of April 1, 2004, based on dividends paid on PPL's common stock since issuance. Since the average price ~~has~~did not ~~exceeded~~exceed the threshold appreciation price, the purchase contracts were excluded from the diluted EPS calculations.

In January 2004, PPL completed an exchange offer resulting in the exchange of approximately 4four million PEPS Units for PEPS Units, Series B. The primary difference in the units ~~relates~~related to the debt component. The purchase contract components of both units, which ~~are~~were potentially dilutive, ~~are~~were identical. The threshold appreciation price for the purchase contract component of the PEPS Units, Series B iswas adjusted in the same manner as that of the PEPS Units and ~~currently is~~was $63.38 as a result of the adjustment as of April 1, 2004. Since the average price did not exceed the threshold appreciation price, the purchase contracts were excluded from the diluted EPS calculations. See Note 6 for a more detailed discussion of the exchange offer.

In May 2003, PPL Energy Supply issued $400 million of 2.625% Convertible Senior Notes due 2023. The notes are guaranteed by PPL and can be converted into shares of PPL common stock if:

•	during any fiscal quarter starting after June 30, 2003, the market price of PPL's common stock trades at or above $59.67 per share over a certain period during the preceding fiscal quarter;
•	PPL calls the debt for redemption;
•	the holder exercises its right to put the debt on any five-year anniversary of the offering;
•	the long-term credit rating assigned to the notes by Moody's Investors Service, Inc. and Standard & Poor's Ratings Services falls below Ba2 and BB or the notes are not rated; or
•	certain specified corporate transactions occur, e.g., change in control and certain distributions to the holders of PPL common stock.

The initial conversion rate is 20.1106 shares per $1,000 principal amount of notes. It will be adjusted if certain specified distributions, whether in the form of cash, stock, other equity interests, evidence of indebtedness or assets, are made to holders of PPL common stock. Additionally, the conversion rate can be increased by PPL if its ~~board~~Board of ~~directors~~Directors has made a determination that to do so would be in the best interests of either PPL or holders of PPL common stock.

Depending upon which of the conversion events identified above occurs, the Convertible Senior Notes can be settled in cash or shares. As none of these events has occurred, the Convertible Senior Notes were excluded from the diluted EPS calculations.

The following number of stock options to purchase PPL common shares ~~and unvested restricted stock awards~~ were excluded in the periods' computations of diluted EPS because the effect would have been antidilutive.

	Three Months Ended March 31,				Three Months Ended June 30,		Six Months Ended June 30,

(Thousands of Shares)	2004		2003		2004	2003	2004	2003

Antidilutive stock options		747		1,673	1,153	1,673	1,526	1,694

Antidilutive restricted stock				42

See Note 16 for a discussion of EITF Issue 03-6, "Participating Securities and the Two-Class Method under FASB Statement No. 128, 'Earnings Per Share'."

Comprehensive Income

(PPL and ~~PPL~~ Energy Supply)

The following tables show the after-tax components of comprehensive income:

PPL

PPL Energy Supply

Three Months Ended
March 31,

Three Months Ended
March 31,

2004

2003

2004

2003

Net Income
$
177

$
239

$
146

$
216

Other comprehensive income:

Foreign currency translation adjustments

78

(15
)

78

(15
)

Disposition of investment in CGE - currency translation adjustment

10

10

Unrealized loss on available-for-sale securities

(3
)

(3
)

(3
)

(3
)

Unrealized gain (loss) on qualifying derivatives

(35
)

27

(32
)

29

Total other comprehensive income

50

9

53

11

Comprehensive Income
$
227

$
248

$
199

$
227

		Three Months Ended June 30,						Six Months Ended June 30,

		2004			2003			2004			2003

PPL

Net Income		$	148		$	116		$	325		$	355

Other comprehensive income (loss):

	Foreign currency translation adjustments		(28	)		32			50			17

	Sale of CEMAR - currency translation adjustment		(4	)					(4	)

	Sale of CGE - currency translation adjustment								10

	Unrealized gain (loss) on available-for-sale securities		(1	)		13			(4	)		10

	Unrealized gain (loss) on qualifying derivatives		6			(13	)		(29	)		14

	Total other comprehensive income (loss)		(27	)		32			23			41

Comprehensive Income		$	121		$	148		$	348		$	396

		Three Months Ended June 30,						Six Months Ended June 30,

		2004			2003			2004			2003

PPL Energy Supply

Net Income		$	157		$	132		$	303		$	348

Other comprehensive income (loss):

	Foreign currency translation adjustments		(28	)		32			50			17

	Sale of CEMAR - currency translation adjustment		(4	)					(4	)

	Sale of CGE - currency translation adjustment								10

	Unrealized gain (loss) on available-for-sale securities		(1	)		11			(4	)		8

	Unrealized gain (loss) on qualifying derivatives		(5	)		(5	)		(37	)		24

	Total other comprehensive income (loss)		(38	)		38			15			49

Comprehensive Income		$	119		$	170		$	318		$	397

(PPL Electric)

PPL Electric's comprehensive income approximates net income.

Credit Arrangements and Financing Activities
Credit Arrangements
(PPL, PPL Energy Supply and PPL Electric)
In February 2004, PPL Energy Supply reduced the size of its $500 million three-year credit facility expiring in June 2004 to $200 million. In June 2004, PPL Energy Supply replaced this facility and its $300 million three-year facility expiring in June 2005 with an $800 million five-year facility expiring in June 2009. Also in June 2004, PPL Electric replaced its $200 million 364-day facility expiring in June 2004 with a $200 million five-year facility expiring in June 2009. At ~~March 31,~~June 30, 2004, no cash borrowings were outstanding under any credit facilities of PPL Electric or PPL Energy Supply. Both PPL Electric and PPL Energy Supply have the ability to cause the lenders under their respective facilities to issue letters of ~~credit under their respective facilities.~~credit. At ~~March 31,~~June 30, 2004, PPL Electric had $42 million of letters of credit outstanding under its $100 million three-year facility expiring in June 2006, and PPL Energy Supply had ~~$59~~$442 million of letters of credit outstanding under its ~~$200~~$800 million ~~three-year~~five-year facility expiring in June ~~2004~~2009 and ~~$64~~$84 million of letters of credit outstanding under its $300 million three-year facility expiring in June 2006. ~~In April 2004,~~The letters of credit outstanding under PPL Energy ~~Supply issued a letter of credit in the amount of $300~~Supply's $800 million ~~to PPL Electric under its $300 million three-year~~five-year facility expiring in June ~~2005. The~~2009 include a $300 million letter of credit ~~was~~ provided to PPL Electric to satisfy the performance assurance provisions under one of the PLR contracts. See Note 9 for additional information.
(PPL and PPL Energy Supply)
At ~~March 31,~~June 30, 2004, WPD (South West) had ~~£4.1 million (approximately $8 million based on current exchange rates) of~~no outstanding borrowings under its £100 million 364-day credit facility expiring in October 2004 ~~and no outstanding borrowings~~or under its £150 million five-year credit facility expiring in October 2008.
(PPL, PPL Energy Supply and PPL Electric)
The subsidiaries of PPL are separate legal entities. PPL's subsidiaries are not liable for the debts of PPL. Accordingly, creditors of PPL may not satisfy their debts from the assets of the subsidiaries absent a specific contractual undertaking by a subsidiary to pay PPL's creditors or as required by applicable law or regulation. Similarly, absent a specific contractual undertaking or as required by applicable law or regulation, PPL is not liable for the debts of its subsidiaries. Accordingly, creditors of PPL's subsidiaries may not satisfy their debts from the assets of PPL absent a specific contractual undertaking by PPL to pay the creditors of its subsidiaries or as required by applicable law or regulation.
Similarly, the subsidiaries of PPL Energy Supply and PPL Electric are separate legal entities. These subsidiaries are not liable for the debts of PPL Energy Supply and PPL Electric. Accordingly, creditors of PPL Energy Supply and PPL Electric may not satisfy their debts from the assets of their subsidiaries absent a specific contractual undertaking by a subsidiary to pay the creditors or as required by applicable law or regulation. In addition, absent a specific contractual undertaking or as required by applicable law or regulation, PPL Energy Supply and PPL Electric are not liable for the debts of their subsidiaries. Accordingly, creditors of these subsidiaries may not satisfy their debts from the assets of PPL Energy Supply or PPL Electric absent a specific contractual undertaking by that parent to pay the creditors of its subsidiaries or as required by applicable law or regulation.
Financing Activities
PEPS Units Transactions
(PPL)
In November 2003, PPL initiated an offer to exchange up to $573 million of its outstanding PEPS Units for up to $573 million of its PEPS Units, Series B and a cash payment by PPL of $0.375 for each validly tendered and accepted outstanding PEPS Unit. The exchange offer, which closed in January 2004, resulted in $99 million, or 17.28%, of the outstanding PEPS Units, being exchanged.
In February 2004, pursuant to the terms of the PEPS Units, PPL remarketed $257 million of the PPL Capital Funding Trust I trust preferred securities that were a component of the PEPS Units. The trust preferred securities were remarketed at a price of 107.284% of their aggregate stated liquidation amount, resulting in a yield to maturity of 3.912% based on the reset distribution rate of 7.29% per annum. Under the terms of the PEPS Units, holders were entitled to surrender their trust preferred securities for remarketing in order to settle the purchase contract component of the PEPS Units in May 2004. Holders of an aggregate of $218 million of the trust preferred securities elected not to participate in the remarketing. Those holders retained their trust preferred securities at a distribution rate of 7.29% per annum.
Additionally, in February 2004, PPL Capital Funding issued $201 million of senior unsecured notes guaranteed by PPL in exchange for $185 million of the trust preferred securities of PPL Capital Funding Trust I and a payment of $400,000 in cash. The senior notes bear interest at a rate of 4.33% per year that is payable semi-annually on March 1 and September 1 of each year, from September 1, 2004, through the maturity date of March 1, 2009. The senior notes are not redeemable by PPL or PPL Capital Funding, and the holders will not be entitled to require PPL or PPL Capital Funding to repurchase the senior notes before maturity. The senior notes were issued in an SEC Rule 144A private offering to qualified institutional ~~buyers. Pursuant to a registration rights agreement~~buyers and were exchanged in full for senior notes registered with the ~~initial purchasers,~~SEC pursuant to an exchange offer completed by PPL and PPL Capital Funding ~~intend~~in July 2004. The registered senior notes issued pursuant to ~~consummate an~~the exchange offer ~~for~~have the same terms as the senior notes ~~to register them with~~issued in the ~~SEC for resale.~~144A private offering.
The January and February 2004 exchanges resulted in the cancellation of an aggregate of $284 million of the trust preferred securities and an aggregate of $9 million of PPL Capital Funding Trust I's common securities held by PPL Capital Funding, as well as a corresponding cancellation of the $293 million of PPL Capital Funding 7.29% subordinated notes due 2006 underlying these trust securities. The cancellation of the underlying PPL Capital Funding subordinate notes together with the issuance of the new PPL Capital Funding debt, as a result of the exchanges, resulted in a net decrease of $9 million of long-term debt, including "Long-term Debt with Affiliate Trusts," as reflected in the Balance Sheet. Following these exchanges, there remained outstanding $290 million of trust preferred securities and $9 million of trust common securities, as well as $299 million of underlying PPL Capital Funding 7.29% subordinated notes due 2006.
In March 2004, PPL liquidated PPL Capital Funding Trust I, resulting in the cancellation of all of the outstanding trust preferred securities and the trust common securities. In exchange for the cancellation of the trust securities, PPL Capital Funding Trust I caused $290 million of underlying PPL Capital Funding 7.29% subordinated notes due 2006 to be distributed to the holders of the trust preferred securities and $9 million of PPL Capital Funding 7.29% subordinated notes due 2006, held by the trust, to be cancelled. The impact to PPL Capital Funding as a result of these cancellations was an additional net decrease of $9 million of long-term debt, including "Long-term Debt with Affiliate Trusts," as reflected in the Balance Sheet.
In May 2004, pursuant to the terms of the PEPS Units, Series B, PPL remarketed approximately $99 million of the PPL Capital Funding notes due 2006 that were a component of the PEPS Units, Series B. The notes were remarketed at a price of 100.5% of their aggregate principal amount with a floating reset interest rate initially equal to 2.31%, which is three-month LIBOR plus a spread of 105 basis points, or 1.05%. Interest on the notes resets quarterly at three-month LIBOR plus a spread of 105 basis points, and is payable quarterly from May 18, 2004, through, but excluding, the maturity date of May 18, 2006. Under the terms of the PEPS Units, Series B, holders were entitled to surrender their PPL Capital Funding notes for remarketing in order to settle the purchase contract component of the PEPS Units, Series B in May 2004.
(PPL and PPL Energy Supply)
The purchase contract component of the PEPS Units and the PEPS Units, Series B settled in May 2004. Pursuant to the settlement of the purchase contracts, PPL issued an aggregate of approximately 11 million shares of its common stock and received aggregate proceeds of approximately $575 million. In June 2004, a subsidiary of PPL Energy Supply used these proceeds and cash on hand to purchase, for approximately $660 million, the Sundance and University Park generation assets that it had been leasing, through a synthetic lease arrangement, from a trust consolidated by PPL Energy Supply. Under the terms of the synthetic lease arrangement, the PPL Energy Supply subsidiary had the right at any time to purchase these assets for an amount sufficient to pay off the consolidated trust's related financing, including accrued and unpaid interest. Repayment of the consolidated trust's debt resulted in a loss of approximately $9 million pre-tax, which is reflected in "Interest Expense."
Other Financing Activities
(PPL)
In April 2004, PPL Capital Funding repurchased $4 million of its 8-3/8% Medium-term Notes due 2007 at a market value of approximately $5 million. This repurchase resulted in a loss of approximately $1 million pre-tax, which is reflected in "Interest Expense."
(PPL and PPL Energy Supply)
During the ~~three~~six months ended ~~March 31,~~June 30, 2004, a Bolivian subsidiary of PPL Global issued ~~$12~~$13 million of bonds with interest rates varying from 6.8% to 7.4% and serial maturities from December 2005 to December 2008. In addition, the PPL Global subsidiary issued bonds denominated in UFVs (inflation-indexed bolivianos) totaling 13.5 million bolivianos (approximately $2 million at current exchange rates) maturing in December 2007. The proceeds of both issuances were used to repay intercompany ~~and~~loans, short-term bank ~~borrowings.~~borrowings, and $3.1 million of its multicurrency denominated Inter-American Development Bank note maturing in November 2009.
At ~~March 31,~~June 30, 2004, PPL Energy Supply had no commercial paper outstanding.
During the ~~three~~six months ended ~~March 31,~~June 30, 2004, PPL Energy Supply distributed approximately ~~$63~~$124 million to its parent company, PPL Energy Funding, and received capital contributions of $8$58 million.
In May 2004, PPL Energy Supply issued a $495 million note payable to an affiliate. The note matures in May 2006 with interest payable monthly in arrears at LIBOR plus 1%.
(PPL and PPL Electric)
In March 2004, PPL Electric retired approximately $25 million of its outstanding First Mortgage Bonds, 6.875% Series due March 2004, at par value. Also in March, PPL Electric redeemed approximately $6 million aggregate principal amount of its First Mortgage Bonds, 7.30% Series due 2024, at par value, through the application of cash deposited with the trustee to release certain transmission lines and other equipment from the lien of the 1945 First Mortgage Bond Indenture.
In ~~March 2004, PPL Transition Bond Company made principal payments on transition bonds totaling approximately $72 million.~~
~~At March 31, 2004, PPL Electric had $45 million of commercial paper outstanding.~~
In April 2004, PPL Electric completed an offer to repurchase its outstanding First Mortgage Bonds, 6-1/2% Series due 2005. Pursuant to the offer, PPL Electric repurchased approximately ~~$40~~$41 million of the bonds at a market value of $43 million. PPL Electric also repurchased in the open market $45 million of ~~outstanding~~ 5-7/8% Senior Secured Bonds and $14 million of ~~outstanding~~ 6-1/4% Senior Secured Bonds at market values of $48 million and $16 million, respectively. ~~Approximately $53~~These repurchases resulted in a loss of approximately $7 million ~~of these open market purchases settled~~pre-tax, which is reflected in ~~May 2004.~~other noncurrent assets as an unamortized loss on reacquired debt. The purpose of the repurchases was to reduce future interest expense.
~~Dividends~~In August 2004, PPL Electric began participating in an asset-backed commercial paper (ABCP) program through which PPL Electric obtains financing by selling and ~~Dividend Restrictions~~contributing to a special purpose, wholly-owned subsidiary its accounts receivable, with certain exceptions, on an ongoing basis. PPL Electric's sale of the accounts receivable is an absolute transfer of the receivables and PPL Electric does not retain an interest in the receivables. The subsidiary, in turn, has pledged the receivables to secure loans to be made to it from time to time by a commercial paper conduit sponsored by a financial institution. PPL Electric will continue to perform certain record-keeping and cash collection functions with respect to the receivables in return for a servicing fee from the subsidiary. The subsidiary's borrowing limit under this program is $150 million. PPL Electric expects to use the proceeds from the ABCP program for general corporate purposes and to cash collateralize letters of credit. The subsidiary is a separate legal entity and its assets are not available for PPL Electric's creditors. However, for financial reporting purposes, the subsidiary's financial results will be consolidated in PPL Electric's financial statements.
During the six months ended June 30, 2004, PPL Transition Bond Company made principal payments on transition bonds totaling $140 million.
At June 30, 2004, PPL Electric had $65 million of commercial paper outstanding.
Dividends(PPL)
In February 2004, PPL announced an increase to its quarterly common stock dividend, ~~payable~~effective April 1, 2004, from 38.5 cents per share to 41 cents per share (equivalent to $1.64 per annum). Future dividends, declared at the discretion of the Board of Directors, will be dependent upon future earnings, cash flows, financial requirements and other factors.
Acquisitions, Development and Divestitures
Domestic Generation Projects(PPL and PPL Energy Supply)
At December 31, 2003, PPL Generation had two remaining spare gas combustion turbine generators and related equipment, originally intended for use in a cancelled project. In February 2004, a subsidiary of PPL Generation sold aone spare gas combustion turbine generator and related equipment for approximately $10 million. ~~There~~In June 2004, the subsidiary sold the other spare gas combustion turbine generator and related equipment for approximately $9 million. The net loss from these sales was ~~an insignificant gain on the sale.~~insignificant.
The turbine upgrade for PPL Susquehanna Unit 1 was completed in April 2004. This project provides a nominal power increase of 5049 MW of generation capacity, of which PPL Susquehanna has a 90% undivided interest. Through ~~March 31,~~June 30, 2004, a total of approximately ~~$62~~$77 million had been incurred on the Unit 1 upgrade.
~~The~~In May 2004, the 600 MW Lower Mt. Bethel ~~facility~~plant in eastern Pennsylvania was placed in service. Construction of the natural gas-fired power plant began in December 2001. Through June 30, 2004, approximately $456 million had been incurred on the plant construction.
In 2003, PPL Maine entered into an agreement in principle with a coalition of government agencies and private groups to sell three of its nine hydroelectric dams in Maine. The parties reached a final agreement in June 2004 and submitted the plan to the FERC for approval. Under the agreement, a non-profit organization designated by the coalition would have a five-year option to purchase the dams for approximately $25 million, and PPL Maine would receive rights to increase energy output at its other hydroelectric dams in Maine. The coalition has announced plans to remove or bypass the dams subject to the agreement in order to restore runs of Atlantic salmon and other migratory fish to the Penobscot River. The agreement will require several approvals by the FERC.
See Note 6 for a discussion of the June 2004 purchase of the Sundance and University Park generation assets from a consolidated trust.
In June 2004, a subsidiary of PPL Generation agreed to sell the 450 MW Sundance power plant located in Pinal County, Arizona, to the Arizona Public Service Company for approximately $190 million in cash, subject to the receipt of various state and federal regulatory approvals and customary closing conditions. If the necessary regulatory approvals can be obtained, the sale is expected to ~~be in-service~~close in the ~~second~~first quarter of 2005. It is expected that the proceeds of the sale would be used to reduce PPL's outstanding debt. Either party may terminate the agreement if the required state regulatory approvals are not obtained by December 31, 2004. If it becomes likely that the required regulatory approvals will be obtained, PPL will reassess the Sundance assets for possible impairment. PPL cannot predict whether or when the regulatory approvals for this transaction will be obtained, and whether or when this transaction will be consummated.
International Energy Projects(PPL and PPL Energy Supply)
~~Write-down~~Sale of ~~International Energy Projects~~CEMAR
In 2001, PPL Global estimated that the long-term viability of its CEMAR investment was jeopardized and that there was minimal probability of positive future cash flows. At that time, PPL Global recorded an impairment loss in the carrying value of its net assets in CEMAR. In March 2002, PPL Global recorded a further impairment loss. In June 2002, PPL made a decision to exit the investment. At that time, PPL Global's remaining portion of its CEMAR investment ~~which related to foreign currency translation adjustments (CTA),~~ was written-off. ~~Accounting guidance prohibited the inclusion of CTA in impairment calculations prior to designating such assets as held for disposal.~~
On August 21, 2002, ANEEL authorized an administrative intervention in CEMAR and fully assumed operational and financial control of the company. The intervener appointed by ANEEL initiated efforts to transfer the ownership interest in CEMAR to a new owner. Since PPL Global no longer controlled or managed CEMAR, it deconsolidated the assets and liabilities of CEMAR from its financial statements and stopped recording CEMAR's operating results at that time. As of February 11, 2003, due to the inability to discharge their obligations under the continuing intervention, PPL-related officers and directors of CEMAR resigned from their respective positions.
In April 2004, PPL Global transferred its interest in CEMAR to two companies controlled by a private equity fund managed by GP Investimentos, a Brazilian private equity firm. The sale resulted in a credit of approximately ~~$22~~$23 million, ~~which will be~~and is included in "Other Income - net" on the ~~second quarter 2004 results.~~Statement of Income. This credit is a result of the reversal of the negative carrying value ~~created by previous consolidated operating losses for this investment,~~ and the associated CTA. ~~At March 31, 2004, the negative investment in CEMAR of $18 million was included in "Deferred Credits and Other Noncurrent Liabilities - Other."~~
PPL Global no longer controlled or managed CEMAR, and PPL Global had deconsolidated the assets and liabilities of CEMAR from its financial statements after ANEEL assumed control of the company. Consistent with the cost method of accounting, PPL Global had not been recording CEMAR's operating results since such time.
Discontinued Operations
In December 2003, PPL Global's Board of Managers authorized PPL Global to sell its investment in a Latin American telecommunications company, and approved a plan of sale. It was determined that the viability of this non-strategic business was not economical. ~~PPL Global plans to sell the telecommunications company in 2004.~~
As a result, PPL Global recorded aan $18 million write-down in the carrying value of the company's net assets to their estimated fair value of approximately $1 million.
In June 2004, PPL Global sold this investment to local management for a nominal amount. The operating results of the Latin American telecommunications company, ~~a loss of approximately $1 million and~~as well as an insignificant ~~amount for the three months ended March 31,~~write-down of its net assets in 2004, ~~and 2003,~~ are ~~reflected~~recorded as "Loss from Discontinued Operations" on the Statement of ~~Income. The assets and liabilities of the discontinued operation totaled $5~~Income, approximately $2 million and $4$1 million ~~at March 31,~~for the six months ended June 30, 2004 and ~~are included in "Current Assets - Other" and "Current Liabilities - Other" on the Balance Sheet.~~2003.
~~Sale of CGE~~Other Sales
In March 2004, PPL Global completed the sale of its minority interest in shares of CGE for approximately $123 million. The sale resulted in a charge of approximately $15 million pre-tax, which is included in operating expenses, as "Energy related businesses," on the Statement of Income. This charge was due primarily to ~~a currency translation adjustment tied to~~ the devaluation of the Chilean peso since the original acquisition in 2000.
In June 2004, PPL Global completed the sale of its 50% ownership interest in nine small hydroelectric generating facilities in Spain for approximately $8 million. There was an insignificant loss on this transaction.
DelSur Tender Offer
In April 2004, EC ~~a wholly owned subsidiary of PPL Global,~~ launched a tender offer ~~for~~to acquire outstanding shares of DelSur for up to an aggregate purchase price of $17 million. ~~PPL currently owns~~The offer closed in May, with a purchase of 163,927 shares for approximately ~~80.5%~~$5 million, increasing EC's ownership of DelSur by 5.34%. At June 30, 2004, EC owned approximately 85.9% of DelSur. ~~The closing~~
Other(PPL)
In June 2004, a PPL subsidiary evaluated its investment in a technology supplier for impairment. As a result of the ~~offer~~evaluation, the subsidiary recorded an impairment charge of approximately $10 million pre-tax, which is ~~expected to occur~~included in ~~May 2004. EC reserves~~"Other Income - net" on the ~~right to cancel the offer if a minimum~~Statement of ~~12.53% of the outstanding shares are not tendered.~~Income.

Commitments and Contingent Liabilities

Energy Purchases and Sales Commitments

Liability for Above Market NUG Contracts(PPL, PPL Energy Supply and PPL Electric)

In 1998, PPL Electric recorded a loss accrual for above market contracts with NUGs of $854 million, due to its generation business being deregulated. Effective January 1999, PPL Electric began reducing this liability as an offset to "Energy purchases" on the Statement of Income. This reduction is based on the estimated timing of the purchases from the NUGs and projected market prices for this generation. The final existing NUG contract expires in 2014. In connection with the corporate realignment in 2000, the remaining balance of this liability was transferred to PPL EnergyPlus. At ~~March 31,~~June 30, 2004, the remaining liability associated with the above market NUG contracts was ~~$334~~$315 million.

Wholesale Energy Commitments

(PPL and PPL Energy Supply)

As part of the purchase of generation assets from Montana Power, PPL Montana assumed a power purchase agreement and a power sales agreement, ~~(for the Flathead Irrigation Project),~~ which were still in effect at ~~March 31,~~June 30, 2004. In accordance with purchase accounting guidelines, PPL Montana recorded liabilities of ~~$66~~$65 million as the estimated fair value of these agreements at the acquisition date. These liabilities are being reduced over the terms of the agreements, through 2010, as adjustments to "Wholesale energy marketing" revenues and "Energy purchases" on the Statement of Income. The unamortized balance of the liability related to the power purchase agreement at ~~March 31,~~June 30, 2004, was ~~$55~~$54 million and is included in "Deferred Credits and Other Noncurrent Liabilities - Other" on the Balance Sheet. The power sales agreement was re-evaluated under DIG Issue C20, "Scope Exceptions: Interpretation of the Meaning of Not Clearly and Closely Related in Paragraph 10(b) Regarding Contracts With a Price Adjustment Feature," and is now reflected at its fair value as a derivative instrument.

On July 1, 2002, PPL EnergyPlus began to sell to NorthWestern an aggregate of 450 MW of energy to be supplied by PPL Montana. Under two five-year agreements, PPL EnergyPlus is supplying 300 MW of around-the-clock electricity and 150 MW of unit-contingent on-peak electricity. PPL Montana also makes short-term energy sales to NorthWestern. Following NorthWestern's credit downgrades to below investment grade in late-2002, PPL Montana and NorthWestern agreed to modify the payment provisions of the energy contracts such that NorthWestern would pay PPL Montana on a weekly basis, in arrears.

In September 2003, NorthWestern filed a voluntary petition for relief seeking to reorganize under Chapter 11 of the U.S. Bankruptcy Code. NorthWestern made its filing in federal bankruptcy court in Delaware. Between the time of NorthWestern's last weekly payment and the bankruptcy filing date, PPL Montana made approximately $1.6 million of energy sales to NorthWestern.

Following the date that NorthWestern filed for bankruptcy, PPL Montana and NorthWestern agreed to amend the power supply agreements to, among other things, eliminate the weekly payment arrangements and resume more typical monthly invoicing and payment arrangements. The amendments were contingent on NorthWestern's assumption of the power supply agreements in its bankruptcy proceeding.

In September 2003, NorthWestern filed a motion with the bankruptcy court seeking, among other things, to assume the two five-year power supply agreements (as amended) and to pay PPL Montana for the approximately $1.6 million of energy sales made immediately prior to the time of the bankruptcy filing. In October 2003, the bankruptcy court entered an order granting NorthWestern's motion. NorthWestern has, in accordance with the terms of the judge's order, paid PPL Montana for the pre-filing energy sales, and the parties have resumed monthly invoicing and payment arrangements.

In April 2003, the Maryland Public Service Commission authorized the competitive provision of the Standard Offer Service (SOS) to allow utilities to procure SOS for customers through the competitive selection of wholesale supply. In March 2004, PPL EnergyPlus was awarded an 11-month fixed-price SOS contract for customer load (approximately 60 MW) for Potomac Electric Power Company. This contract ~~commences~~commenced in July 2004.

As a result of New Jersey's Electric Discount and Energy Competition Act, ~~its~~the New Jersey Board of Public Utilities authorized and made available to power suppliers, on a competitive basis, the opportunity to provide Basic Generation Service (BGS) to all non-shopping New Jersey customers. In February 2003, PPL EnergyPlus was awarded a 34-month fixed-price BGS contract for a fixed percentage of customer load (approximately 1,000 MW) for Atlantic City Electric Company, Jersey Central Power & Light Company and Public Service Electric & Gas Company. In February 2003, PPL EnergyPlus was also awarded about 500 MW for a 10-month hourly energy price ~~supply.~~supply contract. These contracts commenced in August 2003. Additionally, in February 2004, PPL EnergyPlus was awarded a 12-month hourly energy price supply BGS contract for a fixed percentage of customer load (approximately 450 MW) for Atlantic City Electric Company, Jersey Central Power & Light Company and Public Service Electric & Gas Company. These contracts ~~commence~~commenced in June 2004.

In April 2003, PPL EnergyPlus entered into an agreement with Arizona Public Service Company to provide 112 MW of capacity and associated electricity from July through September of 2003 and 150 MW from June through September of 2004 and 2005. See Note 7 for information regarding the possible sale of the Sundance power plant to Arizona Public Service Company.

In May 2003, PPL EnergyPlus entered into agreements with Tucson Electric Power Company to provide 37 MW of capacity and associated electricity from June through December of 2003 and 75 MW from January 2004 through December 2006.

In May 2003, PPL EnergyPlus entered into a 20-year agreement with Community Energy, Inc. to purchase energy from its Bear Creek wind power project in northeastern Pennsylvania. The project is expected to produce up to 20 MW and be completed in 2005.

In September 2003, Connecticut Light and Power Company (CL&P) issued a request for proposals seeking energy supply for CL&P's Transitional Standard Offer retail customer load. In October 2003, PPL EnergyPlus was awarded a three-year, fixed-price contract beginning in January 2004 to supply 12.5% of CL&P's Transitional Standard Offer load. During peak hours, PPL EnergyPlus' obligation to supply CL&P's Transitional Standard Offer load may reach 625 MW.

Legal Matters

(PPL, PPL Energy Supply and PPL Electric)

PPL and its subsidiaries are involved in numerous legal proceedings, claims and litigation in the ordinary course of business. PPL and its subsidiaries cannot predict the ultimate outcome of such matters, or whether such matters may result in material liabilities.

Montana Power Shareholders' Litigation(PPL and PPL Energy Supply)

In August 2001, a purported class-action lawsuit was filed by a group of shareholders of Montana Power against Montana Power, the directors of Montana Power, certain advisors and consultants of Montana Power and PPL Montana. The plaintiffs allege, among other things, that Montana Power was required to, and did not, obtain shareholder approval of the sale of Montana Power's generation assets to PPL Montana in 1999. Although most of the claims in the complaint are against Montana Power, its board of directors, and its consultants and advisors, two claims are asserted against PPL Montana. In the first claim, plaintiffs seek a declaration that because Montana Power shareholders did not vote on the 1999 sale of generating assets to PPL Montana, that sale "was null and void ab initio." The second claim alleges that PPL Montana was privy to and participated in a strategy whereby Montana Power would sell its generation assets to PPL Montana without first obtaining Montana Power shareholder approval, and that PPL Montana has made net profits in excess of $100 million as the result of this alleged illegal sale. In the second claim, plaintiffs request that the court impose a "resulting and/or constructive trust" on both the generation assets themselves and all profits, plus interest on the amounts subject to the trust. This lawsuit is currently pending in the U.S. District Court of Montana, Butte Division. In July 2004, the plaintiffs notified the District Court that the parties had reached a partial settlement of the case that would result in the dismissal of PPL Montana as a defendant. Under the terms of the proposed settlement, PPL Montana would not have to pay any amount to the plaintiffs. The settlement must still be reduced to writing and approved by the plaintiff class and the District Court. PPL and PPL Energy Supply cannot predict whether the settlement will be approved or the ultimate outcome of this ~~matter.~~matter if the settlement is not approved.

NorthWestern Corporation Litigation(PPL and PPL Energy Supply)

In connection with the acquisition of the Montana generation assets, the Montana Power APA, which was previously assigned to PPL Montana by PPL Global, includes a provision concerning the proposed purchase by PPL Montana of a portion of NorthWestern's interest in the 500-kilovolt Colstrip Transmission System (CTS) for $97 million. During 2002, PPL Montana had been in discussions with NorthWestern regarding the proposed purchase of the CTS and the claims that PPL Montana believes it has against NorthWestern arising from the Montana Power APA and related agreements. Notwithstanding such discussions, in September 2002, NorthWestern filed a lawsuit against PPL Montana in Montana state court seeking specific performance of PPL Montana's purchase of the CTS or, alternatively, damages for breach of contract. Pursuant to PPL Montana's application, the matter was removed to the U.S. District Court of Montana, Butte Division. Following removal, NorthWestern asserted additional claims for damages against PPL Montana, and PPL Montana filed defenses denying liability for NorthWestern's claims as well as counterclaims against NorthWestern seeking damages PPL Montana believes it has suffered under the Montana Power APA and related agreements. ~~This matter currently is scheduled for trial in the Montana federal district court in mid-2005.~~

In September 2003, NorthWestern filed a petition in Delaware for reorganization under the U.S. Bankruptcy Code, which resulted in an automatic stay of PPL Montana's counterclaims against NorthWestern. In December 2003, NorthWestern filed a motion to transfer this litigation from the Montana federal district court to the federal district court in Delaware where NorthWestern's bankruptcy proceeding is pending. In March 2004, the Montana federal district court denied this motion to transfer. As a result of the court's decision and a prior stipulation of NorthWestern and PPL Montana in NorthWestern's bankruptcy proceeding, the automatic stay of PPL Montana's counterclaims has been lifted. This matter currently is scheduled for trial in the Montana federal district court in mid-2005. PPL and PPL Energy Supply cannot predict the outcome of this litigation.

Montana Hydroelectric Litigation(PPL and PPL Energy Supply)

In October 2003, a lawsuit was filed against PPL Montana, PPL Services, Avista Corporation, PacifiCorp and nine John Doe defendants in the U.S. District Court of Montana, Missoula Division, by two residents allegedly acting in a representative capacity on behalf of the State of Montana. In January 2004, the complaint was amended to, among other things, include the Great Falls school districts as additional plaintiffs. In May 2004, the Montana Attorney General filed a motion to allow the State of Montana to intervene as an additional plaintiff in the litigation. The corporate defendants have filed motions to dismiss the State of Montana as a party plaintiff. The action seeks a declaratory judgment, compensatory damages for unjust enrichment, trespass and negligence, and attorneys fees on a "private attorney general" theory for use of state and/or "school trust" lands without the compensation required by law and to require the defendants to adequately compensate the state and/or the State School Trust fund for full market value of lands occupied. Generally, the suit is founded on allegations that the bed of navigable rivers is state-owned property following admission to statehood, and that the use thereof for placement of dam structures, affiliated structures and reservoirs should trigger lease payments for use of land underneath. The plaintiffs allege that the State Land Board and Department of Natural Resources and Conservation failed to exercise their duty to administer riverbeds for the maximum benefit of public education and/or the state. No specific amount of damages or future rental value has been claimed. PPL Montana and PPL Services cannot predict the outcome of this litigation.

Proposed Montana Energy Security Initiative(PPL and PPL Energy Supply)

On April 30, 2004, the Montana Secretary of State certified, in accordance with applicable statutes, that it had approved the form of a proposed "Montana Energy Security Act" initiative. The proposed initiative ~~may~~was determined by the Montana Attorney General to be ~~placed on~~legally sufficient, but the initiative failed to qualify for the November 2004 statewide ballot ~~if the Montana Attorney General determines that the initiative is legally sufficient and if~~because sufficient signatures ~~are~~were not obtained prior to June 18, 2004. Among the stated purposes of the proposed initiative ~~is to create~~was the creation of a Montana public power board, appointed by the governor, to determine whether it iswould be in the public interest to purchase electric and natural gas generation, transmission and distribution facilities in Montana on behalf of the state. The proposed initiative would ~~permit~~have permitted the board to purchase such facilities, including any or all of PPL Montana's hydroelectric dams or coal-fired facilities, at fair market value. However, the proposed initiative does not provide the power of condemnation to acquire generation facilities. At this time, PPL and PPL Energy Supply cannot predict whether the Attorney General will determine that the initiative is legally sufficient, whether the proposed initiative will garner enough signatures for placement on the November 2004 statewide ballot, whether there might be a successful legal challenge to the initiative, whether it would pass if on the ballot or what impact, if any, the measure might ultimately have upon PPL Montana or its generation operations. PPL intends to oppose the initiative, if it qualifies for the November ballot.

Regulatory Issues

California ISO and Western Markets(PPL and PPL Energy Supply)

Through its subsidiaries, PPL has made approximately $18 million of sales to the California ISO, of which $17 million has not been paid to PPL subsidiaries. Given the myriad of electricity supply problems presently faced by the California electric utilities and the California ISO, PPL cannot predict whether or when it will receive payment. As of ~~March 31,~~June 30, 2004, PPL has fully reserved for possible underrecoveries of payments for these sales.

Regulatory proceedings arising out of the California electricity supply situation have been filed at the FERC. The FERC has determined that all sellers of energy into markets operated by the California ISO and the California Power Exchange, including PPL Montana, should be subject to refund liability for the period beginning October 2, 2000, through June 20, 2001, and initiated an evidentiary hearing concerning refund amounts. In April 2003, the FERC changed the manner in which this refund liability is to be computed and ordered further proceedings to determine the exact amounts that the sellers, including PPL Montana, would be required to refund.

In June 2003, the FERC took several actions as a result of a number of related investigations. The FERC terminated proceedings pursuant to which it had been considering whether to order refunds for spot market bilateral sales made in the Pacific Northwest, including sales made by PPL Montana, during the period December 2000 through June 2001. The FERC explained that the totality of the circumstances made refunds unfeasible and inequitable, and that it had provided adequate relief by adopting a price cap throughout the western U.S. The FERC also denied pending complaints against long-term contracts in the western U.S. In these complaints, various power buyers challenged selected long-term contracts that they entered into during 2000 and 2001, complaining that the power prices were too high and reflected manipulation of those energy markets. The FERC found that the complainants had not met their burden of showing that changing or canceling the contracts was "in the public interest" and that the dysfunction in the California markets did not justify changing these long-term contracts. In two separate orders, the FERC also ordered 65 different companies, agencies or municipalities to show cause why they should not be ordered to disgorge profits for "gaming" or anomalous market behavior during 2000 and 2001. These orders to show cause address both unilateral and joint conduct identified as the "Enron trading strategies." Neither PPL EnergyPlus nor PPL Montana was included in these orders to show cause, and they previously have explained in responses to data requests from the FERC that they have not engaged in such trading strategies. Finally, the FERC issued a new investigation order directing its staff to investigate any bids made into the California markets in excess of $250/MWh during the period from May 2000 to October 2000, a period of time prior to the period examined in connection with most of the proceedings described above. To their knowledge, neither PPL EnergyPlus nor PPL Montana is being investigated by the FERC under this new order.

Litigation arising out of the California electricity supply situation has been filed in California courts against sellers of energy to the California ISO. The plaintiffs and interveners in these legal proceedings allege, among other things, abuse of market power, manipulation of market prices, unfair trade practices and violations of state antitrust laws, and seek other relief, including treble damages and attorneys' fees. While PPL's subsidiaries have not been named by the plaintiffs in these legal proceedings, PPL Montana was named by a defendant in its cross-complaint in a consolidated court proceeding, which combined into one master proceeding several of the lawsuits alleging antitrust violations and unfair trade practices. This generator denies that any unlawful, unfair or fraudulent conduct occurred but asserts that, if it is found liable, the other generators and power marketers, including PPL Montana, caused, contributed to and/or participated in the plaintiffs' alleged losses.

In May 2003, the Port of Seattle filed a lawsuit in the U.S. District Court for the Western District of Washington against eighteen defendants, including PPL Montana. The lawsuit asserts claims against all defendants under the federal and state antitrust laws, the federal Racketeer Influenced and Corrupt Organizations Act and for common law fraud. The complaint centers on many of the same alleged activities that are the basis for the litigation arising out of the California electricity supply situation described above. The Port of Seattle is seeking actual, trebled and punitive damages, as well as attorneys' fees. ~~PPL Montana and several other defendants have filed a motion to dismiss this complaint that has not been ruled on by the court.~~ In December 2003, this matter was transferred to the U.S. District Court for the Southern District of California for inclusion with proceedings already centralized and pending in that court. In May 2004, the District Court dismissed the action. In its appeal of this decision, the Port of Seattle expressly excluded PPL Montana, thereby making the District Court's dismissal final as to PPL Montana.

In February 2004, the Montana Public Service Commission initiated a limited investigation of the Montana retail electricity market for the years 2000 and 2001, focusing on how that market was affected by transactions involving the possible manipulation of the electricity grid in the western U.S. The investigation includes all public utilities and licensed electricity suppliers in Montana, as well as other entities that may possess relevant information. Through its subsidiaries, PPL is a licensed electricity supplier in Montana and a wholesale supplier in the western U.S. In June 2004, the Montana Attorney General served PPL Montana and more than 20 other companies with subpoenas requesting documents, and PPL Montana currently is providing responsive documents to the Montana Attorney General. As with the other investigations taking place as a result of the issues arising out of the electricity supply situation in California and other western states, PPL and its subsidiaries believe that they have not engaged in any improper trading or marketing practices affecting the Montana retail electricity market.

While PPL and its subsidiaries believe that they have not engaged in any improper trading practices, they cannot predict whether, or the extent to which, any PPL subsidiaries will be the target of any additional governmental investigations or named in other lawsuits or refund proceedings, the outcome of any such lawsuits or proceedings or whether the ultimate impact on them of the electricity supply situation in California and other western states will be material.

PJM Capacity Transactions(PPL, PPL Energy Supply and PPL Electric)

In September 2002, PPL was served with a complaint filed by Utilimax.com, Inc., which was a member of PJM, in the U.S. District Court for the Eastern District of Pennsylvania against PPL and PPL EnergyPlus alleging, among other things, violations of the federal antitrust laws in connection with the pricing of installed capacity in the PJM daily market during the first quarter of 2001. The court dismissed the complaint with prejudice in July 2003, and Utilimax has appealed the court's dismissal to the U.S. Court of Appeals for the Third Circuit.

In December 2002, PPL was served with a complaint against PPL, PPL EnergyPlus and PPL Electric filed in the U.S. District Court for the Eastern District of Pennsylvania by a group of 14 Pennsylvania boroughs that apparently alleges, in broad terms, similar violations of the federal antitrust laws. These boroughs were wholesale customers of PPL Electric. The claims of the boroughs are similar to those previously alleged by a single borough in litigation that is still pending in the same court. In addition, in November 2003, PPL and PPL EnergyPlus were served with a complaint which was filed in the same court by Joseph Martorano, III (d/b/a ENERCO), that also alleges violations of the federal antitrust laws in early 2001. The complaint indicates that ENERCO provides consulting and energy procurement services to clients in Pennsylvania and New Jersey.

Each of the U.S. Department of Justice - Antitrust Division, the FERC and the Pennsylvania Attorney General conducted investigations regarding PPL's PJM capacity market transactions in early 2001 and did not find any reason to take action against PPL.

Although PPL, PPL ~~EnergyPlus~~Energy Supply and PPL Electric believe the claims in these complaints are without merit, they cannot predict the outcome of these matters.

New England Investigation(PPL and PPL Energy Supply)

In January 2004, PPL became aware of an investigation by the Connecticut Attorney General and the FERC's Office of Market Oversight and Investigation (OMOI) regarding allegations that natural gas-fired generators located in New England illegally sold natural gas instead of generating electricity during the week of January 12, 2004. Subsequently, PPL and other generators were served with a data request by OMOI. The data request indicated that PPL was not under suspicion of a regulatory violation, but that OMOI was conducting an initial investigation. PPL has responded to this data request. PPL also has responded to data requests of ~~the~~ ISO - New England and data requests served by subpoena from the Connecticut Attorney General. Both OMOI and ISO - New England have issued preliminary reports finding no regulatory or other violations concerning these matters. While PPL does not believe that it committed any regulatory or other violations concerning the subject matter of these investigations, PPL cannot predict the outcome of these investigations.

PJM Billing(PPL, PPL Energy Supply and PPL Electric)

In March 2004, an Exelon Corporation subsidiary, PECO Energy, Inc. (PECO), alleged that PJM had overcharged PECO by approximately $45 million, exclusive of interest, from April 1998 through May 2003 as a result of an error by PJM in the State Estimator Program used in connection with billing all PJM customers for certain transmission, spot market energy and ancillary services charges. PECO further alleged that PPL Electric or other PPL subsidiaries should be responsible for all these overcharges, plus interest. PPL, PECO and PJM have ~~begun discussions under~~selected a mediator to conduct a non-binding mediation of the dispute pursuant to the dispute resolution procedures of the PJM Operating Agreement. Although participating in the discussions, PPL Electric and PPL Energy Supply do not believe that they or any PPL subsidiaries have any financial responsibility or liability to PJM or PECO as a result of PJM's alleged error. PJM has not taken a position on this matter. PPL Electric and PPL Energy Supply cannot predict the outcome of these discussions, whether any legal proceedings may result from these allegations, the outcome of such proceedings, or the ultimate impact on any PPL subsidiary.

FERC Market-Based Rate Authority(PPL and PPL Energy Supply)

In December 1998, the FERC issued an order authorizing PPL EnergyPlus to make wholesale sales of electric power and related products at market-based rates. In that order, the FERC directed PPL EnergyPlus to file an updated market analysis within three years of the date of the order, and every three years thereafter. PPL EnergyPlus filed its initial updated market analysis in December 2001. Several parties thereafter filed interventions and protests requesting that PPL EnergyPlus be required to provide additional information demonstrating that it has met the FERC's market power tests necessary for PPL EnergyPlus to continue its market-based rate authority. PPL EnergyPlus has responded that the FERC does not require the economic test suggested by the interveners and that, in any event, it would meet such economic test if required by the FERC.

In June 2004, FERC approved certain changes to its standards for granting market-based rate authority. As a result, PPL EnergyPlus will need to re-file for market-based rate authority under the new standards in November 2004. PPL EnergyPlus cannot predict the outcome of this ~~matter.~~filing.

FERC Proposed Rules(PPL, PPL Energy Supply and PPL Electric)

In July 2002, the FERC issued a Notice of Proposed Rulemaking entitled "Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design." The proposed rule is currently available for public comment and contains a proposed implementation date of July 31, 2003. However, since the issuance of the proposed rule, the FERC has delayed the implementation date. This far-reaching proposed rule, in its current form, purports to establish uniform transmission rules and a standard market design by, among other things:

•	enacting standard transmission tariffs and uniform market mechanisms,
•	monitoring and mitigating "market power,"
•	managing transmission congestion through pricing and tradable financial rights,
•	requiring independent operational control over transmission facilities,
•	forming state advisory committees on regional transmission organizations and resource adequacy, and
•	exercising FERC jurisdiction over all transmission service.

In April 2003, the FERC issued a white paper describing certain modifications to the proposed rule. The FERC has requested comments and is holding numerous public comment sessions concerning the white paper.

If adopted, this proposed rule may have a significant impact on PPL and its subsidiaries, which cannot be predicted at this time.

In November 2003, the FERC adopted a proposed rule to require all existing and new electric market-based tariffs and authorizations to include provisions prohibiting the seller from engaging in anticompetitive behavior or the exercise of market power. The FERC order adopts a list of market behavior rules that apply to all electric market-based rate tariffs and authorizations, including those of PPL EnergyPlus and any other PPL subsidiaries that hold market-based rate authority. PPL does not expect this rule to have a significant impact on its subsidiaries.

Wallingford Deactivation (PPL and PPL Energy Supply)

In January 2003, PPL negotiated an agreement with the ISO - New England that would declare that four of the five units at PPL's Wallingford, Connecticut facility are "reliability must run" units and put those units under cost-based rates. This agreement and the cost-based rates are subject to the FERC's approval, and PPL filed a request with the FERC for such approval. PPL requested authority for cost-based rates because the current and anticipated wholesale prices in New England are insufficient to cover the costs of keeping these units available for operation. In March 2003, PPL filed an application with the New England Power Pool to temporarily deactivate these four units. In May 2003, the FERC denied PPL's request for cost-based rates in light of the FERC's changes to the market and bid mitigation rules of ~~the~~ ISO - New England made in a similar case involving generating units owned by NRG Energy, Inc. PPL subsequently has explained to the FERC that its changes to the market and bid mitigation rules of ISO - New England will not provide sufficient revenues to PPL, and PPL continues to seek approval of its cost-based rates. However, PPL has informed the New England Power Pool that it will not pursue its request to temporarily deactivate certain Wallingford units. In February 2004, PPL appealed the FERC's denial of its request for cost-based rates to the U.S. Court of Appeals for the ~~D.C.~~District of Columbia Circuit. PPL cannot predict the outcome of this matter.

IRS Synthetic Fuels Tax Credits(PPL and PPL Energy Supply)

PPL, through its subsidiaries, has interests in two synthetic fuel production facilities: the Somerset facility located in Pennsylvania and the Tyrone facility ~~to be relocated to~~located in Kentucky. PPL receives tax credits pursuant to Section 29 of the Internal Revenue Code based on the sale of ~~synfuel~~synthetic fuel from these facilities to unaffiliatedthird-party purchasers. Section 29 of the Internal Revenue Code provides tax credits for the production and sale of solid synthetic fuels produced from coal. To qualify for the Section 29 tax credits, the synthetic fuel must meet three primary conditions: (i) there must be a significant chemical change in the coal feedstock, (ii) the product must be sold to an unaffiliated entity, and (iii) the production facility must have been placed in service before July 1, 1998. Section 29 tax credits are currently scheduled to expire at the end of 2007.

A PPL subsidiary owns and operates the Somerset facility. In November 2001, PPL received a private letter ruling from the IRS pursuant to which, among other things, the IRS concluded that the synthetic fuel produced at the Somerset facility qualifies for Section 29 tax credits. The Somerset facility uses the Covol technology to produce ~~synfuel,~~synthetic fuel, and the IRS issued the private letter ruling after its review and approval of that technology. In reliance on this private letter ruling, PPL has sold ~~synfuel~~synthetic fuel produced at the Somerset facility resulting in an aggregate of approximately ~~$161~~$175 million of tax credits as of ~~March 31,~~June 30, 2004.

PPL owns a limited partnership interest in the entity that owns and ~~plans to operate~~operates the Tyrone facility. In April 2004, this entity received a private letter ruling from the IRS. Similar to its conclusions relating to the Somerset facility, the IRS concluded that the ~~synfuel~~synthetic fuel to be produced at the Tyrone facility qualifies for Section 29 tax credits. The Tyrone facility ~~currently is being relocated from Pennsylvania to a site in Kentucky. PPL anticipates that the Tyrone facility will commence~~commenced commercial operations in ~~mid-2004.~~ the third quarter of 2004 after being relocated to Kentucky from Pennsylvania.

PPL also purchases ~~synfuel~~synthetic fuel from unaffiliated third parties, at prices below the market price of coal, for use at its coal-fired power plants.

In June 2003, the IRS announced that it had reason to question the scientific validity of certain test procedures and results that have been presented to it by taxpayers with interests in ~~synfuel~~synthetic fuel operations as evidence that the required significant chemical change has occurred, and that it was reviewing information regarding these test procedures and practices. In conjunction with such review, the IRS suspended the issuance of private letter rulings concerning whether a significant chemical change has occurred for requests relying on the procedures and results being reviewed. In addition, the IRS indicated that it might revoke existing private letter rulings that relied on the procedures and results under review if it determined that those test procedures and results do not demonstrate that a significant chemical change has occurred.

In October 2003, the IRS announced that it had completed its review ~~of the scientific validity of test procedures and results presented by taxpayers as evidence of significant chemical change~~ and determined that the test procedures and results used by taxpayers are scientifically valid, if the procedures are applied in a consistent and unbiased manner. Further, the IRS announced that it will continue to issue rulings on significant chemical change under applicable IRS guidelines, despite some question by the IRS as to whether those processes result in the level of significant chemical change required by Section 29 of the Internal Revenue Code and IRS revenue rulings. Finally, theThe IRS indicated that it would require taxpayers to comply with certain sampling and data/record retention practices to obtain or maintain a ruling on significant chemical change.

PPL believes that the October IRS announcement and its receipt of the private letter ruling for the Tyrone facility following this announcement confirms that PPL is justified in its reliance on the private letter rulings for the Somerset and Tyrone facilities and that the test results that PPL presented to the IRS in connection with its private letter rulings are scientifically valid. In addition, PPL believes that it has operated the Somerset facility in compliance with the private letter ruling and Section 29 of the Internal Revenue Code.

In October 2003, following the IRS announcement, it was reported that the U.S. Senate Permanent Subcommittee on Investigations, of the Committee on Governmental Affairs, had begun an investigation of the synthetic fuel industry and its producers. That investigation is ongoing. PPL cannot predict when the investigation will be completed or the potential results of the investigation.

Certain other owners or operators of synthetic fuel facilities have recently reported that the IRS has questioned whether their facilities were placed in service before July 1, 1998. Whether or not a facility meets the "in service" requirement is based on the particular facts and circumstances relating to the operation of that facility. PPL is not aware of the facts and circumstances relating to the operation of the facilities being questioned by the IRS or the specific IRS position in these other matters. However, PPL believes that the Tyrone and Somerset facilities meet the in service requirement.

U.K. Electricity Regulation (PPL and PPL Energy Supply)

The principal legislation governing the structure of the electricity industry in Great Britain is the Electricity Act 1989 (the "Electricity Act"), as amended by the Utilities Act 2000 (the "Utilities Act").

The provisions in the Utilities Act include the replacement of individual gas and electricity regulators with the Gas and Electricity Markets Authority (the "Regulator"). The principal objective of the Regulator is to protect the interests of consumers, wherever appropriate, by promoting effective competition in electricity generation and supply. There currently is no competition in electricity distribution, but recently a small operator has applied to the Regulator for a license to operate in Great Britain.

Each distribution business constitutes a natural regional monopoly and is subject to control on the prices it can charge and the quality of supply it must provide. The operations of WPD are regulated under its distribution licenses, pursuant to which income generated is subject to an allowed revenue regulatory framework that provides economic incentives to minimize operating, capital and financing costs. Under the Electricity Act, WPD is under a statutory duty to offer terms to connect any customer requiring electricity within their area and to maintain that connection. The allowed revenue that is recovered from electricity supply businesses through charges by the Distribution Network Operator (DNO) made for the use of the distribution network is regulated on the basis of the Retail Price Index (RPI) minus X formula. The allowed revenue is increased by RPI minus X during the tenure of each price control period. (RPI is a measure of inflation and equals the percentage change in the U.K. RPI between the six-month period of July to December in the previous year. The X factor is established by the Regulator following review and represents an annual efficiency factor.) The Regulator currently sets the Distribution Price Control Formula for five-year periods.

The current Distribution Price Control Formula permits DNOs, within a review period, to partially retain additional revenues due to increased distribution of units and to retain all increases in operating profit due to efficient operations and the reduction of expenses (including financing costs). The Regulator may reduce this increase in operating profit through a one-off price reduction in the first year of the new pricing regime, if the Regulator determines that it is not a function of efficiency savings, or if genuine efficiency savings have been made and the Regulator determines that customers should benefit through lower prices.

In December 1999, the Regulator published final price proposals for distribution price control for the 12 DNOs in England and Wales. These proposals represented a reduction to distribution prices of 20% for WPD (South West) and 26% for WPD (South Wales) effective April 2000, followed by a reduction in real terms (i.e., before inflation is taken into account) of 3% each year from April 2001. This price control is scheduled to operate until March 2005.

Improvements in quality of supply form an important part of the final proposals. Revised targets for system performance, in terms of the security and availability of supply, were implemented with new targets for reductions in minutes lost and interruptions.

The Regulator ~~has~~previously introduced a quality of service incentive plan for the period from April 2002 to March 2005. Companies ~~will~~may be penalized annually up to 2% of revenue for failing to meet their quality of supply targets for the incentive plan. The plan includes a mechanism for rewarding companies which exceed their targets based on their rate of improvement of performance during the period and a process for rewarding exceptional performance by specifying how the targets will be reset.

Distribution businesses must also meet the Guaranteed and Overall Standards of Performance, which are set by the Regulator to ensure an appropriate level of quality of supply. If a company fails to provide the level of service specified, it must make a fixed payment to the retail customer affected.

In ~~June 2003,~~July 2004, the Regulator published a report on the quality of supply from April ~~2001~~2002 through March ~~2002.~~2003. The report confirms that WPD (South West) and WPD (South Wales) met or exceeded ~~such standards~~quality of service targets set by the Regulator.

In June 2004, the Regulator published its initial distribution price control proposal for the next five-year price control period, which will commence April 1, 2005. This initial proposal is the latest step in the Regulator's ongoing price review of WPD and ~~that no payments were required~~the other DNOs in England and Wales. The Regulator's review is expected to be ~~made by either company.~~

~~Any significant lowering~~completed in November 2004. The initial proposal acknowledged WPD's leading quality-of-service performance and provided an additional 1% in revenues because of ~~rates implemented by~~WPD's reliability performance. PPL cannot predict the ~~Regulator after~~final outcome of the ~~current price control ends in March 2005 could lower~~Regulator's review or how the ~~amount of revenue WPD generates in relation to its operational cost and could materially lower the income of WPD.~~Regulator's final decision will impact WPD's revenues.

Environmental Matters - Domestic

(PPL, PPL Energy Supply and PPL Electric)

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

Air (PPL and PPL Energy Supply)

The Clean Air Act deals, in part, with acid rain, attainment of federal ambient ozone standards and toxic air emissions in the U.S. PPL's subsidiaries are in substantial compliance with the Clean Air Act. The Bush administration and certain members of Congress have made proposals regarding possible amendments to the Clean Air Act. These amendments could require significant further reductions in nitrogen oxide, sulfur dioxide and mercury and could possibly require measures to limit carbon dioxide. The cost of these reductions could be substantial. The federal government is seeking commitments from many major industries to voluntarily reduce carbon dioxide emissions. In addition, several states have taken their own actions requiring mandatory carbon dioxide emission reductions. Pennsylvania and Montana have not, at this time, established any formal programs to address carbon dioxide and other greenhouse gases.

The Pennsylvania DEP began requiring further seasonal (May-June) nitrogen oxide reductions to 80% from 1990 levels starting in 2003. This requirement is pursuant to the EPA's 1998 State Implementation Plan (SIP) call to 22 eastern states, including Pennsylvania, to revise their state implementation plans. PPL achieved the 2003 nitrogen oxide reductions with the installation of SCR technology on the Montour units, and may install SCR or other additional nitrogen oxide reduction technology on one or more Brunner Island units at a later date.

The EPA has also developed new standards for ambient levels of ozone and fine particulates in the U.S. These standards have been upheld following court challenges. To facilitate attainment of these standards, the EPA has also proposed a rule ~~(called~~(now called the Clean Air Interstate ~~Air Quality Rule)~~Rule - CAIR) for 28 ~~midwest~~midwestern and eastern states, including Pennsylvania, to reduce sulfur dioxide emissions by 40% and nitrogen oxide emissions by 55% from ~~today's~~current required levels, starting in 2010. Starting in 2015, the proposed rule requires reductions in sulfur dioxide and nitrogen oxide of 70% and 65%, respectively, from ~~today's~~current required levels. The proposed rule allows these reductions to be achieved through ~~cap and trade~~cap-and-trade programs, and is consistent with the Bush administration's proposed amendments to the Clean Air Act, except that it applies to only the 28 states. In order to meet requirements of the CAIR, PPL has been evaluating the installation of sulfur dioxide scrubbers at one or more of its Pennsylvania plants, as well as the installation of SCR technology at Brunner Island.

The EPA has proposed mercury and nickel regulations and is expected to finalize these regulations in 2004. The proposed mercury regulations affect coal-fired plants. With respect to mercury, the EPA has proposed two alternative approaches: an emission trading program to take effect beginning January 2010 or a requirement to take effect in 2007 that every unit install maximum achievable control technology (MACT). The proposed nickel regulations impose MACT requirements on oil-fired units to take effect in 2007. The nickel regulations would affect Martins Creek Units 3 and 4. The cost of complying with these regulations is not now determinable, but could be significant.

In 1999, the EPA initiated enforcement actions against several utilities, asserting that older, coal-fired power plants operated by those utilities have, over the years, been modified in ways that subject them to more stringent "New Source" requirements under the Clean Air Act. The EPA has since issued notices of violation and commenced enforcement activities against other utilities. The future direction of the EPA's enforcement initiative is presently unclear. Therefore, at this time, PPL is unable to predict whether such EPA enforcement actions will be brought with respect to any of its affiliates' plants. However, the EPA regional offices that regulate plants in Pennsylvania (Region III) and Montana (Region VIII) have indicated an intention to issue information requests to all utilities in their jurisdiction. The Region VIII office issued such a request to PPL Montana's Corette plant in 2000 and the Colstrip plant in 2003. The Region III office issued such a request to PPL Generation's Martins Creek plant in 2002. PPL and its subsidiaries have responded to the Corette and Martins Creek information requests and ~~are in the process of~~began responding to the Colstrip information request. The EPA has stayed further production of Colstrip documents pending discussion among the Colstrip owners and the EPA. The EPA has taken no further action following the Martins Creek and Corette submittals. PPL cannot presently predict what, if any, action the EPA might take in this regard. Should the EPA or any state initiate one or more enforcement actions against PPL or its subsidiaries, compliance with any such enforcement actions could result in additional capital and operating expenses ~~in amounts~~ which are not now determinable, but which could be significant.

In 2003, the EPA issued changes to its "New Source" regulations that clarify what projects are exempt from "New Source" requirements as routine maintenance and repair. Under these clarifications, any project to replace existing equipment with functionally equivalent equipment would be considered routine maintenance and excluded from "New Source" review if the cost of the replaced equipment does not exceed 20% of the replacement cost of the entire process unit, the basic design is not changed and no permit limit is exceeded. These clarifications would substantially reduce the uncertainties under the prior "New Source" regulations; however, they have been stayed by the U.S. Court of Appeals for the District of Columbia Circuit. PPL is therefore continuing to operate under the "New Source" regulations as they existed prior to the EPA's clarifications.

The New Jersey DEP and some New Jersey residents raised environmental concerns with respect to the Martins Creek plant, particularly with respect to sulfur dioxide emissions and the opacity of the plant's plume. These issues were raised in the context of an appeal by the New Jersey DEP of the Air Quality Plan Approval issued by the Pennsylvania DEP to the adjacent Lower Mt. Bethel facility. In October 2003, PPL finalized an agreement with the New Jersey DEP and the Pennsylvania DEP pursuant to which it will reduce sulfur dioxide emissions from its Martins Creek power plant. Under the agreement, PPL Martins Creek will shut down the plant's two coal-fired generating units by September 2007 and may repower them any time after shutting them down so long as it follows all applicable state and federal requirements, including installing the best available pollution control technology. Pursuant to the agreement, PPL Martins Creek ~~also will reduce~~began reducing the fuel sulfur content for ~~those~~the coal units as well as the plant's two oil-fired units ~~beginning~~ in June 2004. In addition, PPL will donate to a non-profit organization 70% of the excess emission allowances and emission reduction credits that result from shutting down or repowering the coal units. As a result of the agreement, the New Jersey DEP withdrew its challenge to the Air Quality Plan Approval for the Lower Mt. Bethel facility. The agreement will not result in material costs to PPL. The agreement does not address the issues raised by the New Jersey DEP regarding the visible opacity of emissions from the Martins Creek plant. If it is determined that actions must be taken to address the visible opacity of these emissions, such actions could result in costs that are not now determinable, but which could be significant.

In addition to the opacity concerns raised by the New Jersey DEP, the Pennsylvania DEP also has raised concerns about the opacity of emissions from the Martins Creek and Montour plants. PPL is discussing these concerns with the Pennsylvania DEP. If it is determined that actions must be taken to address the Pennsylvania DEP's concerns, such actions could result in costs that are not now determinable, but which could be significant.

In December 2003, PPL Montana, as operator of the Colstrip facility, received an Administrative Compliance Order (ACO) from the EPA pursuant to the Clean Air Act. The ACO alleges that Units 3 and 4 of the facility have been in violation of the Clean Air Act permit at Colstrip since 1980. The permit required Colstrip to submit for review and approval by the EPA an analysis and proposal for reducing emissions of nitrogen oxide to address visibility concerns if and when the EPA promulgates Best Available Retrofit Technology requirements for nitrogen oxide. The EPA is asserting that regulations it promulgated in 1980 triggered this requirement. PPL believes that the ACO is unfounded and is discussing the matter with the EPA. The ACO does not expressly seek penalties, and it is unclear at this time what, if any, additional control technology the EPA may consider to be required. Accordingly, the costs to install any additional controls for nitrogen oxide, if required, are not now determinable, but could be significant. In addition, the Montana Department of Environmental Quality (DEQ) is questioning whether the permit limits for sulfur dioxide emissions from Colstrip Units 3 and 4 are too high under provisions of the Clean Air Act that limit allowable emissions from sources built after 1978. PPL is engaged in settlement negotiations on these matters with the EPA, the Montana DEQ and the Northern Cheyenne Tribe. PPL cannot predict the outcome of this matter.

Water/Waste (PPL and PPL Energy Supply)

Brunner Island's NPDES permit contains a provision requiring further studies on the thermal impact of the cooling water discharge from the plant. These studies are underway and are expected to be completed in 2006. The Pennsylvania DEP has stated that it believes the studies to date show that the temperature of the discharge must be lowered. The Pennsylvania DEP has also stated that it believes the plant is in violation of a permit condition prohibiting the discharge from changing the river temperature by more than two degrees per hour. PPL is discussing these matters with the agency. Depending on the outcome of these discussions, the plant could be subject to additional capital and operating costs that are not now determinable, but which could be significant.

The Pennsylvania DEP has issued a water quality certification and NPDES permit to PPL Holtwood, LLC in the FERC license renewal proceeding for its Lake Wallenpaupack hydroelectric facility. PPL has appealed both the certification and the NPDES permit. The parties are ~~discussing settlement. If these discussions are unsuccessful, then depending on the outcome~~close to a settlement of ~~these appeals, each of the certification and the NPDES permit could~~this appeal that, if finalized, would not impose significant additional costs on ~~PPL, which are not now determinable, but which could be significant.~~PPL.

The EPA has significantly tightened the water quality standard for arsenic. The revised standard becomes effective in 2006. The revised standard may result in action by individual states that could require several PPL subsidiaries to either further treat wastewater or take abatement action at their power plants, or both. The cost of complying with ~~the revised standard~~any such requirements is not now determinable, but could be significant.

The EPA recently finalized requirements for new or modified water intake structures. These requirements affect where generating facilities are built, establish intake design standards, and could lead to requirements for cooling towers at new and modified power plants. Another new rule ~~expected to be~~that was finalized in July 2004 addresses existing structures. ~~Based on PPL's preliminary analyses,~~ PPL does not believe that either of these rules will impose material costs on PPL subsidiaries. However, six northeastern states recently challenged the new rules for existing structures as being inadequate. If this challenge is successful, it could result in the EPA establishing stricter standards for existing structures that could impose material costs on PPL subsidiaries.

Superfund and Other Remediation

(PPL and PPL Energy Supply)

Under the Pennsylvania Clean Streams Law, subsidiaries of PPL Generation are obligated to remediate acid mine drainage at former mine sites and may be required to take additional measures to prevent potential acid mine drainage at previously capped refuse piles. One PPL Generation subsidiary is pumping and treating mine water at two mine sites. Another PPL Generation subsidiary ~~plans to install~~is installing passive wetlands treatment at a third site, and the Pennsylvania DEP has suggested that it may require that PPL Generation subsidiary to pump and treat the mine water at that third site. At ~~March 31,~~June 30, 2004, a PPL Energy Supply subsidiary had accrued $29 million to cover the costs of pumping and treating groundwater at the two mine sites for 50 years and for installing passive wetlands treatment at the third site.

(PPL, PPL Energy Supply and PPL Electric)

In 1995, PPL Electric and PPL Generation entered into a consent order with the Pennsylvania DEP to address a number of sites that were not being addressed under another regulatory program such as Superfund, but for which PPL Electric or PPL Generation may be liable for remediation. This may include potential PCB contamination at certain PPL Electric substations and pole sites; potential contamination at a number of coal gas manufacturing facilities formerly owned or operated by PPL Electric; oil or other contamination which may exist at some of PPL Electric's former generating facilities; and potential contamination at abandoned power plant sites owned by PPL Generation. As of ~~March 31,~~June 30, 2004, work has been completed for ~~96%~~97% of the sites included in the consent order. Additional sites formerly owned or operated by PPL Electric are added to the consent order on a case-by-case basis.

In 1996, PPL Gas Utilities entered into a similar consent order with the Pennsylvania DEP to address a number of sites where subsidiaries of PPL Gas Utilities may be liable for remediation. The sites primarily include former coal gas manufacturing facilities. Subsidiaries of PPL Gas Utilities are also investigating the potential for any mercury contamination from gas meters and regulators. Accordingly, PPL Gas Utilities and the Pennsylvania DEP have agreed to add 72 meter/regulation sites to the consent order. As of ~~March 31,~~June 30, 2004, PPL Gas Utilities had addressed 34% of the sites under its consent order.

At ~~March 31,~~June 30, 2004, PPL Electric and PPL Gas Utilities had accrued approximately $3 million and $8 million, representing the estimated amounts ~~they~~each will have to spend for site remediation, including those sites covered by each company's consent orders mentioned above. Depending on the outcome of investigations at sites where investigations have not begun or have not been completed, the costs of remediation and other liabilities could be substantial. PPL also could face other non-remediation liabilities at sites included in the consent order or other contaminated sites, the costs of which are not now determinable, but which could be significant.

(PPL and PPL Energy Supply)

In conjunction with its 1999 acquisition of generating assets from Montana Power, PPL Montana required Montana Power to prepare a Phase I and Phase II Environmental Site Assessment. The assessment identified various ~~groundwater remediation issues.~~seepages from the freshwater pond and wastewater ponds at the Colstrip plant. Based upon that assessment and subsequent assessments ~~and actions taken~~ by PPL Montana, ~~the costs to PPL Montana of the~~certain groundwater remediation measures ~~identified in those assessments are expected to be approximately $3 million.~~have been implemented. However, additional ~~expenditures~~investigations are ongoing and additional remediation measures could be required ~~in amounts~~at costs which are not now determinable, but which could be significant.

In May 2003, approximately 4050 plaintiffs brought an action in the Montana Second Judicial District Court, Butte-Silver Bow County, against PPL Montana and the other owners of the Colstrip plant alleging property damage from ~~freshwater pond~~the seepage ~~and contamination from wastewater ponds at the plant.~~noted above. This action has been moved to the Montana Sixteenth Judicial District Court, Rosebud County. This action could result in PPL Montana and the other Colstrip owners being liable for damages and being required to take additional remedial ~~measures.~~measures beyond those noted above. The cost to PPL Montana of any such damages and remedial measures is not now determinable, but could be significant.

In 1999, the Montana Supreme Court held in favor of several citizens' groups that the right to a clean and healthful environment is a fundamental right guaranteed by the Montana Constitution. The court's ruling could result in significantly more stringent environmental laws and regulations, as well as an increase in citizens' suits under Montana's environmental laws. The effect on PPL Montana of any such changes in laws or regulations or any such increase in legal actions is not currently determinable, but it could be significant.

Future cleanup or remediation work at sites currently under review, or at sites not currently identified, may result in material additional operating costs for PPL subsidiaries that cannot be estimated at this time.

Asbestos(PPL and PPL Energy Supply)

There have been increasing litigation claims throughout the U.S. based on exposure to asbestos against companies that manufacture or distribute asbestos products or that have these products on their premises. Certain of PPL's generation subsidiaries and certain of its energy services subsidiaries, such as those that have supplied, may have supplied or installed asbestos material in connection with the repair or installation of process piping and heating, ventilating and air conditioning systems, have been named as defendants in asbestos-related lawsuits. PPL cannot predict the outcome of these lawsuits or whether additional claims may be asserted against its subsidiaries in the future. PPL does not expect that the ultimate resolution of the current lawsuits will have a material adverse effect on its results of operations.

Electric and Magnetic Fields(PPL, PPL Energy Supply and PPL Electric)

Concerns have been expressed by some members of the public 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. Government officials in the U.S. and the U.K. have focused attention on this issue. PPL and its subsidiaries support the current efforts to determine whether EMFs cause any human health problems and are taking steps to reduce EMFs, where practical, in the design of new transmission and distribution facilities. PPL is unable to predict what effect, if any, the EMF issue might have on its operations and facilities either in the U.S. or abroad, and the associated cost, or what, if any, liabilities it might incur related to the EMF issue.

Lower Mt. Bethel(PPL and PPL Energy Supply)

In August 2002, the Northampton County Court of Common Pleas issued a decision concerning the permissible noise levels from the Lower Mt. Bethel facility when it becomes operational. Specifically, the court's decision sets certain permissible noise levels required for plant operation. PPL appealed the court's decision to the Commonwealth Court, and an intervener in the lawsuit cross-appealed the court's decision. In May 2003, the Commonwealth Court remanded the case to the Court of Common Pleas for further findings of fact concerning the zoning application relating to the construction of the facility. In September 2003, the Court of Common Pleas ruled in PPL's favor while also reaffirming its decision on the noise levels, and the intervener appealed this ruling to the Commonwealth Court. In April 2004, the Commonwealth Court affirmed the decision of the Court of Common Pleas. The intervener has pending before the Supreme Court of Pennsylvania a Petition for Allowance of Appeal. The Lower Mt. Bethel facility ~~is expected to be operational~~was placed in ~~the second quarter of~~service in May 2004.

Environmental Matters - International(PPL and PPL Energy Supply)

U.K.

WPD's distribution businesses are subject to numerous regulatory and statutory requirements with respect to environmental matters. PPL believes that WPD has taken and continues to take measures to comply with the applicable laws and governmental regulations for the protection of the environment. There are no material legal or administrative proceedings pending against WPD with respect to environmental matters. See "Environmental Matters - Domestic - Electric and Magnetic Fields" for a discussion of EMFs.

Latin America

Certain of PPL's affiliates have electric distribution operations in Latin America. PPL believes that these affiliates have taken and continue to take measures to comply with the applicable laws and governmental regulations for the protection of the environment. There are no material legal or administrative proceedings pending against PPL's affiliates in Latin America with respect to environmental matters.

Other

Nuclear Insurance(PPL and PPL Energy Supply)

PPL Susquehanna is a member of certain insurance programs which provide coverage for property damage to members' nuclear generating stations. Facilities at the Susquehanna station are insured against property damage losses up to $2.75 billion under these programs. PPL Susquehanna is also a member of an insurance program which provides insurance coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specified conditions. Under the property and replacement power insurance programs, PPL Susquehanna could be assessed retroactive premiums in the event of the insurers' adverse loss experience. At ~~March 31,~~June 30, 2004, this maximum assessment was about $40 million.

PPL Susquehanna's public liability for claims resulting from a nuclear incident at the Susquehanna station is limited to about $10.8 billion under provisions of The Price Anderson Amendments Act of 1988. PPL Susquehanna is protected against this liability by a combination of commercial insurance and an industry assessment program. In the event of a nuclear incident at any of the reactors covered by The Price Anderson Amendments Act of 1988, PPL Susquehanna could be assessed up to $201 million per incident, payable at $20 million per year.

Guarantees and Other Assurances

(PPL)

PPL fully and unconditionally guarantees all of the debt securities of PPL Capital Funding, a wholly-owned financing subsidiary of PPL.

(PPL, PPL Energy Supply and PPL Electric)

The table below provides an update to those guarantees specifically disclosed in Note 14 to the Financial Statements contained in each Registrant's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003. Not reflected in the table below is the guarantee by PPL of all of the obligations of PPL Capital Funding Trust I under its trust preferred securities that were a component of the PEPS Units. PPL was released from this guarantee upon cancellation of the trust preferred securities as discussed in Note 6.

	PPL																			Recorded Liability at					Exposure at

	PPL Energy Supply										PPL Electric											June 30, 2004	December 31, 2003		June 30, 2004 (a)			Expiration Date

PPL
	Recorded Liability at				Exposure at						Recorded Liability at				Exposure at
Residual value guarantees of leased equipment																									$	3			2005	(b)

	March 31, 2004		December 31, 2003		March 31, 2004		(a)	Expiration Date			March 31, 2004		December 31, 2003		March 31, 2004		(a)	Expiration Date
PPL Energy Supply (c)

WPD LLP guarantee of obligations under SIUK Capital Trust I preferred securities						$ 82	(b)		2027																	82	(d)		2027

Letters of credit issued on behalf of affiliates						8	(c)		2004																	8	(e)		2005

Support agreements to guarantee partnerships' obligations for the sale of coal						9			2007																	9			2007

Potential retroactive premiums under nuclear insurance programs						40																				40
																				Recorded Liability at					Exposure at
Nuclear claims under the Price Anderson Amendments Act of 1988						201	(d)

																						June 30, 2004	December 31, 2003		June 30, 2004 (a)			Expiration Date


Nuclear claims under The Price Anderson Amendments Act of 1988																										201	(f)

Obligation to purchase commodities under option contracts						6			2004																	2			2004

Contingent purchase price payments to former owners of synfuel projects		$ 4		$ 4		60			2007												$ 4			$ 4		59			2007

Residual value guarantees of leased equipment																										4			2005	(b)

WPD guarantee related to a contract assigned as part of a sale of one of its businesses																										19			2005

Guarantee of an unconsolidated entity's lease obligations (g)																										2			2008

PPL Electric(c)

Guarantee of a portion of an unconsolidated entity's debt																$ 7	(b)		2008							7	(d)		2008

Residual value guarantees of leased equipment						4			2005	(e)		$ 14		$ 16		89			2005 (e)		11			16		85			2005	(b)

WPD guarantee related to a contract assigned as part of a sale of one of its businesses						35			2005

(a)		Represents the estimated maximum potential amount of future payments that could be required to be made under the guarantee.
(b)		Although the expiration date noted is 2005, equipment of similar value is generally leased and guaranteed on an on-going basis.
(c)		Other than the exceptions noted in (e) below, all guarantees of PPL Energy Supply and PPL Electric also apply to PPL on a consolidated basis.
(d)		Reflects principal payments only.
~~(c)~~(e)		Represents letters of credit issued at the direction of PPL Energy Supply for the benefit of third parties for assurance against nonperformance by PPL and PPL Gas Utilities. This is not a guarantee by PPL on a consolidated basis.
~~(d)~~(f)		Amount is per incident.
~~(e)~~(g)		~~Although~~This guarantee was entered into in 2004. The maximum amount of potential payments is not explicitly stated in the ~~expiration date noted is 2005, equipment of similar value is generally leased and guaranteed on an on-going basis.~~related agreements.

Related Party Transactions

Affiliate Trust(PPL)

See Note 6 for a discussion of various transactions involving PPL Capital Funding subordinated notes that were held by PPL Capital Funding Trust I.

PLR Contracts(PPL Energy Supply and PPL Electric)

PPL Electric has power sales agreements with PPL EnergyPlus, effective January 1, 2002, to supply all of PPL Electric's PLR load through 2009. Under these contracts, PPL EnergyPlus ~~will provide~~provides electricity at the pre-determined capped prices that PPL Electric is authorized to charge its PLR customers. For the three months ended ~~March 31,~~June 30, 2004 and 2003, these purchases totaled ~~$410~~$346 million and ~~$387~~$327 million. For the six months ended June 30, 2004 and 2003, these purchases totaled $756 million ~~including~~and $714 million. These purchases include nuclear decommissioning recovery and amortization of an up-front contract ~~payment. These purchases~~payment, and are included in the Statement of Income as "Energy purchases from affiliate" by PPL Electric, and as "Wholesale energy marketing to affiliates" revenues by PPL Energy Supply.

Under one of the PLR contracts, PPL Electric is required to make performance assurance deposits with PPL EnergyPlus when the market price of electricity is less than the contract price by more than its contract collateral threshold. Conversely, PPL EnergyPlus is required to make performance assurance deposits with PPL Electric when the market price of electricity is greater than the contract price by more than its contract collateral threshold. At ~~March 31,~~June 30, 2004, PPL Energy Supply was required to provide PPL Electric with performance assurance of $300 million, the maximum amount required under the contract. PPL Energy Supply caused a $300 million letter of credit to be issued under its bank credit facilities to satisfy ~~the requirements.~~this collateral requirement.

In 2001, PPL Electric made a $90 million up-front payment to PPL EnergyPlus in connection with the PLR contracts. The up-front payment is being amortized by both parties over the term of the PLR contracts. The unamortized balance of this payment and other payments under the contract was ~~$67~~$64 million at ~~March 31,~~June 30, 2004, and $70 million at December 31, 2003. This balance is reported on the Balance Sheet as "Prepayment on PLR energy supply from affiliate" by PPL Electric, and as "Deferred revenue on PLR energy supply to affiliate" by PPL Energy Supply.

NUG Purchases(PPL Energy Supply and PPL Electric)

PPL Electric has a reciprocal contract with PPL EnergyPlus to sell electricity purchased under contracts with NUGs. PPL Electric purchases electricity from the NUGs at contractual rates and then sells the electricity at the same price to PPL EnergyPlus. For the three months ended ~~March 31,~~June 30, 2004 and 2003, these NUG purchases totaled ~~$37~~$39 million and ~~$39~~$37 million. For the six months ended June 30, 2004 and 2003, these NUG purchases totaled $76 million ~~and~~for both periods. These amounts are included in the Statement of Income as "Wholesale electric to affiliate" revenues by PPL Electric, and as "Energy purchases from affiliates" by PPL Energy Supply.

Allocations of Corporate Service Costs(PPL Energy Supply and PPL Electric)

PPL Services provides corporate functions such as financial, legal, human resources and information services. PPL Services bills the respective PPL subsidiaries for the cost of such services when they can be specifically identified. The cost of these services that is not directly charged to PPL subsidiaries is allocated to certain of the subsidiaries based on an average of the subsidiaries' relative invested capital, operation and maintenance expenses, and number of employees. PPL Services allocated the following charges to PPL Energy Supply and PPL Electric:

PPL Energy Supply

PPL Electric

Three Months Ended
March 31,

Three Months Ended
March 31,

2004

2003

2004

2003

Direct expenses
$
24

$
21

$
20

$
14

Overhead costs

14

14

6

6

		Three Months Ended June 30,				Six Months Ended June 30,

		2004		2003		2004		2003

Direct expenses

	PPL Energy Supply	$	24	$	24	$	48	$	45

	PPL Electric		20		17		40		31

Overhead costs

	PPL Energy Supply		18		14		32		28

	PPL Electric		7		7		13		13

Intercompany Borrowings(PPL Energy Supply)

PPL Energy Supply ~~primarily~~had no notes receivable at June 30, 2004, and through its financing subsidiary, PPL Investment Corporation, had a $2 million note receivable from PPL Energy Funding ~~totaling $6 million and $2 million~~ at ~~March 31, 2004 and~~ December 31, 2003, with interest equal to the one-month LIBOR plus 3%. Interest earned on loans to affiliates, included in "Other Income - net" on the Statement of Income, was ~~insignificant~~$1 million and $4 million for the three months ended ~~March 31,~~June 30, 2004 and $72003, and was $1 million and $12 million for the ~~same period~~six months ended June 30, 2004 and 2003.

In May 2004, PPL Energy Supply issued a $495 million note payable to an affiliate. The note matures in ~~2003.~~May 2006 with interest payable monthly in arrears at LIBOR plus 1%.

Trademark Royalties(PPL Energy Supply)

In the fourth quarter of 2002, a PPL subsidiary that owns PPL trademarks began billing certain affiliates which use these trademarks. PPL Energy Supply was allocated $8 million and ~~$11~~$9 million of this license fee for the three months ended ~~March 31,~~June 30, 2004 and 2003, ~~which~~and $16 million and $20 million for the six months ended June 30, 2004 and 2003. The allocation of this license fee is primarily included in "Other operation and maintenance" on the Statement of Income.

Other Income - Net

(PPL)

The breakdown of PPL's "Other Income - net" was as follows:

Three Months Ended
March 31,

2004

2003

Other Income

Interest income
$
3

$
3

Equity earnings (loss)

1

(1
)

Realized earnings on nuclear decommissioning trust

4

2

Hyder-related activity

2

1

Gain by WPD on the disposition of property

1

Legal claims

2

Profit on redemption of investment

1

Miscellaneous - International

3

4

Miscellaneous - Domestic

4

1

Total

18

13

Other Deductions

Charitable contributions

2

1

Miscellaneous - International

1

3

Miscellaneous - Domestic

3

1

Other Income - net
$
12

$
8

		Three Months Ended June 30,				Six Months Ended June 30,

		2004		2003		2004		2003

Other Income

	Interest income	$	3	$	4	$	6	$	7

	Sale of CEMAR (Note 7)		23				23

	Realized earnings on nuclear decommissioning trust				6		4		8

	Hyder-related activity				3		2		4

	Gain by WPD on the disposition of property				3		1		3

	Rental income				3				3

	Legal claims				1				3

	Gain on hedge activity		1				1

	Equity earnings		1		1		2

	Miscellaneous - Domestic		4		2		8		2

	Miscellaneous - International		1		5		4		11

	Total		33		28		51		41

Other Deductions

	Impairment of investment in technology supplier (Note 7)		10				10

	Domestic project development costs				1				1

	Taxes, other than income		1		1		1		1

	Charitable contributions						2		1

	Miscellaneous - Domestic		1				4		1

	Miscellaneous - International		2		3		3		6

	Total		14		5		20		10

Other Income - net		$	19	$	23	$	31	$	31

(PPL Energy Supply)

The breakdown of PPL Energy Supply's "Other Income - net" was as follows:

		Three Months Ended March 31,						Three Months Ended June 30,					Six Months Ended June 30,

		2004		2003				2004		2003			2004		2003

Other Income	Other Income						Other Income

							Affiliated interest income	$	1	$	4		$	1	$	12

							Sale of CEMAR (Note 7)		23					23

	Affiliated interest income			$	7		Realized earnings on nuclear decommissioning trust				6			4		8

	Interest income	$	2		1		Hyder-related activity				3			2		4

	Equity earnings		1		1		Gain by WPD on the disposition of property				3			1		3

	Realized earnings on nuclear decommissioning trust		4		2		Interest income		2		3			4		4

	Hyder-related activity		2		1		Rental income				3					3

	Gain by WPD on the disposition of property		1				Legal claims				1					3

	Legal claims				2		Gain on hedge activity		1					1

	Profit on redemption of investment				1		Equity earnings		1		1			2		2

	Miscellaneous - International		3		5		Miscellaneous - Domestic		2		1			3		(1	)

	Miscellaneous - Domestic		1		(1	)	Miscellaneous - International		1		5			4		11

	Total		14		19		Total		31		30			45		49

Other Deductions	Other Deductions						Other Deductions

	Miscellaneous - International		1		3		Domestic project development costs				1					1

	Miscellaneous - Domestic		2				Taxes, other than income		1		1			1		1

							Miscellaneous - Domestic				(1	)		2		(1	)

							Miscellaneous - International		2		3			3		6

							Total		3		4			6		7

Other Income - net	Other Income - net	$	11	$	16		Other Income - net	$	28	$	26		$	39	$	42

Derivative Instruments and Hedging Activities

Fair Value Hedges(PPL and PPL Energy Supply)

PPL and PPL Energy Supply enter into financial or physical contracts to hedge a portion of the fair value of firm commitments of forward electricity sales. These contracts range in maturity through 2006. Additionally, PPL and PPL Energy Supply enter into financial contracts to hedge fluctuations in market value of existing debt issuances. These contracts range in maturity through 2029.

PPL and PPL Energy Supply did not recognize any ~~net~~ gains or losses resulting from hedges of firm commitments that no longer qualified as fair value hedges for the three and six months ended ~~March 31,~~June 30, 2004 or 2003.

PPL and PPL Energy Supply did not recognize any gains or losses resulting from the ineffective portion of fair value hedges for the three and six months ended ~~March 31,~~June 30, 2004 or 2003.

Cash Flow Hedges(PPL and PPL Energy Supply)

PPL and PPL Energy Supply enter into financial and physical contracts, including forwards, futures and swaps, to hedge the price risk associated with electric, gas and oil commodities. These contracts range in maturity through 2010. Additionally, PPL and PPL Energy Supply enter into financial interest rate swap contracts to hedge interest expense associated with both existing and anticipated debt issuances. These swaps range in maturity through ~~2014.~~2014 for PPL and 2010 for PPL Energy Supply. PPL and PPL Energy Supply also enter into foreign currency forward contracts to hedge exchange rates associated with firm commitments denominated in foreign currencies and to hedge the net investment of foreign operations. These forward contracts range in maturity through 2028.

Cash flow hedges may be discontinued ~~because~~if it is probable that the original forecasted transaction will not occur by the end of the originally specified time period. Due to the extinguishment of a consolidated trust's debt related to the Sundance and University Park generating facilities in June 2004, interest rate swaps that hedged the interest payments on the debt were terminated. Therefore, PPL and PPL Energy Supply reclassified a $3 million pre-tax loss from other comprehensive income to "Interest Expense" on the Statement of Income. PPL and PPL Energy Supply did not discontinue any other cash flow hedges during the three and six months ended ~~March 31, 2004 or 2003.~~June 30, 2004. For the three and six months ended June 30, 2003, PPL and PPL Energy Supply discontinued certain cash flow hedges that resulted in a pre-tax loss of $11 million being reclassified from other comprehensive income into earnings (reported in "Interest Expense" on the Statement of Income).

Due to hedge ineffectiveness, PPL and PPL Energy Supply reclassified amounts that were not significant from other comprehensive income (reported in "Wholesale energy marketing" revenues and "Energy purchases" on the Statement of Income) for the three and six months ended ~~March 31, 2004~~June 30, 2004. PPL and PPL Energy Supply recorded a net loss of $1 million in earnings for the three and six months ended June 30, 2003.

As of ~~March 31,~~June 30, 2004, the deferred net loss, after tax, on derivative instruments in "Accumulated other comprehensive loss" expected to be reclassified into earnings during the next twelve months was ~~$11~~$10 million and $6$8 million for PPL and PPL Energy Supply.

The following table shows the change in accumulated unrealized gains or losses on derivatives in other comprehensive income for the following periods:

Three Months Ended
March 31,

2004

2003

PPL

Beginning accumulated derivative gain

$
36

$
7

Net change associated with current period hedging activities and other

40

49

Net change associated with net investment hedges

1

Net change from reclassification into earnings

(76
)

(22
)

Ending accumulated derivative gain

$
1

$
34

Three Months Ended
March 31,

2004

2003

PPL Energy Supply

Beginning accumulated derivative gain

$
55

$
23

Net change associated with current period hedging activities and other

44

47

Net change associated with net investment hedges

1

Net change from reclassification into earnings

(77
)

(18
)

Ending accumulated derivative gain

$
23

$
52

	Three Months Ended June 30,						Six Months Ended June 30,

	2004			2003			2004			2003


PPL

Beginning accumulated derivative gain	$	1		$	34		$	36		$	7

Net change associated with current period hedging activities and other		5			22			48			71

Net change associated with hedges of net investments					(3	)		1			(3	)

Net change from reclassification into earnings		1			(32	)		(78	)		(54	)

Ending accumulated derivative gain	$	7		$	21		$	7		$	21


PPL Energy Supply

Beginning accumulated derivative gain	$	23		$	52		$	55		$	23

Net change associated with current period hedging activities and other		(3	)		31			44			74

Net change associated with hedges of net investments					(3	)		1			(3	)

Net change from reclassification into earnings		(2	)		(33	)		(82	)		(47	)

Ending accumulated derivative gain	$	18		$	47		$	18		$	47

Related Implementation Issues(PPL and PPL Energy Supply)

In June 2001, the FASB issued definitive guidance on DIG Issue C15, "Scope Exceptions: Normal Purchases and Normal Sales Exception for Certain Option-Type Contracts and Forward Contracts in Electricity." DIG Issue C15 provides additional guidance on the classification and application of derivative accounting rules relating to purchases and sales of electricity utilizing forward and option contracts. This guidance became effective as of July 1, 2001. In December 2001, the FASB revised the guidance in DIG Issue C15, principally related to the eligibility of options for the normal purchases and normal sales exception. The revised guidance was effective April 1, 2002. In November 2003, the FASB again revised the guidance in DIG Issue C15 to clarify the application of derivative accounting rules for contracts that may involve capacity. The guidance was effective January 1, 2004 for PPL. PPL had no financial statement impact from this revised guidance.

PPL Energy Supply adopted the final provisions of EITF Issue 03-11, "Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not 'Held for Trading Purposes' as Defined in Issue No. 02-3," prospectively as of October 1, 2003. As a result of the adoption, non-trading bilateral sales of electricity at major market delivery points are netted with purchases that offset the sales at those same delivery points. A major market delivery point is any delivery point with liquid pricing available. The impact on PPL and PPL Energy Supply of applying EITF Issue 03-11 ~~for the first quarter of 2004~~ was a reduction of $61 million in ~~both~~ "Wholesale energy marketing" revenues and "Energy purchases" for the three months ended June 30, 2004, and a reduction of ~~$81~~$142 million in ~~PPL's~~"Wholesale energy marketing" revenues and "Energy purchases" for the six months ended June 30, 2004.

Credit Concentration

(PPL and PPL Energy ~~Supply's Statement of Income.~~

~~Credit Concentration~~~~(PPL, PPL Energy Supply and PPL Electric)~~Supply)

PPL and PPL Energy Supply enter into contracts with many entities for the purchase and sale of energy. Most of these contracts are considered a normal part of doing business and, as such, the mark-to-market value of these contracts is not reflected in the financial statements. However, the mark-to-market value of these contracts is considered when committing to new business from a credit perspective.

PPL and PPL Energy Supply have credit exposures to energy trading partners. The majority of these exposures were the mark-to-market value of multi-year contracts for energy ~~sales.~~sales and purchases. Therefore, if these counterparties fail to perform their obligations under such contracts, ~~the companies~~PPL and PPL Energy Supply would not experience an immediate financial loss, but would experience lower revenues or higher costs in future years to the extent that replacement sales or purchases could not be made at the same prices as ~~sales~~those under the defaulted contracts.

At ~~March 31,~~June 30, 2004, PPL had a credit exposure of ~~$243~~$274 million to energy trading partners. Eleven counterparties accounted for ~~59%~~66% of this exposure. No other individual counterparty accounted for more than 3% of the exposure. ~~With two exceptions, each~~Eight of the eleven ~~primary~~ counterparties had an investment grade credit rating from Standard & Poor's Ratings Services (S&P). One counterparty was not rated by S&P. One non-investment grade counterparty of PPL Montana, NorthWestern, has filed for Chapter 11 bankruptcy protection. This contract has been affirmed by the bankruptcy court, and PPL Montana has been granted critical vendor status. NorthWestern has assumed the power supply agreements in its bankruptcy ~~proceeding.~~proceeding, and NorthWestern has remained current on all post-bankruptcy obligations with PPL Montana. See Note 8 under "Wholesale Energy Commitments" for additional information regarding the NorthWestern bankruptcy proceeding. The other non-investment grade counterparty is also current on its obligations under the existing contract.

At ~~March 31,~~June 30, 2004, PPL Energy Supply had a credit exposure of ~~$237~~$268 million to energy trading partners. Eleven counterparties accounted for ~~61%~~67% of this exposure. No other individual counterparty accounted for more than 3% of the exposure. ~~With two exceptions, each~~Eight of the eleven counterparties had an investment grade credit rating from S&P. One counterparty was not rated by S&P. One non-investment grade counterparty, NorthWestern, has filed for Chapter 11 bankruptcy protection, as discussed above. The other non-investment grade counterparty is also current on its obligations under the existing contract.

PPL and PPL Energy Supply have the right to request collateral from each of these counterparties, except for one government agency, in the event their credit ratings fall below investment grade. PPL Montana and NorthWestern have mutually agreed not to request collateral from each other while NorthWestern's Chapter 11 bankruptcy proceeding is pending. It is also the policy of PPL and PPL Energy Supply to enter into netting agreements with all of their counterparties to minimize credit exposure.

(PPL Energy Supply and PPL Electric)

In past ~~periods,~~years, PPL Energy Supply has had an exposure to PPL Electric under the long-term contract to provide PPL Electric's PLR load. However, increases in electricity prices during ~~the quarter~~2004 have reversed this position. At ~~March 31,~~June 30, 2004, PPL Electric had a mark-to-market exposure to PPL Energy Supply of ~~$800 million.~~$1.3 billion. In accordance with the terms of one of the PLR contracts, PPL Energy Supply provided PPL Electric with performance assurance through a letter of credit in the amount of $300 million, the maximum amount required under the contract. This is the only credit exposure for PPL Electric that has a mark-to-market element. No other counterparty accounts for more than 1% of PPL Electric's total exposure.

Pension and Other Postretirement Benefits
(PPL and PPL Energy Supply)
The components of net pension and other postretirement benefit costs (credits) were as follows:

Pension Benefits

Other Postretirement
Benefits

Pension Benefits

Three Months
Ended
March 31,

Three Months
Ended
March 31,

Three Months Ended
June 30,

Six Months Ended
June 30,

2004

2003

2004

2003

2004

2003

2004

2003

Domestic

International

Domestic

International

Domestic

Intl.

Domestic

Intl.

Domestic

Intl.

Domestic

Intl.

PPL

Service cost
$
12
$
4
$
10
$
3
$
1
$
2
$
12
$
4
$
11
$
4
$
24
$
7
$
21
$
7

Interest cost

28

36

26

31

6

7

28

36

26

31

56

72

52

62

Expected return on plan assets

(38
)

(53
)

(36
)

(47
)

(4
)

(3
)

(38
)

(52
)

(36
)

(47
)

(75
)

(105
)

(72
)

(94
)

Amortization of transition obligation
(1
)
(1
)
2
2
(1
)
(1
)
(2
)
(2
)
Amortization of prior service cost
4
1
4
1
2
4
1
3
1
7
2
7
2
Amortization of (gain)/loss
(2
)
2
(4
)
2
1
(2
)
1
(4
)
(3
)
3
(8
)

Net periodic pension and other postretirement benefit cost/(credit)

$
3

$
(10
)

$
(1
)

$
(12
)

$
7

$
11

Net periodic pension cost/(credit)

$
3

$
(10
)

$
(1
)

$
(11
)

$
7

$
(21
)

$
(2
)

$
(23
)

PPL Energy Supply

Service cost

$
1

$
4

$
1

$
3

$
1

$
4

$
1

$
4

$
2

$
7

$
1

$
7

Interest cost

1

36

1

31

1

36

1

31

2

72

2

62

Expected return on plan assets

(1
)

(53
)

(1
)

(47
)

(1
)

(52
)

(1
)

(47
)

(2
)

(105
)

(2)

(94
)

Amortization of prior service cost
1
1
1
1
2
2

Amortization of loss
2
1
3
1

Net periodic pension cost/(credit)

$
1

$
(10
)

$
1

$
(11
)

$
2

$
(21
)

$
2

$
(23
)

Net periodic pension and other postretirement benefit cost/(credit)

$
1

$
(10
)

$
1

$
(12
)

Other Postretirement Benefits

Three Months Ended
June 30,

Six Months Ended
June 30,

2004

2003

2004

2003

PPL

Service cost
$
2
$
2
$
3
$
3

Interest cost

7

7

14

14

Expected return on plan assets

(4
)

(3
)

(9
)

(6)

Amortization of transition obligation
2
2
4
4
Amortization of prior service cost
1
2
2
4
Amortization of loss
2
1
4
3

Net other postretirement benefit cost

$
10

$
11

$
18

$
22

Medicare Prescription Drug, Improvement and Modernization Act of 2003(PPL, PPL Energy Supply and PPL Electric)
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduces a prescription drug benefit under Medicare Part D and also provides for a federal subsidy to sponsors of retiree health care benefit plans that provide an actuarially equivalent level of prescription drug benefits. The subsidy would be 28% of eligible drug costs for retirees that are over age 65 and covered under PPL's other postretirement benefit plans.
~~The impact of~~In January 2004, the Act on the provisions of SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," has yet to be determined by the FASB. PPL has elected to defer recognition of the potential impact of the Act, as allowed underFASB issued FSP FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." FSP FAS 106-1 permitted companies to defer accounting for the effects of the Act, as the impact of the Act on the provisions of SFAS 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," had not been determined as of such time. PPL elected to defer recognizing the effects of the Act in accounting for its other postretirement benefit plans until authoritative guidance on the accounting for the federal subsidy was issued.
In May 2004, the FASB issued FSP FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," which ~~was issued by~~supersedes FSP FAS 106-1, details the ~~FASB in January~~accounting for the effects of the Act under SFAS 106 and requires certain disclosures. FSP FAS 106-2 is effective for the first interim or annual period beginning after June 15, 2004. Thus, the measures of PPL's accumulated postretirement benefit obligations and net postretirement benefit costs in the financial statements and accompanying notes do not reflect the effects of the Act.
PPL ~~could~~has consulted with its independent actuary and determined that portions of certain of its other postretirement benefit plans provide benefits that may be ~~required~~actuarially equivalent to ~~change previously reported information upon issuance~~Medicare Part D benefits, pending final detailed guidance from the U.S. Department of ~~final accounting guidance related~~Health and Human Services. For those plans that provide benefits that are at least actuarially equivalent to Medicare Part D, PPL will perform a remeasurement of its plan assets and accumulated benefit obligation as of July 1, 2004, resulting in an updated net periodic postretirement benefit cost for 2004, in accordance with the prospective adoption provisions allowed under FSP FAS 106-2. The impact of the Act ason the postretirement benefit obligations and net postretirement benefit costs for PPL's other postretirement benefit plans ~~provide prescription drug coverage~~is not expected to ~~retirees that may~~ be ~~eligible for the federal subsidy.~~material.

Goodwill
(PPL and PPL Energy Supply)
The changes in the carrying amounts of goodwill by segment were as follows:

PPL Energy Supply

PPL

Supply

International

Total

Delivery(a)

Total

Balance at December 31, 2003

$
93

$
920

$
1,013

$
55

$
1,068

Effect of foreign currency exchange rates

47

47

47

Purchase accounting adjustments

1

(37
)
(b)

(36
)

(36
)

Balance at June 30, 2004

$
94

$
930

$
1,024

$
55

$
1,079

(a)
The Delivery segment is not part of PPL Energy Supply.
(b)
Tax adjustments pursuant to EITF Issue 97-3, "Uncertainties Related to Income Taxes in a Purchase Business Combination."

Asset Retirement Obligations
(PPL and PPL Energy Supply)
PPL and PPL Energy Supply adopted SFAS 143, "Accounting for Asset Retirement Obligations," effective January 1, 2003. SFAS 143 addresses the accounting for obligations associated with the retirement of tangible long-lived assets. In connection with the adoption of SFAS 143, PPL and PPL Energy Supply recorded a cumulative effect of adoption that increased net income by $63 million.
Amounts collected from PPL Electric's customers for decommissioning, less applicable taxes, are deposited in external trust funds for investment and can only be used for future decommissioning costs. The fair value of the nuclear decommissioning trust was $370 million as of March 31, 2004 and $357 million as of December 31, 2003.
PPL and PPL Energy Supply's AROs are included in "Deferred Credits and Other Noncurrent Liabilities - Other" on the Balance Sheet. The changes in the carrying amounts of the AROs were as follows:
ARO at December 31, 2003

$
242

Accretion expense

9

Settlement

(4
)

ARO at June 30, 2004

$
247

Funds in the nuclear decommissioning trust are legally restricted for purposes of settling PPL's and PPL Energy Supply's ARO related to the decommissioning of the Susquehanna station. PPL Electric collects authorized nuclear decommissioning costs through the CTC. These revenues are passed on to PPL EnergyPlus under the power supply agreements between PPL Electric and PPL EnergyPlus. Similarly, these revenues are passed on to PPL Susquehanna under a power supply agreement between PPL EnergyPlus and PPL Susquehanna. These revenues, less applicable taxes, are used to fund the nuclear decommissioning trust and can only be used for future decommissioning costs. The fair value of the nuclear decommissioning trust was $373 million as of June 30, 2004, and $357 million as of December 31, 2003.

PPL and PPL Energy Supply
ARO at December 31, 2003

$
242

Accretion expense

5

Settlement

(3
)
ARO at March 31, 2004

$
244
Workforce Reduction
(PPL, PPL Energy Supply and PPL Electric)
In an effort to improve operational efficiency and reduce costs, PPL and its subsidiaries commenced a workforce reduction assessment in June 2002. The program was broad-based and impacted all employee groups except certain positions that are key to providing high-quality service to PPL's electricity delivery customers.
During 2002 and 2003, PPL recorded total charges of $84 million. PPL Energy Supply recorded charges of $41 million in 2002. During 2002 and 2003, PPL Electric recorded total charges of $42 million, including the charges associated with implementation of the Automated Meter Reading project. There was no impact to earnings for the periods ended ~~March 31,~~June 30, 2004 and 2003.
As of ~~March 31,~~June 30, 2004, ~~514~~539 employees of PPL subsidiaries were terminated. ~~Additional~~An additional 64 positions, which are primarily bargaining unit, ~~and are currently estimated at 97,~~ are being evaluated for termination over the next six months, due to the timing of PPL Electric's Automated Meter Reading project and the displacement program under the bargaining unit contract. The program provides primarily for enhanced early retirement benefits and/or one-time special pension separation allowances based on an employee's age and years of service. These features of the program are paid from the PPL Retirement Plan pension trust and increased PPL's pension liabilities in 2002 and 2003 when recorded. Substantially all of the accrued non-pension benefits have been paid.
New Accounting Standards
FIN 46(R)(PPL, PPL Energy Supply and PPL Electric)
In December 2003, the FASB issued Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," which is known as FIN 46(R) and replaces FIN 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." See Note 22 to the Financial Statements contained in each Registrants' Annual Report to the SEC on Form 10-K for the year ended December 31, 2003, for a discussion of FIN 46 and the impact of its adoption for certain entities. FIN 46(R) does not change the general consolidation concepts of FIN 46. Among other things, FIN 46(R) clarifies certain provisions of FIN 46 and provides additional scope exceptions for certain types of businesses. FIN 46(R) provides that a public entity that is not a small business issuer should apply the provisions of FIN 46(R) to all entities no later than the end of the first reporting period that ends after March 15, 2004. PPL and its subsidiaries adopted FIN 46(R) for all entities effective March 31, 2004. This adoption did not have a material impact on the results of PPL and its subsidiaries.
EITF Issue 03-1(PPL, PPL Energy Supply and PPL Electric)
In March 2004, the FASB ratified certain consensus in EITF Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." EITF Issue 03-1 provides guidance for determining when an investment in certain debt and equity securities is considered impaired, whether that impairment is other than temporary and the measurement of an impairment loss. EITF Issue 03-1 also contains disclosure requirements related to information about impairments that have not been recognized as other than temporary as well as disclosure requirements for investments accounted for under the cost method. The recognition and measurement provisions of EITF Issue 03-1 are required to be applied to other-than-temporary impairment evaluations as of the balance sheet date in reporting periods beginning after June 15, 2004. The disclosure provisions related to cost method investments are effective for annual financial statements for fiscal years ending after June 15, 2004, while all other disclosure provisions were effective for annual financial statements for fiscal years ending after December 15, 2003. PPL and its subsidiaries are in the process of evaluating the impact of adopting the recognition and measurement provisions of EITF ~~03-1 effective July 1, 2004.~~Issue 03-1. The potential impact of adopting EITF Issue 03-1 for the third quarter of 2004 is not yet determinable, but could be material. The impact of adoption is dependent upon the fair value of debt and equity securities at the time of the impairment assessment. PPL and its subsidiaries cannot predict the fair values. However, if EITF Issue 03-1 had been effective as of June 30, 2004, PPL estimates that it would have incurred an other-than-temporary impairment charge of approximately $3 million, after tax.
EITF Issue 03-6(PPL)
In March 2004, the FASB ratified EITF Issue 03-6, "Participating Securities and the Two-Class Method under FASB Statement No. 128, 'Earnings per Share'." EITF Issue 03-6 addresses a number of issues regarding the calculation of basic EPS by companies that have issued securities other than common stock that participate in dividends and earnings, which are known as participating securities. EITF Issue 03-6 requires participating securities to be included in the calculation of basic EPS using the two-class method and provides guidance in applying the two-class method. EITF Issue 03-6 is effective for reporting periods beginning after March 31, 2004, and it requires restatement of prior periods. PPL ~~is in~~adopted EITF Issue 03-6 during the ~~process~~second quarter of ~~evaluating the~~2004. The initial adoption did not have an impact ~~of adopting EITF 03-6. The potential impact of adopting EITF 03-6 is not yet determinable, but could be material.~~on PPL.
EITF Issue 03-16(PPL, PPL Energy Supply and PPL Electric)
In March 2004, the FASB ratified EITF Issue 03-16, "Accounting for Investments in Limited Liability Companies." EITF Issue 03-16 provides that an investment in a limited liability company (LLC) that maintains a specific ownership account for each investor should be viewed similarly to an investment in a limited partnership for purposes of determining whether a noncontrolling interest in the LLC should be accounted for using the cost or equity method. EITF Issue 03-16 is effective for reporting periods beginning after June 15, 2004, and is required to be applied as a change in accounting principle with a cumulative effect adjustment reflected in the period of adoption. PPL and its subsidiaries ~~are in the process of evaluating the impact of adopting~~adopted EITF Issue 03-16 effective July 1, 2004. The ~~potential~~adoption did not have a material impact on the results of ~~adopting EITF 03-16 is not yet determinable, but could be material.~~PPL and its subsidiaries.
FSP FAS 106-1 and FSP FAS 106-2(PPL, PPL Energy Supply and PPL Electric)
See Note 12 for a discussion of FSP FAS 106-1 and FSP FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003."

PPL CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
PPL is an energy and utility holding company with headquarters in Allentown, PA. See Item 1, "Business - Background" in PPL's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003, for descriptions of PPL's major segments. See Exhibit 99 in Item 15 in PPL's Form 10-K for the current corporate organization structure. Through its subsidiaries, PPL is primarily engaged in the generation and marketing of electricity in two key markets - the northeastern and western U.S. - and in the delivery of electricity in Pennsylvania, the U.K. and Latin America. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003, for an overview of PPL's strategy and the risks and ~~the~~ challenges that it faces in its business.
The information provided in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with PPL's Condensed Consolidated Financial Statements and the accompanying Notes.
Terms and abbreviations ~~appearing herein~~ are explained in the glossary. Dollars are in millions, except per share data, unless otherwise noted.
Results of Operations
The following discussion, which explains significant changes in principal items on the Statement of Income, compares the three and six months ended ~~March 31,~~June 30, 2004, towith the comparable ~~period~~periods in 2003.
WPD's results, as consolidated in PPL's Statement of Income, are impacted by changes in foreign currency exchange rates. For the three and six months ended ~~March 31,~~June 30, 2004, as compared towith the same ~~period~~periods in 2003, changes in foreign exchange rates increased WPD's portion of revenue and expense line items by about 13%. for both periods.
The Statement of Income reflects the results of past operations and is not intended as any indication of future operating results. Future operating results will necessarily be affected by various and diverse factors and developments. Furthermore, because results for interim periods can be disproportionately influenced by various factors and developments and by seasonal variations, the results of operations for interim periods do not necessarily indicate results or trends for the year.
Earnings
Net income and the related EPS were as follows:

Three Months Ended
March 31,

Three Months Ended
June 30,

Six Months Ended
June 30,

2004

2003

2004

2003

2004

2003

Net income
Net income

$
177

$
239

$
148

$
116

$
325

$
355

EPS - basic
EPS - basic

$
1.00

$
1.43

$
0.81

$
0.68

$
1.80

$
2.10

EPS - diluted
EPS - diluted

$
0.99

$
1.43

$
0.81

$
0.67

$
1.80

$
2.09

The after-tax changes in net income were primarily due to:

June 30, 2004 vs. June 30, 2003

Three Months Ended
March 31, 2004 vs. March 31, 2003

Three Months
Ended

Six Months
Ended

Domestic:
Domestic:

Domestic:

Eastern U.S. margins

$
7

$
19

Net energy trading margins

(4
)

4

Eastern U.S. margins

$
12

Northwestern U.S. margins

(5
)

(1
)

Net energy trading margins

8

Southwestern U.S. margins

1

Northwestern U.S. margins

4

Delivery revenues (net of CTC/ITC amortization and interest on transition bonds)

2

2

Southwestern U.S. margins

1

Operation and maintenance expenses

7

(13
)

Operation and maintenance expenses

(19
)

Depreciation

(5
)

(10
)

Depreciation

(4
)

Taxes, other than income (excluding gross receipts tax)

(1
)

6

Taxes, other than income (excluding gross receipts tax)

7

Interest expense and preferred distributions

(4
)

(7
)

Energy related businesses

(4
)

Realized earnings on nuclear decommissioning trust

(3
)

(2
)

Interest expense and preferred distributions

(3
)

Other

6

3

Other

1

Total Domestic

2

Total Domestic

3

International:
International:

International:

U.K.:

U.K.

Impact of changes in foreign currency exchange rates

7

Impact of changes in foreign currency exchange rates

6

13

Other

2

Other

2

4

Latin America

1

Latin America

5

6

Other

(4
)
Other

3

Total International

6

Total International

16

23

Unusual items
Unusual items

(71
)
Unusual items

16

(55
)

$
(62
)

$
32

$
(30
)

The changes in net income from period to period were, in part, attributable to ~~two~~several unusual items with significant earnings ~~impacts.~~impacts, including accounting changes, discontinued operations and infrequently occurring items. The after-tax impacts of these unusual items are shown below.

Three Months Ended
March 31,

Three Months Ended
June 30,

Six Months Ended
June 30,

2004

2003

2004

2003

2004

2003

Accounting change:
Accounting change:

Accounting change:

ARO (Note 13)

$
63

ARO (Note 14)

$
63

Sale of CGE (Note 7)
Sale of CGE (Note 7)

$
(8
)

Sale of CGE (Note 7)

$
1

$
(7
)

Sale of CEMAR (Note 7)
Sale of CEMAR (Note 7)

23

23

Discontinued operations (Note 7)
Discontinued operations (Note 7)

(2
)

(2
)

Impairment of investment in technology supplier (Note 7)
Impairment of investment in technology supplier (Note 7)

(6
)

(6
)

Total
Total

$
(8
)

$
63

Total

$
16

$
8

$
63

The period to period changes in earnings components, including domestic gross energy margins by region and income statement line items, are discussed in the balance of ~~the discussion in~~ "Results of Operations."
PPL's future earnings could be, or will be, impacted by a number of key factors, including the following:
Due to current electricity and natural gas price levels, there is a risk that PPL may be unable to recover its investment in new gas-fired generation facilities. Under GAAP, PPL does not believe that there is an impairment charge to be recorded for these facilities at this time. PPL is unable to predict the ultimate earnings impact of this issue, based upon future energy price levels, applicable accounting rules and other factors, but such impact may be material. In June 2004, a subsidiary of PPL Generation agreed to sell the 450 MW Sundance power plant to the Arizona Public Service Company. If the necessary regulatory approvals can be obtained, the sale is expected to close in the first quarter of 2005. If it becomes likely that the required regulatory approvals will be obtained, PPL will reassess the Sundance assets for possible impairment. PPL estimates that an impairment charge of about $47 million after-tax, or $0.25 per share, could be recorded in 2004 or 2005 depending on the timing of regulatory approvals. See Note 7 to the Financial Statements for additional information on the potential Sundance sale.
Market prices for electricity and fuel may negatively impact energy margins and earnings.
PPL is unable to predict whether future impairments of goodwill may be required for its domestic and international investments. While no goodwill impairments were required based on the annual review performed in the fourth quarter of 2003, future impairments may occur due to determinations of carrying value exceeding the fair value of these investments.
~~In March 2004,~~ PPL Electric has filed a proposal with the PUC to increase distribution rates by approximately $164 million and has notified the PUC that it plans to pass through to customers approximately $57 million in increased transmission charges that PPL Electric pays to PJM for transmission services. ~~The PUC's review of the distribution rate request is expected to take about nine months.~~ Transmission services are provided under the PJM Open Access Transmission Tariff, a rate schedule filed with and approved by the FERC. Under the federal "filed rate doctrine," such FERC-approved rates may be recovered from retail customers without a review of those rates by a state agency such as the PUC. In addition, PPL Electric's PUC-approved retail tariff permits the automatic pass-through of transmission charges. PPL Electric agreed to a cap on both of these charges until December 31, 2004, as part of its 1998 settlement under the PUC Final Order. Generation charges for customers who do not select an alternative energy supplier are fixed through 2009 and are not affected by these changes. The combination of the proposed distribution rate increase and transmission charge pass-through would result in an 8.1% increase over PPL Electric's present rates effective January 1, 2005. PPL Electric cannot predict the outcome of this proceeding.
In July 2004, the EITF reached a tentative conclusion, under EITF Issue 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings per Share," regarding the inclusion of contingently convertible debt securities in diluted EPS calculations. If the conclusion is finalized and ratified by the FASB in its current form, beginning in the fourth quarter of 2004, PPL potentially would be required to include an additional eight million shares of common stock associated with PPL Energy Supply's 2.625% Convertible Senior Notes due 2023 in its calculation of diluted EPS, for current and relevant prior periods, as if the securities were converted as of the date of issuance (May 2003), despite the fact that the securities contain a market price trigger for conversion that has not yet been attained. PPL currently estimates that the inclusion of the additional shares would decrease its diluted EPS by $0.11 for 2004 and $0.10 for 2003. See Note 4 to the Financial Statements for a discussion of the convertible senior notes.
Earnings in 2005 and beyond are expected to be ~~negatively~~ impacted by a rate review of the delivery business of WPD (South West) and WPD (South Wales). PPL cannot predict the ultimate outcome of the rate review. See Note 8 to the Financial Statements for additional information.
PPL has interests in two ~~synfuel~~synthetic fuel facilities and receives tax credits pursuant to Section 29 of the Internal Revenue Code based on its sale of ~~synfuel~~synthetic fuel to unaffiliated third-party purchasers. PPL has estimated that these facilities will contribute approximately $0.13 to its EPS in 2004, approximately $0.16 to its EPS in 2005 and 2006, and approximately $0.17 to its EPS in 2007. See Note 8 to the Financial Statements for a discussion of the IRS review of ~~synfuel~~synthetic fuel production procedures.
See Note 16 to the Financial Statements for new accounting standards, which have been issued but not yet adopted by PPL, that may impact future earnings.
Domestic Gross Energy Margins
The following table provides changes in the income statement line items that ~~compose~~comprise domestic gross energy margins:

June 30, 2004 vs. June 30, 2003

Three Months Ended
March 31, 2004 vs. March 31, 2003

Three Months
Ended

Six Months
Ended

Utility revenues
Utility revenues

$
66

Utility revenues

$
45

$
111

Unregulated retail electric and gas revenues
Unregulated retail electric and gas revenues

(20
)
Unregulated retail electric and gas revenues

(4
)

(24
)

Wholesale energy marketing revenues
Wholesale energy marketing revenues

(20
)
Wholesale energy marketing revenues

(9
)

(29
)

Net energy trading margins
Net energy trading margins

14

Net energy trading margins

(7
)

7

Other revenue adjustments (a)
Other revenue adjustments (a)

(31
)
Other revenue adjustments (a)

(29
)

(64
)

Total revenues

9

Total revenues

(4
)

1

Fuel
Fuel

6

Fuel

37

43

Energy purchases
Energy purchases

(32
)
Energy purchases

(34
)

(66
)

Other cost adjustments (a)
Other cost adjustments (a)

(8
)
Other cost adjustments (a)

(3
)

(15
)

Total cost of sales

(34
)

Total cost of sales

(38
)

Domestic gross energy margins

$
43

Domestic gross energy margins

$
(4
)

$
39

(a)

Adjusted to exclude the impact of any revenues and costs not associated with domestic gross energy margins, in particular, revenues and energy costs related to the international operations of PPL Global and the domestic delivery operations of PPL Electric and PPL Gas Utilities. Also adjusted to include gains on sales of emission allowances, which are ~~reflected~~included in "Other operation and maintenance" expenses on the Statement of Income.
Changes in Domestic Gross ~~Domestic~~ Energy Margins By Region
Domestic gross energy margins are generated through PPL's normal and hedge activities (non-trading), as well as trading activities. Non-trading margins are now discussed on a geographic basis rather than on an activity basis, as ~~previously provided.~~reported prior to 2004. A regional perspective more closely matches the internal view of how PPL's energy business is managed.

June 30, 2004 vs. June 30, 2003

Three Months Ended
March 31, 2004 vs. March 31, 2003

Three Months
Ended

Six Months
Ended

Eastern U.S.
Eastern U.S.

$
21

Eastern U.S.

$
12

$
33

Northwestern U.S.
Northwestern U.S.

7

Northwestern U.S.

(9
)

(2
)
Southwestern U.S.
Southwestern U.S.

1

Southwestern U.S.

1

Net energy trading
Net energy trading

14

Net energy trading

(7
)

7

Domestic gross energy margins

$
43

Domestic gross energy margins
$
(4
)
$
39

Eastern U.S.
Eastern U.S. non-trading margins were higher for the three and six months ended ~~March 31,~~June 30, 2004, compared towith the same ~~period~~periods in 2003, due to ~~higher prices and~~retail volumes ~~as well as a lower-cost mix of generation. Wholesale sale prices increased~~increasing 5% and 4% and wholesale volumes increasing 1% and 2%. Retail volumes increased 4%, primarily due to serving new competitive load obligations in Connecticut and New Jersey. Retail energy prices increased about 1% in accordance with the schedule established by the PUC's Final Order, and retail volumes increased 4% primarily due to the return of customers who previously shopped for energy in the competitive market in Pennsylvania. ~~Finally, supply costs did not increase proportionally because~~In addition, retail energy prices increased ~~generation from coal units displaced marginal-cost oil units. These coal units had improved performance~~about 1% in ~~2004 over 2003 because of differences~~accordance with the schedule established by the PUC's Final Order. Wholesale volumes increased primarily due to serving new competitive load obligations in ~~planned outage schedules~~Connecticut and ~~the elimination of transmission constraints.~~New Jersey.
Northwestern U.S.
Northwestern U.S. non-trading margins were ~~higher~~lower for the three and six months ended June 30, 2004, compared with the same periods in 2003, primarily due to a retroactive coal price increase caused by an unfavorable arbitration ruling. Incremental expense of $6 million was recorded during the three months ended June 30, 2004, as a result of the ruling, most of which related to years 2001 to 2003. In addition, for the three months ended ~~March 31,~~June 30, 2004, ~~compared to~~hydro generation was 16% lower than the same period in 2003 ~~primarily~~ due to ~~higher~~continuing drought conditions. For the six months ended June 30, 2004, a 4% increase in realized sales prices combined with ~~improved generation production. Sales prices rose 8% for the three months ended March 31, 2004, compared to the same period~~a slight improvement in ~~2003. Hydro~~ generation production ~~rose 12% due~~contributed to ~~more precipitation, and~~lowering supply costs, that partially offset the retroactive coal ~~generation production rose 6% due to operational improvements.~~price adjustment.
Southwestern U.S.
Southwestern U.S. non-trading margins ~~increased by $1 million~~were relatively flat for the three and six months ended ~~March 31,~~June 30, 2004, compared towith the same ~~period~~periods in ~~2003, because of lower market prices for purchased power.~~2003.
Net Energy Trading
PPL enters into certain energy contracts that meet the criteria of trading derivatives as defined by EITF Issue 02-3, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities." These physical and financial contracts cover trading activity associated with electricity, gas and oil. The ~~$14~~$7 million ~~increase~~decrease for the three months ended ~~March 31,~~June 30, 2004, compared towith the same period in 2003, was primarily due to ~~unrealized gas derivative gains from increases~~a decrease in ~~natural gas prices for the three months ended March 31, 2004, and~~ realized and unrealized ~~electric swap losses~~gains on electricity positions. The $7 million increase for the ~~three~~six months ended ~~March 31, 2003.~~June 30, 2004, compared with the same period in 2003, was due to a $3 million increase in electricity positions and a $4 million increase in gas and oil positions. The physical volumes associated with energy trading for the three months ended June 30, 2004, were ~~994~~1,186 GWh and ~~2.4~~1.8 Bcf, compared with 1,055 GWh and 3.4 Bcf for the three months ended ~~March 31,~~June 30, 2003. Energy trading physical volumes for the six months ended June 30, 2004, ~~compared to 1,213~~were 2,180 GWh and no4.3 Bcf, compared with 2,269 GWh and 7.2 Bcf for the ~~three~~six months ended ~~March 31,~~June 30, 2003.
Utility Revenues
The ~~increase (decrease)~~increases in utility revenues ~~was~~were attributable to the following:

June 30, 2004 vs. June 30, 2003

Three Months Ended
March 31, 2004 vs. March 31, 2003

Three Months
Ended

Six Months
Ended

Domestic:
Domestic:

Domestic:

Retail electric revenue (PPL Electric)

PLR electric generation supply

$
27

$
57

Retail electric revenue (PPL Electric)

PLR electric generation supply
$
30

Electric delivery

3

3

Other

(1
)

Other

(1
)

Wholesale electric revenue (PPL Electric)

(5
)

Wholesale electric revenue (PPL Electric)

(7
)

(11
)

Gas revenue (PPL Gas Utilities)

4

Gas revenue (PPL Gas Utilities)

3

6

International:
International:

International:

Retail electric delivery (PPL Global)

Retail electric delivery (PPL Global)

U.K.

26

U.K.

14

40

Chile

12

Chile

7

19

$
66

El Salvador

(2
)

(2
)

$
45

$
111

The increase in utility revenues for the three months ended ~~March 31,~~June 30, 2004, compared with the same period in 2003, was primarily due to:
higher PLR revenues due to higher energy and capacity rates in 2004 compared with 2003, and a 5% increase in volumes, in part due to the return of customers previously served by alternate suppliers;
higher WPD revenues in the U.K. primarily due to the change in foreign currency exchange rates;
higher revenues in Chile due to higher energy prices, which are a pass-through to customer rates, the change in foreign currency exchange rates, and a 5% increase in sales volumes;
higher PPL Gas Utilities revenues, primarily due to the increase in natural gas prices which are a pass-through to customer rates, partially offset by a decrease in volumes; and
higher PPL Electric delivery revenues resulting from a 4% increase in delivery sales, in part due to warmer weather in the second quarter of 2004 compared to 2003; partially offset by
lower wholesale electric revenues due to the expiration of all PPL Electric municipal purchase power agreements at the end of January 2004.
The increase in utility revenues for the six months ended June 30, 2004, compared with the same period in 2003, was primarily due to:
higher PLR revenues due to higher energy and capacity rates in 2004 compared with 2003, and a 4% increase in volumes, in part due to the return of customers previously served by alternate suppliers;
higher PPL Gas Utilities revenues, primarily due to the increase in natural gas prices which are a pass-through to customer ~~rates;~~rates, partially offset by a decrease in volumes;
higher WPD revenues in the U.K., primarily due to the change in foreign currency exchange ~~rates from period to period;~~rates; and
higher revenues in Chile ~~primarily~~ due to higher energy prices, which are a pass-through to customer ~~rates.~~rates, the change in foreign currency exchange rates, and a 7% increase in sales volumes; partially offset by
lower wholesale electric revenues due to the expiration of all PPL Electric municipal purchase power agreements at the end of January 2004.
Energy Related Businesses
Energy related businesses contributed ~~$25~~$24 million less to operating income for the ~~three~~six months ended ~~March 31,~~June 30, 2004, compared towith the same period in 2003. The decrease ~~resulted primarily from~~ was attributable to the following:
a $15 million loss on the sale of ~~PPL Global's minority interest in~~ CGE (see Note 7 to the Financial Statements), ;
a $4 million decrease indue to WPD ~~net revenues due largely to~~ contract terminations in 2003 and ~~2004, and~~ 2004;
a $2$4 million decrease ~~in contributions~~ from mechanical contracting and engineering subsidiaries due to the continued decline in capital spending in commercial and industrial markets, ~~and~~ lower margins experienced in those ~~markets.~~
markets, and cost overruns at two major projects;
a $2 million decrease from Latin American subsidiaries due primarily to lower dividends received and lower construction sales; and
a $2 million higher pre-tax operating loss from synfuel projects; partially offset by
a $5 million operating loss on some Hyder properties in the first quarter of 2003, which were subsequently sold in April 2003.
Other Operation and Maintenance
The increase (decrease) in other operation and maintenance expenses was primarily due to:

Three Months Ended
March 31, 2004 vs. March 31, 2003

June 30, 2004 vs. June 30, 2003

Timing of outage costs associated with the planned refueling and inspection at the Susquehanna station, and of other nuclear-related expenses

$
16

Three Months
Ended

Six Months
Ended

Insurance settlements - property damage and environmental which were recorded in 2003

12

Property damage and environmental insurance settlements which were
recorded in 2003
Property damage and environmental insurance settlements which were
recorded in 2003

$
12

Increase in foreign currency exchange rates
Increase in foreign currency exchange rates

4

Increase in foreign currency exchange rates

$
4

8

Decrease in domestic and international pension income
Decrease in domestic and international pension income

4

Decrease in domestic and international pension income

4

8

Outage costs associated with planned maintenance at the Montour plant

3

Outage costs associated with planned maintenance at the Montour and Conemaugh plants
Outage costs associated with planned maintenance at the Montour and Conemaugh plants

4

7

Timing and extent of outage costs associated with the planned refueling and inspection at the Susquehanna station and of other nuclear-related expenses
Timing and extent of outage costs associated with the planned refueling and inspection at the Susquehanna station and of other nuclear-related expenses

(9
)

7

Lease expense on office building and parking garage
Lease expense on office building and parking garage

2

Lease expense on office building and parking garage

1

4

Decrease in lease expense due to consolidation of the lessor of the Sundance and University Park generation facilities due to FIN 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51"
Decrease in lease expense due to consolidation of the lessor of the Sundance and University Park generation facilities due to FIN 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51"

(6
)

(12
)

Decrease in other postretirement benefit expense
Decrease in other postretirement benefit expense

(4
)
Decrease in other postretirement benefit expense

(1
)

(5
)

Gains on sales of emission allowances

(4
)
Impairment charge on transmission rights in 2003
Impairment charge on transmission rights in 2003

(4
)

(4
)

Other
Other

6

Other

3

10

$
39

$
(4
)

$
35

The ~~$4 million decrease~~decreases in net pension income ~~was~~for the three and six months ended June 30, 2004, compared with the same periods in 2003, were attributable to a reduction in the discount rate assumptions for PPL's domestic and international pension plans. Although financial markets have improved and PPL's domestic and international pension plans have experienced significant asset gains, interest rates on fixed-income obligations have continued to fall, requiring a further reduction in the discount rate assumption as of December 31, 2003. The reduction in the discount rate assumption has a significant impact on the measurement of plan obligations and net pension costs, which will result in PPL's recognition of lower levels of net pension income in 2004. See Note 12 to the Financial Statements for details of the costs of PPL's pension plans.
Depreciation
The ~~increase~~increases in depreciation expense ~~was~~were primarily due to:

June 30, 2004 vs. June 30, 2003

Three Months Ended
March 31, 2004 vs. March 31, 2003

Three Months
Ended

Six Months
Ended

Additions to PP&E
Additions to PP&E

$
4

Additions to PP&E

$
8

$
12

Consolidation of the lessor of the Sundance and University Park generation facilities due to FIN 46
Consolidation of the lessor of the Sundance and University Park generation facilities due to FIN 46

4

8

Foreign currency exchange rates
Foreign currency exchange rates

4

Foreign currency exchange rates

3

7

2003 purchase accounting adjustments to WPD assets
2003 purchase accounting adjustments to WPD assets

(9
)

2003 purchase accounting adjustments to WPD assets

(5
)

(14
)

Consolidation of the lessor of the Sundance and University Park generation facilities due to FIN 46

4

$
10

$
13

$
3

Taxes, Other Than Income
Taxes, other than income, ~~decreased~~increased by $8$4 million during the three months ended ~~March 31,~~June 30, 2004, compared with the same period in 2003. The increase was primarily due to increases in WPD's property taxes, primarily related to the impact of changes in foreign currency exchange rates and an increase in property tax rates, as well as increases in domestic gross receipts tax and capital stock tax.
Taxes, other than income, decreased by $4 million during the six months ended June 30, 2004, compared with the same period in 2003. In the first quarter of 2004, PPL Electric reversed a $14 million of accrued liability for 1998 and 1999 PURTA taxes that had been ~~previously~~ accrued based on potential exposure ~~of third-party intervention~~ in the proceedings regarding the Susquehanna nuclear station tax assessment. The rights of ~~these~~the third ~~parties~~party interveners to further appeal expired in 2004. This decrease was partially offset by increases in WPD's property taxes, primarily related to the impact of changes in foreign currency exchange rates, ~~and~~ adjustments recorded in 2003 and an increase in property tax rates, as well as increases in domestic gross receipts tax and capital stock tax.
Other Income - net
See Note 10 to the Financial Statements for details of other income.
Financing Costs
~~Financing~~The increase (decrease) in financing costs, which include "Interest Expense" and "Distributions on Preferred Securities," ~~increased~~was primarily due to:

June 30, 2004 vs. June 30, 2003

Three Months
Ended

Six Months
Ended

Increase in interest expense due to consolidation of the lessors of the Sundance, University Park and Lower Mt. Bethel generation facilities, in accordance with FIN 46

$
10

$
16

Financing costs associated with the repayment of the consolidated trust's debt for the Sundance and University Park generation facilities

9

9

Increase in long-term debt interest expense from WPD's additional debt issuances in March and May 2003

11

25

Increase in long-term debt interest expense due to PPL Energy Supply's issuance of Convertible Senior Notes in May 2003

2

4

Decrease in interest expense due to hedging activities accounted for under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities"

(7
)

(8
)

Decrease in amortization expense

(3
)

(6
)

Decrease in short-term debt expense

(4
)

(11
)

Decrease in long-term debt interest expense due to net long-term debt retirements
(9
)
(15
)

Write-off of unamortized swap costs on WPD debt restructuring
(11
)
(11
)

$
(2
)

$
3

Income Taxes
Income taxes decreased by $5$23 million ~~during~~and $20 million for the three and six months ended ~~March 31,~~June 30, 2004, compared with the same ~~period~~periods in ~~2003, primarily~~2003. The decreases were due to:
~~$14~~lower pre-tax book income, resulting in $2 million of and $4 million decreases in income taxes for the three and six months ended June 30, 2004;
differences in income recognition for tax purposes related to foreign affiliates, resulting in $17 million and $13 million reductions in income taxes for the three and six months ended June 30, 2004; and
additional ~~long-term debt interest from WPD's additional debt issuances~~synthetic fuel tax credits recognized, resulting in ~~March~~$2 million and ~~May 2003;~~
$6$3 million ~~of additional interest due~~reductions in income taxes for the three and six months ended June 30, 2004.
See Note 2 to the ~~consolidation of the lessor of the Sundance and University Park generation facilities~~Financial Statements for details on ~~December 31, 2003 in accordance with FIN 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51;" and~~
~~$2 million of additional long-term debt interest due to PPL Energy Supply's issuance of Convertible Senior Notes in May 2003; offset by~~
~~$7 million of lower interest on short-term debt due to less commercial paper and WPD short-term debt outstanding;~~
~~a $6 million decrease in long-term interest due to debt retirements in 2003; and~~
~~a $3 million decrease in amortization expense.~~
effective income tax rates.
Discontinued Operations
See "Discontinued Operations" in Note 7 to the Financial Statements for information regarding the ~~loss of $1 million~~losses recorded ~~in the first quarter of 2004~~ related to ~~PPL Global's plan of~~the sale of ~~its~~PPL Global's investment in a Latin American telecommunications company.
Cumulative Effect of a Change in Accounting Principle
PPL adopted SFAS 143, "Accounting for Asset Retirement Obligations," effective January 1, 2003. SFAS 143 addresses the accounting for obligations associated with the retirement of tangible long-lived assets. Application of the new rules resulted in a cumulative effect of adoption that increased net income by $63 million in 2003. See Note 21 to the Financial Statements in PPL's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003, for additional information.
Financial Condition
Liquidity
At ~~March 31,~~June 30, 2004, PPL had ~~$572~~$358 million of cash and cash equivalents and ~~$53~~$65 million of short-term debt. At December 31, 2003, PPL had $476 million inof cash and cash equivalents and $56 million of short-term debt. The ~~increase~~decrease in PPL's cash position was the net result of:
the retirement of $938 million of long-term debt;
$~~318~~375 million of capital expenditures; and
the payment of $142 million of common and preferred dividends; partially offset by
$628 million of cash provided by operating activities;
the issuance of $589 million of common stock;
proceeds of $123 million from the sale of CGE;
~~the issuance of $14 million of long-term debt;~~ and
the issuance of ~~$12 million of common stock; offset by~~
~~the retirement of $107~~$15 million of long-term ~~debt;~~
~~payment of $70 million of common and preferred dividends; and~~
~~$192 million of capital expenditures.~~debt.
Rating Agency Decisions
Standard & Poor's Ratings Services (S&P), Moody's Investors Service, Inc. (Moody's) and Fitch Ratings (Fitch) periodically review the credit ratings on the debt and preferred securities of PPL and its subsidiaries. Based on their respective reviews, the rating agencies may make certain ratings revisions.
Management does not expect these ratings decisions to limit PPL's or its subsidiaries' ability to fund their short-term liquidity needs through the issuance of commercial paper or borrowing under the subsidiaries' revolving credit facilities. In addition, management does not expect these ratings decisions to impact PPL's or its subsidiaries' ability to raise new long-term debt. These ratings decisions will have an immaterial impact on the cost for PPL's subsidiaries to maintain their credit facilities, as well as on the cost of any new long-term debt.
The ratings of S&P, Moody's and Fitch are not a recommendation to buy, sell or hold any securities of PPL or its subsidiaries. Such ratings may be subject to revisions or withdrawal by the agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to their securities.
~~In September 2003, Moody's announced that it was placing~~During the second quarter of 2004, S&P affirmed its BBB ratings on both PPL and PPL Energy Supply and revised its outlook on both entities from negative to stable. S&P also affirmed its BBB- rating on PPL Montana's ~~8.903%~~ Pass-Through Certificates due 2020 ~~under review for possible downgrade. During~~and revised its outlook from negative to stable. At the ~~first quarter of 2004, Moody's~~same time, S&P affirmed its ~~stable~~A-/A2 rating and negative outlook on ~~these securities~~PPL Electric. Also, S&P indicated that the following ratings would remain unchanged following the aforementioned revision to PPL's outlook:
WPDH Limited of BBB-/Negative/A-3;
WPD (South West) of BBB+/Negative/A-2; and
WPD (South Wales) of BBB+/Negative/A-2.
Subsequent Financings
In August 2004, PPL Electric began participating in an asset-backed commercial paper (ABCP) program through which PPL Electric obtains financing by selling and contributing to a subsidiary certain of its accounts receivable. The subsidiary pledges the accounts receivable to secure loans of up to an aggregate of $150 million from a commercial paper conduit sponsored by a financial institution. PPL Electric expects to use the proceeds from the ABCP program for general corporate purposes and to cash collateralize letters of credit. See Note 6 to the Financial Statements for additional information.
Other
The pension plans of WPD are subject to formal actuarial valuations every three years, which are ~~currently rated 'Baa3'.~~used to determine funding requirements. WPD's two principal plans were the subject of a formal actuarial valuation as of March 31, 2004. Preliminary valuations show an actuarial deficit of approximately £250 million (approximately $454 million based on current exchange rates) that may need to be funded over approximately 14 years if markets and asset values do not recover. WPD expects to conclude the formal valuation process and agree on deficit contribution schedules with the Trustees of the plans by March 31, 2005.
WPD believes that its internally generated cash flow, combined with its bank credit facilities, provides sufficient resources to finance its cash requirements and to maintain appropriate available liquidity.
For additional information on PPL's ~~Liquidity,~~liquidity, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003.
Risk Management - Energy Marketing & Trading and Other
Market Risk
Commodity Price Risk (Non-trading)
PPL's commodity derivative contracts that qualify for hedge accounting treatment mature at various times through 2010. The following chart sets forth PPL's net fair market value of these contracts:

Three Months Ended
March 31,

Three Months Ended
June 30,

Six Months Ended
June 30,

2004
2003

2004

2003

2004

2003

Fair value of contracts outstanding at the beginning of the period
$
86
$
63

$
85

$
133

$
86

$
63

Contracts realized or otherwise settled during the period
(24
)
(7
)

(21
)

(15
)

(45
)

(60
)

Fair value of new contracts at inception

Other changes in fair values
23
77

24

(34
)

47

81

Fair value of contracts outstanding at the end of the period
$
85
$
133

$
88

$
84

$
88

$
84

~~During~~"Contracts realized or otherwise settled during the period" relate to contracts entered into prior to April 1 for the three months ended ~~March 31, 2004~~June 30 and ~~2003, PPL realized or otherwise settled net gains of approximately $24 million and $7 million related to~~ contracts entered into prior to January 1 offor the ~~previous year.~~six months ended June 30. These amounts do not reflect ~~intra-quarter~~intra-period contracts that were entered into and settled during the periods.
"Other changes in fair ~~values," a gain of approximately $23 million and $77 million,~~values" represents changes in the market value that have occurred ~~during the three months ended March 31, 2004 and 2003~~ for contracts that were outstanding at the end of each period.
The following chart segregates estimated fair values of PPL's commodity derivative contracts that qualify for hedge accounting treatment at ~~March 31,~~June 30, 2004, based on whether the fair values are determined by quoted market prices or other more subjective means.

Fair Value of Contracts at Period-End
Gains/(Losses)

Maturity
Less
Than
1 Year

Maturity
1-3
Years

Maturity
4-5
Years

Maturity
in Excess
of 5
Years

Total
Fair
Value

Source of Fair Value

Prices actively quoted

$
9

$
9

Prices provided by other external sources

51

$
31

$
(5
)

$
(1
)

76

Prices based on models and other valuation methods

Fair value of contracts outstanding at the end of the period

$
60

$
31

$
(5
)

$
(1
)

$
85

Fair Value of Contracts at Period-End
Gains/(Losses)

Maturity
Less
Than
1 Year

Maturity
1-3
Years

Maturity
4-5
Years

Maturity
in Excess
of 5
Years

Total
Fair
Value

Source of Fair Value

Prices actively quoted

$
7

$
3

$
10

Prices provided by other external sources

53

29

$
(3
)

$
(1
)

78

Prices based on models and other valuation methods

Fair value of contracts outstanding at the end of the period

$
60

$
32

$
(3
)

$
(1
)

$
88

The "Prices actively quoted" category includes the fair value of exchange-traded natural gas futures contracts quoted on the New York Mercantile Exchange (NYMEX). The NYMEX has currently quoted prices through 2010.
The "Prices provided by other external sources" category includes PPL's forward positions and options in natural gas and power and natural gas basis swaps at points for which over-the-counter (OTC) broker quotes are available. The fair value of electricity positions recorded above use the midpoint of the bid/ask spreads obtained through OTC brokers. On average, OTC quotes for forwards and swaps of natural gas and power extend one and two years into the future.
The "Prices based on models and other valuation methods" category includes the value of transactions for which an internally developed price curve was constructed as a result of the long-dated nature of the transaction or the illiquidity of the market point, or the value of options not quoted by an exchange or OTC broker. Additionally, this category includes "strip" transactions whose prices are obtained from external sources and then modeled to monthly prices as appropriate.
As of ~~March 31,~~June 30, 2004, PPL estimated that a 10% adverse movement in market prices across all geographic areas and time periods would have decreased the value of the commodity contracts in its non-trading portfolio by approximately ~~$170 million, compared to a decrease of $196 million at March 31, 2003.~~$174 million. However, the change in the value of the non-trading portfolio would have been substantially offset by an increase in the value of the underlying commodity, the electricity generated, because these contracts serve to reduce the market risk inherent in the generation of electricity. Additionally, the value of PPL's unsold generation would be improved. Because PPL's electricity portfolio is generally in a net sales position, the adverse movement in prices is usually an increase in prices. Conversely, because PPL's commodity fuels portfolio is generally in a net purchase position, the adverse movement in prices is usually a decrease in prices. If both of these scenarios happened, the implied margins for the unsold generation would increase.
In accordance with its marketing strategy, PPL does not completely hedge its generation output or fuel requirements. PPL estimates that for its entire portfolio, including all generation and physical and financial energy positions, a 10% adverse change in power prices across all geographic zones and time periods would decrease expected 2004 gross margins by about $6$1 million. Similarly, a 10% adverse movement in all fossil fuel prices would decrease 2004 gross margins by $4 million.
Commodity Price Risk (Trading)
PPL's trading contracts mature at various times through 2006. The following chart sets forth PPL's net fair market value of trading contracts:

Three Months Ended
June 30,

Six Months Ended
June 30,

2004

2003

2004

2003

Fair value of contracts outstanding at the beginning of the period

$
11

$
(16
)

$
3

$
(6
)

Contracts realized or otherwise settled during the period

(4
)

10

(7
)

9

Fair value of new contracts at inception

(2
)

4

(2
)

Other changes in fair values

5

1

12

(8
)

Fair value of contracts outstanding at the end of the period

$
12

$
(7
)

$
12

$
(7
)

Three Months Ended
March 31,
2004
2003
Fair value of contracts outstanding at the beginning of the period
$
3
$
(6
)
Contracts realized or otherwise settled during the period
(3
)
(1
)
Fair value of new contracts at inception
4
Other changes in fair values
7
(9
)
Fair value of contracts outstanding at the end of the period
$
11
$
(16
)
~~During the three months ended March 31, 2004 and 2003, PPL~~"Contracts realized or otherwise settled ~~net gains of approximately $3 million and $1 million related~~during the period" relate to trading contracts entered into prior to April 1 for the three months ended June 30 and contracts entered into prior to January 1 offor the ~~previous year.~~six months ended June 30. These amounts do not reflect ~~intra-year~~intra-period contracts that were entered into and settled during the periods.
The ~~fair~~"Fair value of new contracts at ~~inception~~inception" is usually zero, because they are entered into at current market prices. However, when PPL enters into an option contract, a premium is paid or received. ~~PPL paid a net of $4 million during the three months ended March 31, 2004 for these option contracts.~~
"Other changes in fair ~~values," a gain/(loss) of approximately $7 million and $(9) million,~~values" represents changes in the market value that have occurred ~~during the three months ended March 31, 2004 and 2003~~ for contracts that were outstanding at the end of each period.
As of ~~March 31,~~June 30, 2004, the net loss on PPL's trading activities expected to be recognized in earnings during the next three months is ~~approximately $2~~$3 million.
The following chart segregates estimated fair values of PPL's trading portfolio at ~~March 31,~~June 30, 2004, based on whether the fair values are determined by quoted market prices or other more subjective means.

Fair Value of Contracts at Period-End
Gains/(Losses)

Fair Value of Contracts at Period-End
Gains/(Losses)

Maturity
Less
Than
1 Year

Maturity
1-3
Years

Maturity
4-5
Years

Maturity
in Excess
of 5
Years

Total
Fair
Value

Maturity
Less
Than
1 Year

Maturity
1-3
Years

Maturity
4-5
Years

Maturity
in Excess
of 5
Years

Total
Fair
Value

Source of Fair Value

Prices actively quoted

$
1

$
1

$
1

$
1

$
2

Prices provided by other external sources

$
4

4

4

4

Prices based on models and other valuation methods

4

2

6

5

1

6

Fair value of contracts outstanding at the end of the period

$
5

$
6

$
11

$
6

$
6

$
12

As of ~~March 31,~~June 30, 2004, PPL estimated that a 10% adverse movement in market prices across all geographic areas and time periods would have decreased the value of the commodity contracts in its trading portfolio by ~~$10 million, compared to a decrease of $6 million at March 31, 2003.~~$9 million.
Interest Rate Risk
PPL and its subsidiaries have issued debt to finance their operations. PPL utilizes various financial derivative products to adjust the mix of fixed and floating interest rates in its debt portfolio, adjust the duration of its debt portfolio and lock in U.S. Treasury rates (and interest rate spreads over treasuries) in anticipation of future financing, when appropriate. Risk limits under the risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of PPL's debt portfolio due to changes in the absolute level of interest rates.
At ~~March 31,~~June 30, 2004, PPL's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was estimated at $3$5 million.
PPL is also exposed to changes in the fair value of its U.S. and international debt portfolios. At ~~March 31,~~June 30, 2004, PPL estimated that its potential exposure to a change in the fair value of its debt portfolio, through a 10% adverse movement in interest rates, was ~~$160~~$221 million.
PPL utilizes various risk management instruments to reduce its exposure to adverse interest rate movements for future anticipated financing. While PPL is exposed to changes in the fair value of these instruments, they are designed such that anany economic loss in value should generally be offset by interest rate savings at the time the future anticipated financing is completed. At ~~March 31,~~June 30, 2004, PPL estimated that its potential exposure to a change in the fair value of these instruments, through a 10% adverse movement in interest rates, was approximately $3$7 million.
Foreign Currency Risk
PPL is exposed to foreign currency risk, primarily through investments in affiliates in Latin America and Europe. In addition, PPL may make purchases of equipment in currencies other than U.S. dollars.
PPL has adopted a foreign currency risk management program designed to hedge certain foreign currency exposures, including firm commitments, recognized assets or liabilities and net investments. In addition, PPL enters into financial instruments to protect against foreign currency translation risk.
PPL executed forward sale transactions for ~~£21.4~~£17.7 million to hedge a portion of its net investment in WPDH Limited. The estimated value of these agreements as of ~~March 31,~~June 30, 2004, was $5 million, being the amount PPL would pay to terminate the transactions.
PPL executed forward sale transactions for 79.6 billion Chilean pesos to hedge a portion of its net investment in its subsidiary that owned the investment in CGE. The estimated value of these agreements as of March 31, 2004, being the amount PPL would receive to terminate the transactions, was $2 million.
To protect expected income in British pounds sterling, PPL entered into average rate forward sales contracts for £29 million. In conjunction with these forward contracts, PPL executed average rate purchase options ~~for £44 million.~~of £20 million to mitigate the liquidity risk inherent in the average rate forwards. At ~~March 31,~~June 30, 2004, the market value of these positions, representing the amount PPL would ~~pay~~receive to terminate them, was insignificant.
To protect expected income in Chilean pesos, PPL entered into average rate ~~options~~forward sales contracts for ~~4.1~~5.5 billion Chilean pesos. At ~~March 31,~~June 30, 2004, the market value of these positions, representing the amount PPL would ~~pay~~receive to terminate them, was insignificant.
WPDH Limited ~~executed~~held a net position in cross-currency swaps totaling ~~$1.5~~$1.3 billion to hedge the interest payments and value of its U.S. dollar-denominated bonds. The estimated value of this position ~~on March 31,~~at June 30, 2004, being the amount PPL would pay to terminate ~~them,~~it, including accrued interest, was ~~$204~~$197 million.
On the Statement of Income, gains and losses associated with hedges of interest payments denominated in foreign currencies are reflected in "Interest Expense." Gains and losses associated with the purchase of equipment are reflected in "Depreciation." Gains and losses associated with net investment hedges remain in "Accumulated other comprehensive loss" on the Balance Sheet until the investment is disposed.
Nuclear Decommissioning Fund - Securities Price Risk
In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the Susquehanna station. As of ~~March 31,~~June 30, 2004, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on PPL's 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 values of fixed-rate, fixed-income securities are exposed to changes in interest rates. PPL Susquehanna actively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement. At ~~March 31,~~June 30, 2004, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated ~~$26~~$27 million reduction in the fair value of the trust assets.
PPL Electric's 1998 restructuring settlement agreement provides for the collection of authorized nuclear decommissioning costs through the CTC. Additionally, PPL Electric is permitted to seek recovery from customers of up to 96% of certain increases in these costs. Under the power supply agreements between PPL Electric and PPL EnergyPlus, these revenues are passed on to PPL EnergyPlus. Similarly, these revenues are passed on to PPL Susquehanna under a power supply agreement between PPL EnergyPlus and PPL Susquehanna. These revenues are used to fund the trusts.
Credit Risk
Credit risk relates to the risk of loss that PPL would incur as a result of non-performance by counterparties of their contractual obligations. PPL maintains credit policies and procedures with respect to counterparties (including requirements that counterparties maintain certain credit ratings criteria) and requires other assurances in the form of credit support or collateral in certain circumstances in order to limit counterparty credit risk. However, PPL has concentrations of suppliers and customers among electric utilities, natural gas distribution companies and other energy marketing and trading companies. These concentrations of counterparties may impact PPL's overall exposure to credit risk, either positively or negatively, in that counterparties may be similarly affected by changes in economic, regulatory or other conditions. PPL records certain non-performance reserves to reflect the probability that a counterparty with contracts that are out of the money (from the counterparty's standpoint) will default in its performance, in which case PPL would have to sell into a lower-priced market or purchase from a higher-priced market. These reserves are reflected in the fair value of assets recorded in "Price risk management assets" on the Balance Sheet. PPL also records reserves to reflect the probability that a counterparty will not make payments for deliveries PPL has made but not yet billed. These reserves are reflected in "Unbilled revenues" on the Balance Sheet. PPL has also established a reserve with respect to certain sales to the California ISO for which PPL has not yet been paid, as well as a reserve related to PPL's exposure as a result of the Enron bankruptcy, which are reflected in "Accounts receivable" on the Balance Sheet. See Note 8 to the Financial Statements for additional information on the sales to the California ISO.
Related Party Transactions
PPL is not aware of any material ownership interests or operating responsibility by senior management of PPL, PPL Energy Supply or PPL Electric in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with PPL.
Acquisitions, Development and Divestitures
From time to time, PPL and its subsidiaries are involved in negotiations with third parties regarding acquisitions, joint ventures and other arrangements which may or may not result in definitive agreements. See Note 7 to the Financial Statements for information regarding recent acquisitions and development activities.
At ~~March 31,~~June 30, 2004, PPL had domestic generation projects under development which ~~will~~are expected to provide ~~863~~218 MW of additional generation. In April 2004, the turbine upgrade for PPL Susquehanna Unit 1 was completed. This project provides a nominal power increase of 50 MW of generation capacity, of which PPL Susquehanna has a 90% undivided interest.
PPL is continuously reexamining development projects based on market conditions and other factors to determine whether to proceed with these projects, sell them, cancel them, expand them, execute tolling agreements or pursue other opportunities.
Environmental Matters
See Note 8 to the Financial Statements for a discussion of environmental matters.
New Accounting Standards
See Note 1516 to the Financial Statements for information on new accounting standards adopted in 2004 or pending adoption.
Application of Critical Accounting Policies
PPL's financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to the financial condition or results of operations of PPL, and require estimates or other judgments of matters inherently uncertain: price risk management, pension and other postretirement benefits, asset impairment, leasing, loss contingencies and asset retirement obligations.
See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003, for a discussion of each critical accounting policy. PPL's senior management has reviewed these critical accounting policies, and the estimates and assumptions regarding them, with its Audit Committee. In addition, PPL's senior management reviewed the Form 10-K disclosures regarding the application of these critical accounting policies with the Audit Committee.

PPL ENERGY SUPPLY, LLC AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
PPL Energy Supply is an energy company with headquarters in Allentown, PA. See Item 1, "Business - Background" in PPL Energy Supply's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003, for a description of PPL Energy Supply's domestic and international businesses. See Exhibit 99 in Item 15 in PPL Energy Supply's Form 10-K for a listing of its principal subsidiaries. Through its subsidiaries, PPL Energy Supply is primarily engaged in the generation and marketing of electricity in two key markets - the northeastern and western U.S. - and in the delivery of electricity in the U.K. and Latin America. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL Energy Supply's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003, for an overview of PPL Energy Supply's strategy and the risks and ~~the~~ challenges that it faces in its business.
The information provided in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with PPL Energy Supply's Condensed Consolidated Financial Statements and the accompanying Notes.
Terms and abbreviations ~~appearing herein~~ are explained in the glossary. Dollars are in millions unless otherwise noted.
Results of Operations
The following discussion, which explains significant changes in principal items on the Statement of Income, compares the three and six months ended ~~March 31,~~June 30, 2004, towith the comparable ~~period~~periods in 2003.
WPD's results, as consolidated in PPL Energy Supply's Statement of Income, are impacted by changes in foreign currency exchange rates. For the three and six months ended ~~March 31,~~June 30, 2004, as compared towith the same ~~period~~periods in 2003, changes in foreign exchange rates increased WPD's portion of revenue and expense line items by about 13%. for both periods.
The Statement of Income reflects the results of past operations and is not intended as any indication of future operating results. Future operating results will necessarily be affected by various and diverse factors and developments. Furthermore, because results for interim periods can be disproportionately influenced by various factors and developments and by seasonal variations, the results of operations for interim periods do not necessarily indicate results or trends for the year.
Earnings
Net income was as follows:

Three Months Ended
March 31,

2004

2003

$
146

$
216

Three Months Ended
June 30,

Six Months Ended
June 30,

2004

2003

2004

2003

$
157

$
132

$
303

$
348

The after-tax changes in net income were primarily due to:

June 30, 2004 vs. June 30, 2003

Three Months Ended
March 31, 2004 vs. March 31, 2003

Three Months
Ended

Six Months
Ended

Domestic:
Domestic:

Domestic:

Eastern U.S. margins

$
7

$
19

Eastern U.S. margins

$
12

Net energy trading margins

(4
)

4

Net energy trading margins

8

Northwestern U.S. margins

(5
)

(1
)

Northwestern U.S. margins

4

Southwestern U.S. margins

1

Southwestern U.S. margins

1

Depreciation

(5
)

(7
)

Depreciation

(2
)
Interest expense

(10
)

(15
)

Interest expense

(5
)
Operation and maintenance expenses

8

(4
)

Operation and maintenance expenses

(12
)
Other income - affiliated interest

(2
)

(6
)

Other income - affiliated interest

(4
)
Energy related businesses

(1
)

(3
)

Energy related businesses

(4
)
Realized earnings on nuclear decommissioning trust

(3
)

(2
)

Other

(3
)
Other

2

(5
)

Total Domestic

(5
)

Total Domestic

(13
)

(19
)

International:
International:

International:

U.K.:

U.K.

Impact of changes in foreign currency exchange rates

7

Impact of changes in foreign currency exchange rates

6

13

Other

2

Other

2

4

Latin America

1

Latin America

5

6

Other

(4
)
Other

3

Total International

6

Total International

16

23

Unusual items
Unusual items

(71
)
Unusual items

22

(49
)

$
(70
)

$
25

$
(45
)

The changes in net income from period to period were, in part, attributable to ~~two~~several unusual items with significant earnings ~~impacts.~~impacts, including accounting changes, discontinued operations and infrequently occurring items. The after-tax impacts of these unusual items are shown below.

Three Months Ended
March 31,

Three Months Ended
June 30,

Six Months Ended
June 30,

2004

2003

2004

2003

2004

2003

Accounting change:
Accounting change:

Accounting change:

ARO (Note 13)
$
63
ARO (Note 14)

$
63

Sale of CGE (Note 7)
Sale of CGE (Note 7)

$
(8
)

Sale of CGE (Note 7)

$
1

$
(7
)

Sale of CEMAR (Note 7)
Sale of CEMAR (Note 7)

23

23

Discontinued operations (Note 7)
Discontinued operations (Note 7)
(2
)
(2
)

Total
Total

$
(8
)

$
63

Total

$
22

$
14

$
63

The period to period changes in earnings components, including domestic gross energy margins by region and income statement line items, are discussed in the balance of ~~the discussion in~~ "Results of Operations."
PPL Energy Supply's future earnings could be, or will be, impacted by a number of key factors, including the following:
Due to current electricity and natural gas price levels, there is a risk that PPL Energy Supply may be unable to recover its investment in new gas-fired generation facilities. Under GAAP, PPL Energy Supply does not believe that there is an impairment charge to be recorded for these facilities at this time. PPL Energy Supply is unable to predict the ultimate earnings impact of this issue, based upon future energy price levels, applicable accounting rules and other factors, but such impact may be material. In June 2004, a subsidiary of PPL Generation agreed to sell the 450 MW Sundance power plant to the Arizona Public Service Company. If the necessary regulatory approvals can be obtained, the sale is expected to close in the first quarter of 2005. If it becomes likely that the required regulatory approvals will be obtained, PPL Energy Supply will reassess the Sundance assets for possible impairment. PPL Energy Supply estimates that an impairment charge of about $47 million after-tax could be recorded in 2004 or 2005 depending on the timing of regulatory approvals. See Note 7 to the Financial Statements for additional information on the potential Sundance sale.
Market prices for electricity and fuel may negatively impact energy margins and earnings.
PPL Energy Supply is unable to predict whether future impairments of goodwill may be required for its domestic and international investments. While no goodwill impairments were required based on the annual review performed in the fourth quarter of 2003, future impairments may occur due to determinations of carrying value exceeding the fair value of these investments.
Earnings in 2005 and beyond are expected to be ~~negatively~~ impacted by a rate review of the delivery business of WPD (South West) and WPD (South Wales). PPL Energy Supply cannot predict the ultimate outcome of the rate review. See Note 8 to the Financial Statements for additional information.
PPL Energy Supply has interests in two ~~synfuel~~synthetic fuel facilities and receives tax credits pursuant to Section 29 of the Internal Revenue Code based on its sale of ~~synfuel~~synthetic fuel to unaffiliated third-party purchasers. PPL Energy Supply has estimated that these facilities will contribute approximately $23 million to earnings in 2004, approximately $30 million to earnings in 2005 and 2006, and approximately $32 million to earnings in 2007. See Note 8 to the Financial Statements for a discussion of the IRS review of ~~synfuel~~synthetic fuel production procedures.
See Note 16 to the Financial Statements for new accounting standards that may impact future earnings.
Domestic Gross Energy Margins
The following table provides changes in the income statement line items that comprise domestic gross energy margins:

June 30, 2004 vs. June 30, 2003

Three Months Ended
March 31, 2004 vs. March 31, 2003

Three Months
Ended

Six Months
Ended

Wholesale energy marketing revenues
Wholesale energy marketing revenues

$
(20
)
Wholesale energy marketing revenues

$
(9
)

$
(29
)

Wholesale energy marketing to affiliates

21

Wholesale energy marketing to affiliates revenues
Wholesale energy marketing to affiliates revenues

18

39

Unregulated retail electric and gas revenues
Unregulated retail electric and gas revenues

(20
)
Unregulated retail electric and gas revenues

(4
)

(24
)

Net energy trading margins
Net energy trading margins

14

Net energy trading margins

(7
)

7

Other revenue adjustments (a)
Other revenue adjustments (a)

14

Other revenue adjustments (a)

(2
)

8

Total revenues

9

Total revenues

(4
)

1

Fuel
Fuel

5

Fuel

34

39

Energy purchases
Energy purchases

(34
)
Energy purchases

(36
)

(70
)

Energy purchases from affiliates
Energy purchases from affiliates

(7
)
Energy purchases from affiliates

1

(6
)

Other cost adjustments (a)
Other cost adjustments (a)

2

Other cost adjustments (a)

1

(1
)

Total cost of sales

(34
)

Total cost of sales

(38
)

Domestic gross energy margins

$
43

Domestic gross energy margins

$
(4
)

$
39

(a)

Adjusted to exclude the impact of any revenues and costs not associated with domestic gross energy margins, in particular, revenues and energy costs related to the international operations of PPL Global. Also adjusted to include gains on sales of emission allowances, which are ~~reflected~~included in "Other operation and maintenance" expenses on the Statement of Income.
Changes in Domestic Gross ~~Domestic~~ Energy Margins By Region
Domestic gross energy margins are generated through PPL's normal and hedge activities (non-trading), as well as trading activities. Non-trading margins are now discussed on a geographic basis rather than on an activity basis, as ~~previously provided.~~reported prior to 2004. A regional perspective more closely matches the internal view of how PPL's energy business is managed.

June 30, 2004 vs. June 30, 2003

Three Months Ended
March 31, 2004 vs. March 31, 2003

Three Months
Ended

Six Months
Ended

Eastern U.S.
Eastern U.S.

$
21

Eastern U.S.

$
12

$
33

Northwestern U.S.
Northwestern U.S.

7

Northwestern U.S.

(9
)

(2
)
Southwestern U.S.
Southwestern U.S.

1

Southwestern U.S.

1

Net energy trading
Net energy trading

14

Net energy trading

(7
)

7

Domestic gross energy margins

$
43

Domestic gross energy margins
$
(4
)
$
39

Eastern U.S.
Eastern U.S. non-trading margins were higher for the three and six months ended ~~March 31,~~June 30, 2004, compared towith the same ~~period~~periods in 2003, due to ~~higher prices and~~retail volumes ~~as well as a lower-cost mix of generation. Wholesale sale prices increased~~increasing 5% and 4% and wholesale volumes increasing 1% and 2%. Retail volumes increased 4%, primarily due to serving new competitive load obligations in Connecticut and New Jersey. Retail energy prices increased about 1% in accordance with the schedule established by the PUC's Final Order, and retail volumes increased 4% primarily due to the return of customers who previously shopped for energy in the competitive market in Pennsylvania. ~~Finally, supply costs did not increase proportionally because~~In addition, retail energy prices increased ~~generation from coal units displaced marginal-cost oil units. These coal units had improved performance~~about 1% in ~~2004 over 2003 because of differences~~accordance with the schedule established by the PUC's Final Order. Wholesale volumes increased primarily due to serving new competitive load obligations in ~~planned outage schedules~~Connecticut and ~~the elimination of transmission constraints.~~New Jersey.
Northwestern U.S.
Northwestern U.S. non-trading margins were ~~higher~~lower for the three and six months ended June 30, 2004, compared with the same periods in 2003, primarily due to a retroactive coal price increase caused by an unfavorable arbitration ruling. Incremental expense of $6 million was recorded during the three months ended June 30, 2004, as a result of the ruling, most of which related to years 2001 to 2003. In addition, for the three months ended ~~March 31,~~June 30, 2004, ~~compared to~~hydro generation was 16% lower than the same period in 2003 ~~primarily~~ due to ~~higher~~continuing drought conditions. For the six months ended June 30, 2004, a 4% increase in realized sales prices combined with ~~improved generation production. Sales prices rose 8% for the three months ended March 31, 2004, compared to the same period~~a slight improvement in ~~2003. Hydro~~ generation production ~~rose 12% due~~contributed to ~~more precipitation, and~~lowering supply costs, that partially offset the retroactive coal ~~generation production rose 6% due to operational improvements.~~price adjustment.
Southwestern U.S.
Southwestern U.S. non-trading margins ~~increased by $1 million~~were relatively flat for the three and six months ended ~~March 31,~~June 30, 2004, compared towith the same ~~period~~periods in ~~2003, because of lower market prices for purchased power.~~2003.
Net Energy Trading
PPL enters into certain energy contracts that meet the criteria of trading derivatives as defined by EITF Issue 02-3, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities." These physical and financial contracts cover trading activity associated with electricity, gas and oil. The ~~$14~~$7 million ~~increase~~decrease for the three months ended March 31, 2004, compared to the same period in 2003, was primarily due to unrealized gas derivative gains from increases in natural gas prices for the three months ended March 31, 2004, and realized and unrealized electric swap losses for the three months ended March 31, 2003. The physical volumes associated with energy trading were 994 GWh and 2.4 Bcf for the three months ended March 31, 2004, compared to 1,213 GWh and no Bcf for the three months ended March 31, 2003.
~~Utility Revenues~~
~~The increase in utility revenues was attributable to the following:~~

Three Months Ended
March 31, 2004 vs. March 31, 2003

International:

Retail electric delivery (PPL Global)

U.K.

$
26

Chile

12

$
38

~~The increase in utility revenues for the three months ended March 31,~~June 30, 2004, compared with the same period in 2003, was primarily due to a decrease in realized and unrealized gains on electricity positions. The $7 million increase for the six months ended June 30, 2004, compared with the same period in 2003, was due to a $3 million increase in electricity positions and a $4 million increase in gas and oil positions. The physical volumes associated with energy trading for the three months ended June 30, 2004, were 1,186 GWh and 1.8 Bcf, compared with 1,055 GWh and 3.4 Bcf for the three months ended June 30, 2003. Energy trading physical volumes for the six months ended June 30, 2004, were 2,180 GWh and 4.3 Bcf, compared with 2,269 GWh and 7.2 Bcf for the six months ended June 30, 2003.
Utility Revenues
The increases in utility revenues were attributable to the following:

June 30, 2004 vs. June 30, 2003

Three Months
Ended

Six Months
Ended

International:

Retail electric delivery (PPL Global)

U.K.

$
14

$
40

Chile

7

19

El Salvador

(2
)

(2
)

$
19
$
57

The increases for both periods were primarily due to:
higher WPD revenues in the U.K., primarily due to the change in foreign currency exchange ~~rates from period to period;~~rates; and
higher revenues in Chile ~~primarily~~ due to higher energy prices, which are a pass-through to customer ~~rates.~~rates, the change in foreign currency exchange rates, and increases in sales volumes of 5% and 7% for the three and six months ended June 30, 2004, compared with the same periods in 2003; partially offset by
lower revenues in El Salvador due to lower energy prices, despite higher sales volumes.
Energy Related Businesses
Energy related businesses contributed $23 million less to operating income for the ~~three~~six months ended ~~March 31,~~June 30, 2004, compared towith the same period in 2003. The decrease ~~resulted primarily from~~ was attributable to the following:
a $15 million loss on the sale of ~~PPL Global's minority interest in~~ CGE (see Note 7 to the Financial Statements), ;
a $4 million decrease indue to WPD ~~net revenues due largely to~~ contract terminations in 2003 and ~~2004, and~~ 2004;
a $2$4 million decrease ~~in contributions~~ from mechanical contracting and engineering subsidiaries due to the continued decline in capital spending in commercial and industrial markets, ~~and~~ lower margins experienced in those ~~markets.~~
markets, and cost overruns at two major projects;
a $2 million decrease from Latin American subsidiaries due primarily to lower dividends received and lower construction sales; and
a $2 million higher pre-tax operating loss from synfuel projects; partially offset by
a $5 million operating loss on some Hyder properties in the first quarter of 2003, which were subsequently sold in April 2003.
Other Operation and Maintenance
The increase (decrease) in other operation and maintenance expenses was primarily due to:

Three Months Ended
March 31, 2004 vs. March 31, 2003

Timing of outage costs associated with the planned refueling and inspection at the Susquehanna station, and of other nuclear-related expenses

$
16

Insurance settlements - property damage and environmental which were recorded in 2003

12

Increase in foreign currency exchange rates

4

Outage costs associated with planned maintenance at the Montour plant

3

Decrease in domestic and international pension income

2

Gains on sales of emission allowances

(4
)

Lower trademark license fees from a PPL subsidiary (see Note 9)

(3
)

Decrease in other postretirement benefit expense

(1
)

Other

(1
)

$
28

June 30, 2004 vs. June 30, 2003

Three Months
Ended

Six Months
Ended

Property damage and environmental insurance settlements which were recorded in 2003

$
12

Increase in foreign currency exchange rates

$
4

8

Outage costs associated with planned maintenance at the Montour and Conemaugh plants

4

7

Timing and extent of outage costs associated with the planned refueling and inspection at the Susquehanna station and of other nuclear-related expenses

(9
)

7

Decrease in domestic and international pension income

2

4

Decrease in lease expense due to consolidation of the lessor of the Sundance and University Park generation facilities due to FIN 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51"

(6
)

(12
)

Impairment charge on transmission rights in 2003

(4
)

(4
)

Lower trademark license fees from a PPL subsidiary (Note 9)

(1
)

(4
)

$
(10
)

$
18

The ~~$2 million decrease~~decreases in net pension income ~~was~~for the three and six months ended June 30, 2004, compared with the same periods in 2003, were attributable to a reduction in the discount rate assumptions for PPL Energy Supply's domestic and international pension plans. Although financial markets have improved and PPL Energy Supply's domestic and international pension plans have experienced significant asset gains, interest rates on fixed-income obligations have continued to fall, requiring a further reduction in the discount rate assumption as of December 31, 2003. The reduction in the discount rate assumption has a significant impact on the measurement of plan obligations and net pension costs, which will result in PPL Energy Supply's recognition of lower levels of net pension income in 2004. See Note 12 to the Financial Statements for details of the costs of PPL Energy Supply's pension plans.
Depreciation
~~Depreciation~~The increases in depreciation expense ~~was impacted by the following offsetting items:~~were primarily due to:

June 30, 2004 vs. June 30, 2003

Three Months Ended
March 31, 2004 vs. March 31, 2003

Three Months
Ended

Six Months
Ended

Additions to PP&E
Additions to PP&E

$
1

Additions to PP&E

$
7

$
8

Consolidation of the lessor of the Sundance and University Park generation facilities due to FIN 46
Consolidation of the lessor of the Sundance and University Park generation facilities due to FIN 46

4

8

Foreign currency exchange rates
Foreign currency exchange rates

4

Foreign currency exchange rates

3

7

2003 purchase accounting adjustments to WPD assets
2003 purchase accounting adjustments to WPD assets

(9
)

2003 purchase accounting adjustments to WPD assets

(5
)

(14
)

Consolidation of the lessor of the Sundance and University Park generation facilities due to FIN 46

4

$
9

$
9

$

Taxes, Other Than Income
Taxes, other than income, increased by $5$7 million during the ~~three~~six months ended ~~March 31,~~June 30, 2004, compared with the same period in ~~2003,~~2003. The increase was primarily due to an increase in domestic capital stock ~~taxes~~tax of $2$3 million and increases in WPD's property taxes of ~~$3 million. The increase in property taxes was~~$5 million, primarily related to the impact of changes of foreign currency exchange rates, ~~and~~ adjustments recorded in ~~2003.~~2003 and an increase in property tax rates.
Other Income - net
See Note 10 to the Financial Statements for details of other income.
Financing Costs
~~Financing~~The increases in financing costs, ~~including~~which include "Interest Expense" and "Distributions on Preferred Securities," ~~increased~~were primarily due to:

June 30, 2004 vs. June 30, 2003

Three Months
Ended

Six Months
Ended

Increase in interest expense due to consolidation of the lessors of the Sundance, University Park and Lower Mt. Bethel generation facilities, in accordance with FIN 46
$
10
$
16

Financing costs associated with the repayment of the consolidated trust's debt for the Sundance and University Park generating facilities

9

9

Increase in long-term debt interest expense from WPD's additional debt issuances in March and May 2003

11

25

Increase in long-term debt interest expense due to the issuance of Convertible Senior Notes in May 2003

2

4

Increase in other long-term debt interest expense

2

3

Decrease in amortization expense

(4
)

(8
)

Decrease in short-term debt interest expense

(4
)

(11
)

Write-off of unamortized swap costs on WPD debt restructuring

(11
)

(11
)

$
15

$
27

Income Taxes
Income taxes decreased by ~~$12~~$22 million ~~during~~and $21 million for the three and six months ended ~~March 31,~~June 30, 2004, compared with the same ~~period~~periods in ~~2003, primarily~~2003. The decreases were due to:
~~$14 million of additional long-term debt interest from WPD's additional debt issuances~~lower pre-tax book income, resulting in ~~March and May 2003;~~
$6 million of additional interest due to the consolidation of the lessor of the Sundance and University Park generation facilities on December 31, 2003 in accordance with FIN 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51;" and
~~$2 million of additional long-term debt interest due to the issuance of Convertible Senior Notes in May 2003; offset by~~
~~$7 million of lower interest on short-term debt due to less commercial paper and WPD short-term debt outstanding; and~~
a $4 million decrease in ~~amortization expense.~~income taxes for the six months ended June 30, 2004;
differences in income recognition for tax purposes related to foreign affiliates, resulting in $17 million and $13 million reductions in income taxes for the three and six months ended June 30, 2004; and
additional synthetic fuel tax credits recognized, resulting in $2 million and $3 million reductions in income taxes for the three and six months ended June 30, 2004.
See Note 2 to the Financial Statements for details on effective income tax rates.
Discontinued Operations
See "Discontinued Operations" in Note 7 to the Financial Statements for information regarding the ~~loss of $1 million~~losses recorded ~~in the first quarter of 2004~~ related to ~~PPL Global's plan of~~the sale of ~~its~~PPL Global's investment in a Latin American telecommunications company.
Cumulative Effect of a Change in Accounting Principle
PPL Energy Supply adopted SFAS 143, "Accounting for Asset Retirement Obligations," effective January 1, 2003. SFAS 143 addresses the accounting for obligations associated with the retirement of tangible long-lived assets. Application of the new rules resulted in a cumulative effect of adoption that increased net income by $63 million in 2003. See Note 21 to the Financial Statements in PPL Energy Supply's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003, for additional information.
Financial Condition
Liquidity
At ~~March 31,~~June 30, 2004, PPL Energy Supply had ~~$394~~$222 million of cash and cash equivalents and ~~$8 million of~~no short-term debt. At December 31, 2003, PPL Energy Supply had $227 million inof cash and cash equivalents and $56 million of short-term debt. The ~~increase~~decrease in PPL Energy Supply's cash position was the net result of:
the retirement of $663 million of long-term debt;
$~~272~~264 million of capital expenditures;
the distribution to Member of $124 million; and
a decrease of $61 million in short-term debt; partially offset by
$438 million of cash provided by operating activities;
proceeds of $495 million from a note payable to an affiliate;
proceeds of $123 million from the sale of CGE;
the contribution from Member of $58 million; and
the issuance of ~~$14~~$15 million of long-term ~~debt; offset by~~
~~the distribution to Member of $63 million;~~
~~a decrease of $51 million in short-term debt; and~~
~~$132 million of capital expenditures.~~debt.
Rating Agency Decisions
Standard & Poor's Ratings Services (S&P), Moody's Investors Service, Inc. (Moody's) and Fitch Ratings (Fitch) periodically review the credit ratings on the debt and preferred securities of PPL Energy Supply and its subsidiaries. Based on their respective reviews, the rating agencies may make certain ratings revisions.
Management does not expect these ratings decisions to limit PPL Energy Supply's or its subsidiaries' ability to fund their short-term liquidity needs through the issuance of commercial paper or borrowing under their revolving credit facilities. In addition, management does not expect these ratings decisions to impact PPL Energy Supply's or its subsidiaries' ability to raise new long-term debt. These ratings decisions will have an immaterial impact on the cost for PPL Energy Supply or its subsidiaries to maintain their credit facilities, as well as on the cost of any new long-term debt.
The ratings of S&P, Moody's and Fitch are not a recommendation to buy, sell or hold any securities of PPL Energy Supply or its subsidiaries. Such ratings may be subject to revisions or withdrawal by the agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to their securities.
~~In September 2003, Moody's announced that it was placing~~During the second quarter of 2004, S&P affirmed its BBB ratings on both PPL and PPL Energy Supply and revised its outlook on both entities from negative to stable. S&P also affirmed its BBB- rating on PPL Montana's ~~8.903%~~ Pass-Through Certificates due 2020 ~~under review for possible downgrade. During~~and revised its outlook from negative to stable. Also, S&P indicated that the ~~first quarter 2004, Moody's affirmed its stable outlook on these securities~~following ratings would remain unchanged following the aforementioned revision to PPL Energy Supply's outlook:
WPDH Limited of BBB-/Negative/A-3;
WPD (South West) of BBB+/Negative/A-2; and
WPD (South Wales) of BBB+/Negative/A-2.
Other
The pension plans of WPD are subject to formal actuarial valuations every three years, which are ~~currently rated 'Baa3'.~~used to determine funding requirements. WPD's two principal plans were the subject of a formal actuarial valuation as of March 31, 2004. Preliminary valuations show an actuarial deficit of approximately £250 million (approximately $454 million based on current exchange rates) that may need to be funded over approximately 14 years if markets and asset values do not recover. WPD expects to conclude the formal valuation process and agree on deficit contribution schedules with the Trustees of the plans by March 31, 2005.
WPD believes that its internally generated cash flow, combined with its bank credit facilities, provides sufficient resources to finance its cash requirements and to maintain appropriate available liquidity.
For additional information on PPL Energy Supply's ~~Liquidity,~~liquidity, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL Energy Supply's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003.
Risk Management - Energy Marketing & Trading and Other
Market Risk
Commodity Price Risk (Non-trading)
PPL Energy Supply's commodity derivative contracts that qualify for hedge accounting treatment mature at various times through 2010. The following chart sets forth PPL Energy Supply's net fair market value of these contracts:
Three Months Ended
March 31,

Three Months Ended
June 30,

Six Months Ended
June 30,

2004
2003

2004

2003

2004

2003

Fair value of contracts outstanding at the beginning of the period
$
86
$
58
Fair value of contracts outstanding at the beginning of the period

$
84

$
129

$
86

$
58

Contracts realized or otherwise settled during the period
(24
)
(5
)
Contracts realized or otherwise settled during the period

(20
)

(14
)

(44
)

(54
)

Fair value of new contracts at inception
Fair value of new contracts at inception

Other changes in fair values
22
76
Other changes in fair values

21

(31
)

43

80

Fair value of contracts outstanding at the end of the period
$
84
$
129
Fair value of contracts outstanding at the end of the period

$
85

$
84

$
85

$
84

~~During~~"Contracts realized or otherwise settled during the period" relate to contracts entered into prior to April 1 for the three months ended ~~March 31, 2004~~June 30 and ~~2003, PPL Energy Supply realized or otherwise settled net gains of approximately $24 million and $5 million related to~~ contracts entered into prior to January 1 offor the ~~previous year.~~six months ended June 30. These amounts do not reflect ~~intra-quarter~~intra-period contracts that were entered into and settled during the periods.
"Other changes in fair ~~values," a gain of approximately $22 million and $76 million,~~values" represents changes in the market value that have occurred ~~during the three months ended March 31, 2004 and 2003~~ for contracts that were outstanding at the end of each period.
The following chart segregates estimated fair values of PPL Energy Supply's commodity derivative contracts that qualify for hedge accounting treatment at ~~March 31,~~June 30, 2004, based on whether the fair values are determined by quoted market prices or other more subjective means.

Fair Value of Contracts at Period-End
Gains/(Losses)

Fair Value of Contracts at Period-End
Gains/(Losses)

Maturity
Less
Than
1 Year

Maturity
1-3
Years

Maturity
4-5
Years

Maturity
in Excess
of 5
Years

Total
Fair
Value

Maturity
Less
Than
1 Year

Maturity
1-3
Years

Maturity
4-5
Years

Maturity
in Excess
of 5
Years

Total
Fair
Value

Source of Fair Value

Prices actively quoted

$
9

$
9

$
7

$
3

$
10

Prices provided by other external sources

50

$
31

$
(5
)

$
(1
)

75

52

27

$
(3
)

$
(1
)

75

Prices based on models and other valuation methods

Fair value of contracts outstanding at the end of the period

$
59

$
31

$
(5
)

$
(1
)

$
84

$
59

$
30

$
(3
)

$
(1
)

$
85

The "Prices actively quoted" category includes the fair value of exchange-traded natural gas futures contracts quoted on the New York Mercantile Exchange (NYMEX). The NYMEX has currently quoted prices through 2010.
The "Prices provided by other external sources" category includes PPL Energy Supply's forward positions and options in natural gas and power and natural gas basis swaps at points for which over-the-counter (OTC) broker quotes are available. The fair value of electricity positions recorded above use the midpoint of the bid/ask spreads obtained through OTC brokers. On average, OTC quotes for forwards and swaps of natural gas and power extend one and two years into the future.
The "Prices based on models and other valuation methods" category includes the value of transactions for which an internally developed price curve was constructed as a result of the long-dated nature of the transaction or the illiquidity of the market point, or the value of options not quoted by an exchange or OTC broker. Additionally, this category includes "strip" transactions whose prices are obtained from external sources and then modeled to monthly prices as appropriate.
As of ~~March 31,~~June 30, 2004, PPL Energy Supply estimated that a 10% adverse movement in market prices across all geographic areas and time periods would have decreased the value of the commodity contracts in its non-trading portfolio by approximately ~~$170 million, compared to a decrease of $196 million at March 31, 2003.~~$174 million. However, the change in the value of the non-trading portfolio would have been substantially offset by an increase in the value of the underlying commodity, the electricity generated, because these contracts serve to reduce the market risk inherent in the generation of electricity. Additionally, the value of PPL Energy Supply's unsold generation would be improved. Because PPL Energy Supply's electricity portfolio is generally in a net sales position, the adverse movement in prices is usually an increase in prices. Conversely, because PPL Energy Supply's commodity fuels portfolio is generally in a net purchase position, the adverse movement in prices is usually a decrease in prices. If both of these scenarios happened, the implied margins for the unsold generation would increase.
In accordance with its marketing strategy, PPL Energy Supply does not completely hedge its generation output or fuel requirements. PPL Energy Supply estimates that for its entire portfolio, including all generation and physical and financial energy positions, a 10% adverse change in power prices across all geographic zones and time periods would decrease expected 2004 gross margins by about $6$1 million. Similarly, a 10% adverse movement in all fossil fuel prices would decrease 2004 gross margins by $4 million.
Commodity Price Risk (Trading)
PPL Energy Supply's trading contracts mature at various times through 2006. The following chart sets forth PPL Energy Supply's net fair market value of trading contracts:
Three Months Ended
March 31,

Three Months Ended
June 30,

Six Months Ended
June 30,

2004
2003

2004

2003

2004

2003

Fair value of contracts outstanding at the beginning of the period
$
3
$
(6
)
Fair value of contracts outstanding at the beginning of the period

$
11

$
(16
)

$
3

$
(6
)

Contracts realized or otherwise settled during the period
(3
)
(1
)
Contracts realized or otherwise settled during the period

(4
)

10

(7
)

9

Fair value of new contracts at inception
4
Fair value of new contracts at inception

(2
)

4

(2
)

Other changes in fair values
7
(9
)
Other changes in fair values

5

1

12

(8
)

Fair value of contracts outstanding at the end of the period
$
11
$
(16
)
Fair value of contracts outstanding at the end of the period

$
12

$
(7
)

$
12

$
(7
)

~~During the three months ended March 31, 2004 and 2003, PPL Energy Supply~~"Contracts realized or otherwise settled ~~net gains of approximately $3 million and $1 million related~~during the period" relate to trading contracts entered into prior to April 1 for the three months ended June 30 and contracts entered into prior to January 1 offor the ~~previous year.~~six months ended June 30. These amounts do not reflect ~~intra-year~~intra-period contracts that were entered into and settled during the periods.
The ~~fair~~"Fair value of new contracts at ~~inception~~inception" is usually zero, because they are entered into at current market prices. However, when PPL Energy Supply enters into an option contract, a premium is paid or received. ~~PPL Energy Supply paid a net of $4 million during the three months ended March 31, 2004 for these option contracts.~~
"Other changes in fair ~~values," a gain/(loss) of approximately $7 million and $(9) million,~~values" represents changes in the market value that have occurred ~~during the three months ended March 31, 2004 and 2003~~ for contracts that were outstanding at the end of each period.
As of ~~March 31,~~June 30, 2004, the net loss on PPL Energy Supply's trading activities expected to be recognized in earnings during the next three months is ~~approximately $2~~$3 million.
The following chart segregates estimated fair values of PPL Energy Supply's trading portfolio at ~~March 31,~~June 30, 2004, based on whether the fair values are determined by quoted market prices or other more subjective means.

Fair Value of Contracts at Period-End
Gains/(Losses)

Fair Value of Contracts at Period-End
Gains/(Losses)

Maturity
Less
Than
1 Year

Maturity
1-3
Years

Maturity
4-5
Years

Maturity
in Excess
of 5
Years

Total
Fair
Value

Maturity
Less
Than
1 Year

Maturity
1-3
Years

Maturity
4-5
Years

Maturity
in Excess
of 5
Years

Total
Fair
Value

Source of Fair Value

Prices actively quoted

$
1

$
1

$
1

$
1

$
2

Prices provided by other external sources

$
4

4

4

4

Prices based on models and other valuation methods

4

2

6

5

1

6

Fair value of contracts outstanding at the end of the period

$
5

$
6

$
11

$
6

$
6

$
12

As of ~~March 31,~~June 30, 2004, PPL Energy Supply estimated that a 10% adverse movement in market prices across all geographic areas and time periods would have decreased the value of the commodity contracts in its trading portfolio by ~~$10 million, compared to a decrease of $6 million at March 31, 2003.~~$9 million.
Interest Rate Risk
PPL Energy Supply and its subsidiaries have issued debt to finance their operations. PPL manages interest rate risk for PPL Energy Supply by using various financial derivative products to adjust the mix of fixed and floating interest rates in its debt portfolio, ~~adjusting~~adjust the duration of its debt portfolio and ~~locking~~lock in U.S. Treasury rates (and interest rate spreads over treasuries) in anticipation of future financing, when appropriate. Risk limits under the risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of PPL Energy Supply's debt portfolio due to changes in the absolute level of interest rates.
At ~~March 31,~~June 30, 2004, PPL Energy Supply's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was insignificant.
PPL Energy Supply is also exposed to changes in the fair value of its U.S. and international debt portfolio. At ~~March 31,~~June 30, 2004, PPL Energy Supply estimated that its potential exposure to a change in the fair value of its debt portfolio, through a 10% adverse movement in interest rates, was ~~$109~~$164 million.
PPL and PPL Energy Supply utilize various risk management instruments to reduce PPL Energy Supply's exposure to adverse interest rate movements for future anticipated financings. While PPL Energy Supply is exposed to changes in the fair value of these instruments, they are designed such that any economic loss in value should generally be offset by interest rate savings at the time the future anticipated financing is completed. At ~~March 31,~~June 30, 2004, PPL Energy Supply estimated that its potential exposure to a change in the fair value of these instruments, through a 10% adverse movement in interest rates, was ~~$1 million.~~immaterial.
Foreign Currency Risk
PPL Energy Supply is exposed to foreign currency risk, primarily through investments in affiliates in Latin America and Europe. In addition, PPL Energy Supply may make purchases of equipment in currencies other than U.S. dollars.
PPL has adopted a foreign currency risk management program designed to hedge certain foreign currency exposures, including firm commitments, recognized assets or liabilities and net investments. In addition, PPL enters into financial instruments to protect against foreign currency translation risk.
PPL executed forward sale transactions for ~~£21.4~~£17.7 million to hedge a portion of its net investment in WPDH Limited. The estimated value of these agreements as of ~~March 31,~~June 30, 2004, was $5 million, being the amount PPL would pay to terminate the transactions.
PPL executed forward sale transactions for 79.6 billion Chilean pesos to hedge a portion of its net investment in its subsidiary that owned the investment in CGE. The estimated value of these agreements as of March 31, 2004, being the amount PPL would receive to terminate the transactions, was $2 million.
To protect expected income in British pounds sterling, PPL entered into average rate forward sales contracts for £29 million. In conjunction with these forward contracts, PPL executed average rate purchase options ~~for £44 million.~~of £20 million to mitigate the liquidity risk inherent in the average rate forwards. At ~~March 31,~~June 30, 2004, the market value of these positions, representing the amount PPL would ~~pay~~receive to terminate them, was insignificant.
To protect expected income in Chilean pesos, PPL entered into average rate ~~options~~forward sales contracts for ~~4.1~~5.5 billion Chilean pesos. At ~~March 31,~~June 30, 2004, the market value of these positions, representing the amount PPL would ~~pay~~receive to terminate them, was insignificant.
WPDH Limited ~~executed~~held a net position in cross-currency swaps totaling ~~$1.5~~$1.3 billion to hedge the interest payments and value of its U.S. dollar-denominated bonds. The estimated value of this position ~~on March 31,~~at June 30, 2004, being the amount PPL would pay to terminate ~~them,~~it, including accrued interest, was ~~$204~~$197 million.
On the Statement of Income, gains and losses associated with hedges of interest payments denominated in foreign currencies are reflected in "Interest Expense." Gains and losses associated with the purchase of equipment are reflected in "Depreciation." Gains and losses associated with net investment hedges remain in accumulated other comprehensive loss on the Balance Sheet until the investment is disposed.
Nuclear Decommissioning Fund - Securities Price Risk
In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the Susquehanna station. As of ~~March 31,~~June 30, 2004, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on PPL Energy Supply's 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 values of fixed-rate, fixed-income securities are exposed to changes in interest rates. PPL Susquehanna actively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement. At ~~March 31,~~June 30, 2004, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated ~~$26~~$27 million reduction in the fair value of the trust assets.
PPL Electric's 1998 restructuring settlement agreement provides for the collection of authorized nuclear decommissioning costs through the CTC. Additionally, PPL Electric is permitted to seek recovery from customers of up to 96% of certain increases in these costs. Under the power supply agreements between PPL Electric and PPL EnergyPlus, these revenues are passed on to PPL EnergyPlus. Similarly, these revenues are passed on to PPL Susquehanna under a power supply agreement between PPL EnergyPlus and PPL Susquehanna. These revenues are used to fund the trusts.
Credit Risk
Credit risk relates to the risk of loss that PPL Energy Supply would incur as a result of non-performance by counterparties of their contractual obligations. PPL Energy Supply maintains credit policies and procedures with respect to counterparties (including requirements that counterparties maintain certain credit ratings criteria) and requires other assurances in the form of credit support or collateral in certain circumstances in order to limit counterparty credit risk. However, PPL Energy Supply has concentrations of suppliers and customers among electric utilities, natural gas distribution companies and other energy marketing and trading companies. These concentrations of counterparties may impact PPL Energy Supply's overall exposure to credit risk, either positively or negatively, in that counterparties may be similarly affected by changes in economic, regulatory or other conditions. PPL Energy Supply records certain non-performance reserves to reflect the probability that a counterparty with contracts that are out of the money (from the counterparty's standpoint) will default in its performance, in which case PPL Energy Supply would have to sell into a lower-priced market or purchase from a higher-priced market. These reserves are reflected in the fair value of assets recorded in "Price risk management assets" on the Balance Sheet. PPL Energy Supply also records reserves to reflect the probability that a counterparty will not make payments for deliveries PPL Energy Supply has made but not yet billed. These reserves are reflected in "Unbilled revenues" on the Balance Sheet. PPL Energy Supply has also established a reserve with respect to certain sales to the California ISO for which PPL Energy Supply has not yet been paid, as well as a reserve related to PPL Energy Supply's exposure as a result of the Enron bankruptcy, which are reflected in "Accounts receivable" on the Balance Sheet. See Note 8 to the Financial Statements for additional information on the sales to the California ISO.
Related Party Transactions
PPL Energy Supply is not aware of any material ownership interests or operating responsibility by senior management of PPL Energy Supply in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with PPL Energy Supply.
For additional information on related party transactions, see Note 9 to the Financial Statements.
Acquisitions, Development and Divestitures
From time to time, PPL Energy Supply and its subsidiaries are involved in negotiations with third parties regarding acquisitions, joint ventures and other arrangements which may or may not result in definitive agreements. See Note 7 to the Financial Statements for information regarding recent acquisitions and development activities.
At ~~March 31,~~June 30, 2004, PPL Energy Supply had domestic generation projects under development which ~~will~~are expected to provide ~~863~~218 MW of additional generation. In April 2004, the turbine upgrade for PPL Susquehanna Unit 1 was completed. This project provides a nominal power increase of 50 MW of generation capacity, of which PPL Susquehanna has a 90% undivided interest.
PPL Energy Supply is continuously reexamining development projects based on market conditions and other factors to determine whether to proceed with these projects, sell them, cancel them, expand them, execute tolling agreements or pursue other opportunities.
Environmental Matters
See Note 8 to the Financial Statements for a discussion of environmental matters.
New Accounting Standards
See Note 1516 to the Financial Statements for information on new accounting standards adopted in 2004 or pending adoption.
Application of Critical Accounting Policies
PPL Energy Supply's financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to the financial condition or results of operations of PPL Energy Supply, and require estimates or other judgments of matters inherently uncertain: price risk management, pension and other postretirement benefits, asset impairment, leasing, loss contingencies and asset retirement obligations.
See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL Energy Supply's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003, for a discussion of each critical accounting policy. PPL's senior management has reviewed these critical accounting policies, and the estimates and assumptions regarding them, with its Audit Committee. In addition, PPL's senior management reviewed the Form 10-K disclosures regarding the application of these critical accounting policies with the Audit Committee.

PPL ELECTRIC UTILITIES CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
PPL Electric provides electricity delivery service in eastern and central Pennsylvania. Its headquarters are in Allentown, Pennsylvania. See Item 1, "Business - Background" in PPL Electric's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003, for a description of PPL Electric's business. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL Electric's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003, for an overview of PPL Electric's strategy and the risks and ~~the~~ challenges that it faces in its business.
The information provided in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with PPL Electric's Condensed Consolidated Financial Statements and the accompanying Notes.
Terms and abbreviations ~~appearing herein~~ are explained in the glossary. Dollars are in millions unless otherwise noted.
Results of Operations
The following discussion, which explains significant changes in principal items on the Statement of Income, compares the three and six months ended ~~March 31,~~June 30, 2004, towith the comparable ~~period~~periods in 2003.
The Statement of Income reflects the results of past operations and is not intended as any indication of future operating results. Future operating results will necessarily be affected by various and diverse factors and developments. Furthermore, because results for interim periods can be disproportionately influenced by various factors and developments and by seasonal variations, the results of operations for interim periods do not necessarily indicate results or trends for the year.
Earnings
Income available to PPL ~~was:~~was as follows:

Three Months Ended
March 31,

2004

2003

$
33

$
29

Three Months Ended
June 30,

Six Months Ended
June 30,

2004

2003

2004

2003

$
3

$

$
36

$
29

The after-tax changes in income available to PPL were primarily due to:

Three Months Ended
March 31, 2004 vs. March 31, 2003

June 30, 2004 vs. June 30, 2003

Three Months
Ended

Six Months
Ended

Taxes, other than income

$
8

Wholesale electric revenues

(2
)
Delivery revenues (net of CTC/ITC amortization and interest expense on transition bonds)

$
2

$
2

Operation and maintenance expenses
Operation and maintenance expenses

(2
)

(2
)

Taxes, other than income

(1
)

7

Depreciation
Depreciation

(1
)

(1
)

(2
)

Financing costs (excluding transition bond interest expense)
Financing costs (excluding transition bond interest expense)

1

1

2

Other

2

$
4

$
3

$
7

The period to period changes in earnings components are discussed in the balance of "Results of Operations."
~~In March 2004,~~ PPL Electric has filed a proposal with the PUC to increase distribution rates by approximately $164 million and has notified the PUC that it plans to pass through to customers approximately $57 million in increased transmission charges that PPL Electric pays to PJM for transmission services. ~~The PUC's review of the distribution rate request is expected to take about nine months.~~ Transmission services are provided under the PJM Open Access Transmission Tariff, a rate schedule filed with and approved by the FERC. Under the federal "filed rate doctrine," such FERC-approved rates may be recovered from retail customers without a review of those rates by a state agency such as the PUC. In addition, PPL Electric's PUC-approved retail tariff permits the automatic pass-through of transmission charges. PPL Electric agreed to a cap on both of these charges until December 31, 2004, as part of its 1998 settlement under the PUC Final Order. Generation charges for customers who do not select an alternative energy supplier are fixed through 2009 and are not affected by these changes. The combination of the proposed distribution rate increase and transmission charge pass-through would result in an 8.1% increase over PPL Electric's present rates effective January 1, 2005. PPL Electric cannot predict the outcome of this proceeding.
PPL Electric had been using CashPoint Network Services, Inc. (CashPoint) to manage customer bill payment centers. In April 2004, PPL Electric terminated the use of CashPoint to collect bill payments because of financial uncertainties and processing irregularities. CashPoint's largest creditors forced it into involuntary bankruptcy. As of June 30, 2004, PPL Electric recorded a reserve of $1 million, representing the estimated amount of funds owed by CashPoint that will not be recovered.
Operating Revenues
Retail Electric
The ~~increase (decrease)~~increases in revenues from retail electric operations ~~was~~were attributable to the following:

Three Months Ended
March 31, 2004 vs. March 31, 2003

PLR electric generation supply

$
30

Delivery and PLR Supply to PPL Generation

(3
)
Other

(1
)

$
26

June 30, 2004 vs. June 30, 2003

Three Months
Ended

Six Months
Ended

PLR electric generation supply

$
27

$
57

Electric delivery

3

3

Delivery and PLR Supply to PPL Generation

(1
)

(4
)

Other

(1
)

$
29

$
55

The ~~increase in operating revenues from retail electric operations~~increases for ~~the three months ended March 31, 2004, compared with the same period in 2003, was~~both periods were primarily due ~~to:~~
to higher PLR revenues due to higher energy and capacity rates in 2004 compared with 2003, and a 5% and 4% increase in volumes for the three and six months ended June 30, 2004, in part due to the return of customers previously served by alternate ~~suppliers; partially offset by~~
~~lower delivery revenues resulting from a .8% decrease in delivery sales, in part due to colder than normal weather during the first quarter of 2003; and~~
~~lower sales to PPL Generation. PPL Generation's power plants began self-supplying their station use in April 2003, rather than taking delivery from PPL Electric.~~
suppliers.
Wholesale Electric
PPL Electric wholesale revenues were primarily derived from sales to municipalities. The $4$7 million ~~decrease~~and $11 million decreases in wholesale electric revenues for the three and six months ended ~~March 31,~~June 30, 2004, compared with the same ~~period~~periods in 2003, ~~was~~were due to the expiration of all municipal purchase power agreements at the end of January 2004.
Energy Purchases from Affiliate
Energy purchases from affiliate increased by ~~$23~~$19 million and $42 million for the three and six months ended ~~March 31,~~June 30, 2004, compared with the same ~~period~~periods in 2003. ~~This~~The increases reflect an increase ~~reflects~~in PLR load for both periods in 2004, as well as higher prices for energy purchased under the power supply contracts with PPL EnergyPlus needed to support ~~PLR load, coupled with an increase in PLR~~that load.
Depreciation
Depreciation increased by $2$3 million for the ~~three~~six months ended ~~March 31,~~June 30, 2004, compared with the same period in 2003, primarily due to plant ~~and software~~ additions, including the Automated Meter Reading project.
Taxes, Other Than Income
In the first quarter of 2004, PPL Electric reversed a $14 million of accrued liability for 1998 and 1999 PURTA taxes that had been ~~previously~~ accrued based on potential exposure ~~of third-party intervention~~ in the proceedings regarding the Susquehanna nuclear station tax assessment. The rights of ~~these~~the third ~~parties~~party interveners to further appeal expired in 2004. ~~This~~The reversal is the primary reason for the ~~$13~~$12 million decrease in taxes, other than income, for the ~~three~~six months ended ~~March 31,~~June 30, 2004, compared with the same period in 2003.
Interest Expense
Interest expense decreased by $7$6 million and $13 million for the three and six months ended ~~March 31,~~June 30, 2004, compared towith the same ~~period~~periods in 2003. ~~This decrease was~~These decreases were the net impact of retirements ~~in 2003~~ of First Mortgage Bonds, Pollution Control Bonds, Senior Secured Bonds and Transition Bonds in 2003 and 2004, partially offset by the issuance ~~in 2003~~ of $100 million of Senior Secured Bonds and $90 million of Pollution Control ~~Bonds.~~Bonds in 2003.
Income Taxes
Income taxes increased by $4 million for the ~~three~~six months ended ~~March 31,~~June 30, 2004, compared with the same period in 2003, as a result of higher pre-tax book income.
Financial Condition
Liquidity
At ~~March 31,~~June 30, 2004, PPL Electric had ~~$96~~$39 million of cash and cash equivalents and ~~$45~~$65 million of short-term debt. At December 31, 2003, PPL Electric had $162 million inof cash and cash equivalents and no short-term debt. The decrease in cash and cash equivalents was the net result of:
the retirement of ~~$102~~$271 million of long-term debt; and
$5498 million of capital expenditures; partially offset by
$44185 million of cash provided by operating activities; and
an increase of ~~$45~~$65 million in short-term debt.
For additional information on PPL Electric's ~~Liquidity, See~~liquidity, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL Electric's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003.
Subsequent Financing
In August 2004, PPL Electric began participating in an asset-backed commercial paper (ABCP) program through which PPL Electric obtains financing by selling and contributing to a subsidiary certain of its accounts receivable. The subsidiary pledges the accounts receivable to secure loans of up to an aggregate of $150 million from a commercial paper conduit sponsored by a financial institution. PPL Electric expects to use the proceeds from the ABCP program for general corporate purposes and to cash collateralize letters of credit. See Note 6 to the Financial Statements for additional information.
Risk Management
Market Risk
Commodity Price Risk - PLR Contracts
PPL Electric and PPL EnergyPlus have power supply agreements under which PPL EnergyPlus sells to PPL Electric (under a predetermined pricing arrangement) energy and capacity to fulfill PPL Electric's PLR obligation through 2009. As a result, PPL Electric has shifted any electric price risk relating to its PLR obligation to PPL EnergyPlus ~~for 2002~~ through 2009. See Note 9 to the Financial Statements for information on the PLR contracts.
Interest Rate Risk
PPL Electric has issued debt to finance its operations, which increases its interest rate risk. At ~~March 31,~~June 30, 2004, PPL Electric's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was insignificant.
PPL Electric is also exposed to changes in the fair value of its debt portfolio. At ~~March 31,~~June 30, 2004, PPL Electric estimated that its potential exposure to a change in the fair value of its debt portfolio, through a 10% adverse movement in interest rates, was approximately ~~$20~~$21 million.
Related Party Transactions
PPL Electric is not aware of any material ownership interests or operating responsibility by senior management of PPL Electric in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with PPL Electric.
For additional information on related party transactions, see Note 9 to the Financial Statements.
Environmental Matters
See Note 8 to the Financial Statements for a discussion of environmental matters.
New Accounting Standards
See Note 1516 to the Financial Statements for information on new accounting standards adopted in 2004 or pending adoption.
Application of Critical Accounting Policies
PPL Electric's financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to the financial condition or results of operations of PPL Electric, and require estimates or other judgments of matters inherently uncertain: pension and other postretirement benefits and loss contingencies.
See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL Electric's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003, for a discussion of each critical accounting policy. PPL's senior management has reviewed these critical accounting policies, and the estimates and assumptions regarding them, with its Audit Committee. In addition, PPL's senior management reviewed the Form 10-K disclosures regarding the application of these critical accounting policies with the Audit Committee.

PPL CORPORATION
PPL ENERGY SUPPLY, LLC ~~AND~~
PPL ELECTRIC UTILITIES CORPORATION
~~AND SUBSIDIARIES~~
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Reference is made to "Risk Management - Energy Marketing & Trading and Other" in Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 4. Controls and Procedures
(a)
Evaluation of disclosure controls and procedures.
The registrants' principal executive officers and principal financial officers, based on their evaluation of the registrants' disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) have concluded that, as of ~~March 31,~~June 30, 2004, the registrants' disclosure controls and procedures are adequate and effective to ensure that material information relating to the registrants and their consolidated subsidiaries is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, particularly during the period for which this quarterly report has been prepared.
(b)
Change in internal controls over financial reporting.
The registrants' principal executive officers and principal financial officers have concluded that there were no changes in the registrants' internal controls over financial reporting during the registrants' ~~first~~second fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrants' internal control over financial reporting.

PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For additional information regarding various pending administrative and judicial proceedings involving regulatory, environmental and other matters, which information is incorporated by reference into this Part II, see:

•
Item 3 "Legal Proceedings" in PPL's, PPL Energy Supply's and PPL Electric's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003; and
•
Note 8 of the registrants' "Combined Notes to Condensed Consolidated Financial Statements" in Part I of this report.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Issuer Purchases Ofof Equity Securities:

(a)
(b)
(c)
(d)
(a)
(b)
(c)
(d)
Period
Total Number of
Shares (or Units)
Purchased (1)
Average Price Paid
per Share
(or Unit)
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs (2)
Maximum Number (or
Approximate Dollar Value) of
Shares (or Units) that May Yet Be
Purchased Under the Plans or
Programs (2)
Total Number of
Shares (or Units)
Purchased (1)
Average Price Paid
per Share
(or Unit)
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs (2)
Maximum Number (or
Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased under the Plans or Programs (2)
January 1 to January 31, 2004
5,751
$45.23

5,751

$45.23

February 1 to February 29, 2004
1,703
$45.11

1,703

$45.11

March 1 to March 31, 2004
     37
$46.44

37

$46.44

April 1 to April 30, 2004
-

-

May 1 to May 31, 2004 (3)
17

$51.94

June 1 to June 30, 2004
-

-

Total
7,491

7,508

(1)

~~Represents~~Except for the shares acquired in May 2004, represents shares of common stock withheld by PPL at the request of its executive officers to pay taxes upon the vesting of the officers' restricted stock awards, as permitted under the terms of PPL's Incentive Compensation Plan and Incentive Compensation Plan for Key Employees.
(2)

Not applicable. PPL does not currently have in place any publicly announced plans or programs to purchase equity securities.
(3)
Represents shares of common stock acquired upon the settlement in May 2004 of the purchase contract component of the PEPS Units and PEPS Units, Series B.
Item 4. Submission of Matters to a Vote of Security Holders
At PPL's Annual Meeting of Shareowners held on April 23, 2004, the shareowners:
(1)
Elected the three nominees for the office of director. The votes for individual nominees were as follows:
Number of Votes
For
Withhold Authority
William F. Hecht
142,849,348
3,887,320
Stuart Heydt
141,280,636
5,456,032
W. Keith Smith
141,956,618
4,780,050
(2)
Ratified the appointment of PricewaterhouseCoopers LLP as independent auditors for the year ended December 31, 2004. The vote was 141,903,132 in favor and 3,537,680 against, with 1,295,856 abstaining.
At PPL Electric's Annual Meeting of Shareowners held on April 20, 2004, the shareowners elected all eight nominees for the office of director. The votes for individual nominees were as follows:
Number of Votes for
John R. Biggar
78,029,863
Paul T. Champagne
78,029,863
Dean A. Christiansen
78,029,863
Lawrence E. De Simone
78,029,863
Robert J. Grey
78,029,863
William F. Hecht
78,029,863
James H. Miller
78,029,863
John F. Sipics
78,029,863
Item 6. Exhibits and Reports on Form 8-K
(a)

Exhibits

3
-
Bylaws of PPL Electric Utilities Corporation, as amended effective July 16, 2004
*4(a)
-
Supplement, dated ~~as of January 21,~~May 18, 2004, to Indenture dated November 1, 1997, among PPL Corporation, PPL Capital Funding, Inc. and JPMorgan Chase Bank (formerly known as Chase Manhattan Bank), as Trustee (Exhibit 4.7 to Registration Statement Nos. 333-116478, 333-116478-01 and 333-116478-02)

~~4(b)~~10(a)
-
~~Indenture,~~Asset Purchase Agreement, dated as of ~~February 26,~~June 1, 2004, ~~among~~by and between PPL ~~Corporation, PPL Capital Funding, Inc.~~Sundance Energy, LLC, as Seller, and ~~JPMorgan Chase Bank,~~Arizona Public Service Company, as ~~Trustee~~Purchaser

~~4(c)~~10(b)
-
~~Registration Rights~~$800 million Five-Year Credit Agreement, dated as of ~~February 26,~~June 22, 2004, among PPL ~~Corporation, PPL Capital Funding, Inc.~~Energy Supply, LLC, as Borrower, and the ~~Representatives~~banks named therein
10(c)
-
$200 million Five-Year Credit Agreement, dated as of June 22, 2004, among PPL Electric Utilities Corporation, as Borrower, and the ~~Initial Purchasers~~banks named therein
10(d)
-
Receivables Sale Agreement, dated as of August 1, 2004, between PPL Electric Utilities Corporation, as Originator, and PPL Receivables Corporation, as Buyer
10(e)
-
Credit and Security Agreement, dated as of August 1, 2004, among PPL Receivables Corporation, as Borrower, PPL Electric Utilities Corporation, as Servicer, Blue Ridge Asset Funding Corporation, the Liquidity Banks from time to time party thereto and Wachovia Bank, National Association, as Agent

12(a)
-
PPL Corporation and Subsidiaries, Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends

12(b)
-
PPL Energy Supply, LLC and Subsidiaries, Computation of Ratio of Earnings to Fixed Charges

* - previously filed

Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended ~~March 31,~~June 30, 2004, filed by the following officers for the following companies:

31(a)
-
William F. Hecht for PPL Corporation

31(b)
-
John R. Biggar for PPL Corporation

31(c)
-
William F. Hecht for PPL Energy Supply, LLC

31(d)
-
James E. Abel for PPL Energy Supply, LLC

31(e)
-
John F. Sipics for PPL Electric Utilities Corporation

31(f)
-
James E. Abel for PPL Electric Utilities Corporation

Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended ~~March 31,~~June 30, 2004, furnished by the following officers for the following companies:

32(a)
-
William F. Hecht for PPL Corporation

32(b)
-
John R. Biggar for PPL Corporation

32(c)
-
William F. Hecht for PPL Energy Supply, LLC

32(d)
-
James E. Abel for PPL Energy Supply, LLC

32(e)
-
John F. Sipics for PPL Electric Utilities Corporation

32(f)
-
James E. Abel for PPL Electric Utilities Corporation

(b)

Reports on Form 8-K

The following Reports on Form 8-K were filed (*) or furnished (**), as indicated, during the three months ended ~~March 31,~~June 30, 2004:
*
Report dated April 6, 2004 - PPL and PPL Electric
Item 5.
Other Events

Announced an offer by PPL Electric to repurchase for cash any and all of its $110 million outstanding principal amount of First Mortgage Bonds, 6-1/2% Series due 2005.
Item 7.
Financial Statements and Exhibits
Press release announcing the Tender Offer.
*
Report dated April 16, 2004 - PPL and PPL Electric
Item 5.
Other Events
Announced the completion of PPL Electric's offer to repurchase for cash any and all of its $110 million outstanding principal amount of First Mortgage Bonds, 6-1/2% Series due 2005.
Item 7.
Financial Statements and Exhibits
Press release announcing the completion of the Tender Offer.
**
Report dated ~~January~~April 28, 2004 - PPL

Item 12.

Disclosure of Results of Operations and Financial Condition

Reported PPL's results for the ~~year~~quarter ended ~~2003~~March 31, 2004, and ~~the~~affirmed its 2004 earnings ~~forecast for 2004.~~forecast.

Item 7.

Financial Statements and Exhibits

Press release regarding PPL's results for the ~~year~~first quarter ended ~~2003~~March 31, 2004, and affirming its 2004 earnings ~~forecast for 2004.~~forecast.
*
Report dated ~~March 29,~~June 1, 2004 - PPL and PPL ~~Electric~~Energy Supply

Item 5.

Other Events

Announced that PPL Sundance Energy, LLC has agreed to sell the ~~filing of a request with the PUC for an overall annual net increase~~450-megawatt Sundance power plant in ~~distribution revenues of approximately $164 million effective January 1, 2005. In addition~~Arizona to the ~~distribution rate increase request, PPL Electric also informed~~Arizona Public Service Company for $190 million in cash, subject to the ~~PUC that transmission service charges reflected in retail rates are expected to increase by approximately $57 million, effective January 1, 2005.~~receipt of various state and federal regulatory approvals.

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiaries.

PPL Corporation

(Registrant)

PPL Energy Supply, LLC

(Registrant)

PPL Electric Utilities Corporation

(Registrant)

Date: ~~May 7,~~August 6, 2004
/s/  John R. Biggar

John R. Biggar

Executive Vice President and

Chief Financial Officer

(PPL Corporation)

(principal financial officer)

/s/  James E. Abel

James E. Abel

Treasurer

(PPL Energy Supply, LLC)

(principal financial officer)

/s/  Mark D. Woods

Mark D. Woods

Controller

(PPL Electric Utilities Corporation)

(principal accounting officer)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended~~March 31,~~June 30, 2004
	OR
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _________ to ___________

Commission File Number	Registrant; State of Incorporation; Address and Telephone Number	IRS Employer Identification No.

1-11459	PPL Corporation (Exact name of Registrant as specified in its charter) (Pennsylvania) Two North Ninth Street Allentown, PA 18101-1179 (610) 774-5151	23-2758192

333-74794	PPL Energy Supply, LLC (Exact name of Registrant as specified in its charter) (Delaware) Two North Ninth Street Allentown, PA 18101-1179 (610) 774-5151	23-3074920

1-905	PPL Electric Utilities Corporation (Exact name of Registrant as specified in its charter) (Pennsylvania) Two North Ninth Street Allentown, PA 18101-1179 (610) 774-5151	23-0959590

PPL Corporation	Yes X	No
PPL Energy Supply, LLC	Yes X	No
PPL Electric Utilities Corporation	Yes X	No

	PPL Corporation	Common stock, $.01 par value, ~~177,820,831~~ 188,908,802 shares outstanding at ~~April~~July 30, 2004, excluding ~~31,033,738~~31,034,493 shares held as treasury stock

	PPL Energy Supply, LLC	PPL Corporation indirectly holds all of the member interests in PPL Energy Supply, LLC.

	PPL Electric Utilities Corporation	Common stock, no par value, 78,029,863 shares outstanding and all held by PPL Corporation at ~~April~~July 30, 2004, excluding 79,270,519 shares held as treasury stock

				Page
GLOSSARY OF TERMS AND ABBREVIATIONS

FORWARD-LOOKING INFORMATION				1

PART I. FINANCIAL INFORMATION

	Item 1. Financial Statements
		PPL Corporation and Subsidiaries
			Condensed Consolidated Statement of Income	2
			Condensed Consolidated Statement of Cash Flows	3
			Condensed Consolidated Balance Sheet	4
		PPL Energy Supply, LLC and Subsidiaries
			Condensed Consolidated Statement of Income	6
			Condensed Consolidated Statement of Cash Flows	7
			Condensed Consolidated Balance Sheet	8
		PPL Electric Utilities Corporation and Subsidiaries
			Condensed Consolidated Statement of Income	10
			Condensed Consolidated Statement of Cash Flows	11
			Condensed Consolidated Balance Sheet	12
		Combined Notes to Condensed Consolidated Financial Statements		14

	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
			PPL Corporation and Subsidiaries	3839
			PPL Energy Supply, LLC and Subsidiaries	4649
			PPL Electric Utilities Corporation and Subsidiaries	5458

	Item 3. Quantitative and Qualitative Disclosures About Market Risk			5761

	Item 4. Controls and Procedures			5761

PART II. OTHER INFORMATION
	Item 1. Legal Proceedings			5761
	Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities			5761
	Item 4. Submission of Matters to a Vote of Security Holders			62
	Item 6. Exhibits and Reports on Form 8-K			5863

SIGNATURES				5965

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
			PPL Corporation and Subsidiaries	6066
			PPL Energy Supply, LLC and Subsidiaries	6167

CERTIFICATES OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 ~~OF THE SARBANES-OXLEY ACT OF 2002~~
			~~PPL Corporation~~		62
			~~PPL Energy Supply, LLC~~		64
			~~PPL Electric Utilities Corporation~~		66

~~CERTIFICATES OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER~~ ~~PURSUANT TO SECTION 906~~ OF THE SARBANES-OXLEY ACT OF 2002
			PPL Corporation	68
			PPL Energy Supply, LLC	70
			PPL Electric Utilities Corporation	72

CERTIFICATES OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
			PPL Corporation	74
			PPL Energy Supply, LLC	76
			PPL Electric Utilities Corporation	78

	Pension Benefits													Other Postretirement Benefits						Pension Benefits

	Three Months Ended March 31,													Three Months Ended March 31,						Three Months Ended June 30,												Six Months Ended June 30,

	2004						2003							2004			2003			2004						2003						2004						2003

	Domestic			International			Domestic			International										Domestic			Intl.			Domestic			Intl.			Domestic			Intl.			Domestic			Intl.

PPL

Service cost	$	12		$	4		$	10		$	3		$		1		$	2		$	12		$	4		$	11		$	4		$	24		$	7		$	21		$	7

Interest cost		28			36			26			31				6			7			28			36			26			31			56			72			52			62

Expected return on plan assets		(38	)		(53	)		(36	)		(47	)			(4	)		(3	)		(38	)		(52	)		(36	)		(47	)		(75	)		(105	)		(72	)		(94	)

Amortization of transition obligation		(1	)					(1	)						2			2			(1	)					(1	)					(2	)					(2	)

Amortization of prior service cost		4			1			4			1							2			4			1			3			1			7			2			7			2

Amortization of (gain)/loss		(2	)		2			(4	)						2			1			(2	)		1			(4	)					(3	)		3			(8	)

Net periodic pension and other postretirement benefit cost/(credit)	$	3		$	(10	)	$	(1	)	$	(12	)	$		7		$	11
Net periodic pension cost/(credit)																				$	3		$	(10	)	$	(1	)	$	(11	)	$	7		$	(21	)	$	(2	)	$	(23	)

PPL Energy Supply

Service cost	$	1		$	4		$	1		$	3									$	1		$	4		$	1		$	4		$	2		$	7		$	1		$	7

Interest cost		1			36			1			31										1			36			1			31			2			72			2			62

Expected return on plan assets		(1	)		(53	)		(1	)		(47	)									(1	)		(52	)		(1	)		(47	)		(2	)		(105	)		(2)			(94	)

Amortization of prior service cost					1						1													1						1						2						2

Amortization of loss					2																			1												3			1

Net periodic pension cost/(credit)																				$	1		$	(10	)	$	1		$	(11	)	$	2		$	(21	)	$	2		$	(23	)

Net periodic pension and other postretirement benefit cost/(credit)	$	1		$	(10	)	$	1		$	(12	)

	Other Postretirement Benefits

	Three Months Ended June 30,						Six Months Ended June 30,

	2004			2003			2004			2003

PPL

Service cost	$	2		$	2		$	3		$	3

Interest cost		7			7			14			14

Expected return on plan assets		(4	)		(3	)		(9	)		(6)

Amortization of transition obligation		2			2			4			4

Amortization of prior service cost		1			2			2			4

Amortization of loss		2			1			4			3

Net other postretirement benefit cost	$	10		$	11		$	18		$	22

(a)		The Delivery segment is not part of PPL Energy Supply.
(b)		Tax adjustments pursuant to EITF Issue 97-3, "Uncertainties Related to Income Taxes in a Purchase Business Combination."

ARO at December 31, 2003	$	242

Accretion expense		9

Settlement		(4	)

ARO at June 30, 2004	$	247

	PPL and PPL Energy Supply

ARO at December 31, 2003		$	242

Accretion expense			5

Settlement			(3	)

ARO at March 31, 2004		$	244

									June 30, 2004 vs. June 30, 2003

			Three Months Ended March 31, 2004 vs. March 31, 2003						Three Months Ended			Six Months Ended

Domestic:	Domestic:						Domestic:

							Eastern U.S. margins		$	7		$	19

							Net energy trading margins			(4	)		4
	Eastern U.S. margins			$	12
							Northwestern U.S. margins			(5	)		(1	)
	Net energy trading margins				8
							Southwestern U.S. margins						1
	Northwestern U.S. margins				4
							Delivery revenues (net of CTC/ITC amortization and interest on transition bonds)			2			2
	Southwestern U.S. margins				1
							Operation and maintenance expenses			7			(13	)
	Operation and maintenance expenses				(19	)
							Depreciation			(5	)		(10	)
	Depreciation				(4	)
							Taxes, other than income (excluding gross receipts tax)			(1	)		6
	Taxes, other than income (excluding gross receipts tax)				7
							Interest expense and preferred distributions			(4	)		(7	)
	Energy related businesses				(4	)
							Realized earnings on nuclear decommissioning trust			(3	)		(2	)
	Interest expense and preferred distributions				(3	)
							Other			6			3
	Other				1
								Total Domestic					2
		Total Domestic			3

International:	International:						International:

	U.K.:						U.K.

		Impact of changes in foreign currency exchange rates			7			Impact of changes in foreign currency exchange rates		6			13

		Other			2			Other		2			4

	Latin America				1		Latin America			5			6

	Other				(4	)	Other			3

		Total International			6			Total International		16			23

Unusual items	Unusual items				(71	)	Unusual items			16			(55	)

				$	(62	)			$	32		$	(30	)

(a)		Adjusted to exclude the impact of any revenues and costs not associated with domestic gross energy margins, in particular, revenues and energy costs related to the international operations of PPL Global and the domestic delivery operations of PPL Electric and PPL Gas Utilities. Also adjusted to include gains on sales of emission allowances, which are ~~reflected~~included in "Other operation and maintenance" expenses on the Statement of Income.

		Three Months Ended March 31, 2004 vs. March 31, 2003					June 30, 2004 vs. June 30, 2003

Timing of outage costs associated with the planned refueling and inspection at the Susquehanna station, and of other nuclear-related expenses			$	16
							Three Months Ended			Six Months Ended
Insurance settlements - property damage and environmental which were recorded in 2003				12

Property damage and environmental insurance settlements which were recorded in 2003						Property damage and environmental insurance settlements which were recorded in 2003				$	12

Increase in foreign currency exchange rates	Increase in foreign currency exchange rates			4		Increase in foreign currency exchange rates	$	4			8

Decrease in domestic and international pension income	Decrease in domestic and international pension income			4		Decrease in domestic and international pension income		4			8

Outage costs associated with planned maintenance at the Montour plant				3
Outage costs associated with planned maintenance at the Montour and Conemaugh plants						Outage costs associated with planned maintenance at the Montour and Conemaugh plants		4			7

Timing and extent of outage costs associated with the planned refueling and inspection at the Susquehanna station and of other nuclear-related expenses						Timing and extent of outage costs associated with the planned refueling and inspection at the Susquehanna station and of other nuclear-related expenses		(9	)		7

Lease expense on office building and parking garage	Lease expense on office building and parking garage			2		Lease expense on office building and parking garage		1			4

Decrease in lease expense due to consolidation of the lessor of the Sundance and University Park generation facilities due to FIN 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51"						Decrease in lease expense due to consolidation of the lessor of the Sundance and University Park generation facilities due to FIN 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51"		(6	)		(12	)

Decrease in other postretirement benefit expense	Decrease in other postretirement benefit expense			(4	)	Decrease in other postretirement benefit expense		(1	)		(5	)

Gains on sales of emission allowances				(4	)
Impairment charge on transmission rights in 2003						Impairment charge on transmission rights in 2003		(4	)		(4	)

Other	Other			6		Other		3			10

			$	39			$	(4	)	$	35

	Fair Value of Contracts at Period-End Gains/(Losses)

	Maturity Less Than 1 Year		Maturity 1-3 Years		Maturity 4-5 Years			Maturity in Excess of 5 Years			Total Fair Value

Source of Fair Value

Prices actively quoted	$	9									$	9

Prices provided by other external sources		51	$	31	$	(5	)	$	(1	)		76

Prices based on models and other valuation methods

Fair value of contracts outstanding at the end of the period	$	60	$	31	$	(5	)	$	(1	)	$	85

		Three Months Ended March 31, 2004 vs. March 31, 2003

International:

Retail electric delivery (PPL Global)

	U.K.		$	26

	Chile			12

			$	38

	Three Months Ended March 31, 2004 vs. March 31, 2003

PLR electric generation supply		$	30

Delivery and PLR Supply to PPL Generation			(3	)

Other			(1	)

		$	26

Item 4. Controls and Procedures

(a)		Evaluation of disclosure controls and procedures.

		The registrants' principal executive officers and principal financial officers, based on their evaluation of the registrants' disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) have concluded that, as of ~~March 31,~~June 30, 2004, the registrants' disclosure controls and procedures are adequate and effective to ensure that material information relating to the registrants and their consolidated subsidiaries is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, particularly during the period for which this quarterly report has been prepared.

(b)		Change in internal controls over financial reporting.

		The registrants' principal executive officers and principal financial officers have concluded that there were no changes in the registrants' internal controls over financial reporting during the registrants' ~~first~~second fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrants' internal control over financial reporting.

Item 1. Legal Proceedings

For additional information regarding various pending administrative and judicial proceedings involving regulatory, environmental and other matters, which information is incorporated by reference into this Part II, see:

	•	Item 3 "Legal Proceedings" in PPL's, PPL Energy Supply's and PPL Electric's Annual Report to the SEC on Form 10-K for the year ended December 31, 2003; and

	•	Note 8 of the registrants' "Combined Notes to Condensed Consolidated Financial Statements" in Part I of this report.

	(a)	(b)	(c)	(d)	(a)	(b)	(c)	(d)
Period	Total Number of Shares (or Units) Purchased (1)	Average Price Paid per Share (or Unit)	Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2)	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (2)	Total Number of Shares (or Units) Purchased (1)	Average Price Paid per Share (or Unit)	Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2)	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased under the Plans or Programs (2)
January 1 to January 31, 2004	5,751	$45.23			5,751	$45.23
February 1 to February 29, 2004	1,703	$45.11			1,703	$45.11
March 1 to March 31, 2004	37	$46.44			37	$46.44
April 1 to April 30, 2004					-	-
May 1 to May 31, 2004 (3)					17	$51.94
June 1 to June 30, 2004					-	-
Total	7,491				7,508

(1)		~~Represents~~Except for the shares acquired in May 2004, represents shares of common stock withheld by PPL at the request of its executive officers to pay taxes upon the vesting of the officers' restricted stock awards, as permitted under the terms of PPL's Incentive Compensation Plan and Incentive Compensation Plan for Key Employees.

(2)		Not applicable. PPL does not currently have in place any publicly announced plans or programs to purchase equity securities.
(3)		Represents shares of common stock acquired upon the settlement in May 2004 of the purchase contract component of the PEPS Units and PEPS Units, Series B.

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

	At PPL's Annual Meeting of Shareowners held on April 23, 2004, the shareowners:

	(1)	Elected the three nominees for the office of director. The votes for individual nominees were as follows:

				Number of Votes
				For		Withhold Authority
		William F. Hecht		142,849,348		3,887,320
		Stuart Heydt		141,280,636		5,456,032
		W. Keith Smith		141,956,618		4,780,050

	(2)	Ratified the appointment of PricewaterhouseCoopers LLP as independent auditors for the year ended December 31, 2004. The vote was 141,903,132 in favor and 3,537,680 against, with 1,295,856 abstaining.

	At PPL Electric's Annual Meeting of Shareowners held on April 20, 2004, the shareowners elected all eight nominees for the office of director. The votes for individual nominees were as follows:

			Number of Votes for
		John R. Biggar			78,029,863
		Paul T. Champagne			78,029,863
		Dean A. Christiansen			78,029,863
		Lawrence E. De Simone			78,029,863
		Robert J. Grey			78,029,863
		William F. Hecht			78,029,863
		James H. Miller			78,029,863
		John F. Sipics			78,029,863

Item 6. Exhibits and Reports on Form 8-K

(a)	Exhibits

	3	-	Bylaws of PPL Electric Utilities Corporation, as amended effective July 16, 2004
	*4(a)	-	Supplement, dated ~~as of January 21,~~May 18, 2004, to Indenture dated November 1, 1997, among PPL Corporation, PPL Capital Funding, Inc. and JPMorgan Chase Bank (formerly known as Chase Manhattan Bank), as Trustee (Exhibit 4.7 to Registration Statement Nos. 333-116478, 333-116478-01 and 333-116478-02)
	~~4(b)~~10(a)	-	~~Indenture,~~Asset Purchase Agreement, dated as of ~~February 26,~~June 1, 2004, ~~among~~by and between PPL ~~Corporation, PPL Capital Funding, Inc.~~Sundance Energy, LLC, as Seller, and ~~JPMorgan Chase Bank,~~Arizona Public Service Company, as ~~Trustee~~Purchaser
	~~4(c)~~10(b)	-	~~Registration Rights~~$800 million Five-Year Credit Agreement, dated as of ~~February 26,~~June 22, 2004, among PPL ~~Corporation, PPL Capital Funding, Inc.~~Energy Supply, LLC, as Borrower, and the ~~Representatives~~banks named therein
	10(c)	-	$200 million Five-Year Credit Agreement, dated as of June 22, 2004, among PPL Electric Utilities Corporation, as Borrower, and the ~~Initial Purchasers~~banks named therein
	10(d)	-	Receivables Sale Agreement, dated as of August 1, 2004, between PPL Electric Utilities Corporation, as Originator, and PPL Receivables Corporation, as Buyer
	10(e)	-	Credit and Security Agreement, dated as of August 1, 2004, among PPL Receivables Corporation, as Borrower, PPL Electric Utilities Corporation, as Servicer, Blue Ridge Asset Funding Corporation, the Liquidity Banks from time to time party thereto and Wachovia Bank, National Association, as Agent
	12(a)	-	PPL Corporation and Subsidiaries, Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
	12(b)	-	PPL Energy Supply, LLC and Subsidiaries, Computation of Ratio of Earnings to Fixed Charges
	* - previously filed

	Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended ~~March 31,~~June 30, 2004, filed by the following officers for the following companies:
	31(a)	-	William F. Hecht for PPL Corporation
	31(b)	-	John R. Biggar for PPL Corporation
	31(c)	-	William F. Hecht for PPL Energy Supply, LLC
	31(d)	-	James E. Abel for PPL Energy Supply, LLC
	31(e)	-	John F. Sipics for PPL Electric Utilities Corporation
	31(f)	-	James E. Abel for PPL Electric Utilities Corporation

	Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended ~~March 31,~~June 30, 2004, furnished by the following officers for the following companies:
	32(a)	-	William F. Hecht for PPL Corporation
	32(b)	-	John R. Biggar for PPL Corporation
	32(c)	-	William F. Hecht for PPL Energy Supply, LLC
	32(d)	-	James E. Abel for PPL Energy Supply, LLC
	32(e)	-	John F. Sipics for PPL Electric Utilities Corporation
	32(f)	-	James E. Abel for PPL Electric Utilities Corporation

(b)	Reports on Form 8-K

	The following Reports on Form 8-K were filed () or furnished (*), as indicated, during the three months ended ~~March 31,~~June 30, 2004:

*	Report dated April 6, 2004 - PPL and PPL Electric
	Item 5.	Other Events
		Announced an offer by PPL Electric to repurchase for cash any and all of its $110 million outstanding principal amount of First Mortgage Bonds, 6-1/2% Series due 2005.
	Item 7.	Financial Statements and Exhibits
		Press release announcing the Tender Offer.

*	Report dated April 16, 2004 - PPL and PPL Electric
	Item 5.	Other Events
		Announced the completion of PPL Electric's offer to repurchase for cash any and all of its $110 million outstanding principal amount of First Mortgage Bonds, 6-1/2% Series due 2005.
	Item 7.	Financial Statements and Exhibits
		Press release announcing the completion of the Tender Offer.

**	Report dated ~~January~~April 28, 2004 - PPL
	Item 12.	Disclosure of Results of Operations and Financial Condition
			Reported PPL's results for the ~~year~~quarter ended ~~2003~~March 31, 2004, and ~~the~~affirmed its 2004 earnings ~~forecast for 2004.~~forecast.
	Item 7.	Financial Statements and Exhibits
		Press release regarding PPL's results for the ~~year~~first quarter ended ~~2003~~March 31, 2004, and affirming its 2004 earnings ~~forecast for 2004.~~forecast.

*	Report dated ~~March 29,~~June 1, 2004 - PPL and PPL ~~Electric~~Energy Supply
	Item 5.	Other Events
		Announced that PPL Sundance Energy, LLC has agreed to sell the ~~filing of a request with the PUC for an overall annual net increase~~450-megawatt Sundance power plant in ~~distribution revenues of approximately $164 million effective January 1, 2005. In addition~~Arizona to the ~~distribution rate increase request, PPL Electric also informed~~Arizona Public Service Company for $190 million in cash, subject to the ~~PUC that transmission service charges reflected in retail rates are expected to increase by approximately $57 million, effective January 1, 2005.~~receipt of various state and federal regulatory approvals.

	PPL Corporation
	(Registrant)

	PPL Energy Supply, LLC
	(Registrant)

	PPL Electric Utilities Corporation
	(Registrant)





Date: ~~May 7,~~August 6, 2004	/s/ John R. Biggar

	John R. Biggar
	Executive Vice President and
	Chief Financial Officer
	(PPL Corporation)
	(principal financial officer)




	/s/ James E. Abel

	James E. Abel
	Treasurer
	(PPL Energy Supply, LLC)
	(principal financial officer)




	/s/ Mark D. Woods

	Mark D. Woods
	Controller
	(PPL Electric Utilities Corporation)
	(principal accounting officer)