[X] OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _________ to ___________ 1-11459 23-2758192 333-74794 23-3074920 1-905 23-0959590 PPL Corporation PPL Energy Supply, LLC PPL Electric Utilities Corporation PPL Corporation PPL Energy Supply, LLC PPL Electric Utilities Corporation PPL Corporation Common stock, $.01 par value, PPL Energy Supply, LLC PPL Corporation indirectly holds all of the membership interests in PPL Energy Supply, LLC. PPL Electric Utilities Corporation Common stock, no par value, 20052006 Large accelerated filer Accelerated filer Non-accelerated filer PPL Corporation [ X ] [ ] [ ] PPL Energy Supply, LLC [ ] [ ] [ X ] PPL Electric Utilities Corporation [ ] [ ] [ X ] No 189,753,784380,495,159 shares outstanding at April 29, 2005,28, 2006, excluding 31,056,52162,139,729 shares held as treasury stock 78,029,86366,368,056 shares outstanding and all held by PPL Corporation at April 29, 2005,28, 2006, excluding 79,270,51990,932,326 shares held as treasury stock
GLOSSARY OF TERMS AND ABBREVIATIONS i FORWARD-LOOKING INFORMATION 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements 2 3 4 6 7 8 10 11 12 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results PART II. OTHER INFORMATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES interest. May 2004. Section 404 of the Sarbanes-Oxley Act of 2002, which sets requirements for management assessment of internal controls for financial reporting. It also requires an independent auditor to attest to and report on management's assessment and make its own assessment. Item 1. Financial Statements CONDENSED CONSOLIDATED STATEMENT OF INCOME PPL Corporation and Subsidiaries (Unaudited) (Millions of Dollars, except per share data) Three Months Ended 2005 2004 Operating Revenues Utility $ 1,151 $ 1,085 Unregulated retail electric and gas 25 31 Wholesale energy marketing 271 278 Net energy trading margins 16 6 Energy related businesses 139 119 Total 1,602 1,519 Operating Expenses Operation Fuel 245 205 Energy purchases 269 267 Other operation and maintenance 364 316 Amortization of recoverable transition costs 69 71 Depreciation 105 99 Taxes, other than income 73 57 Energy related businesses 148 138 Total 1,273 1,153 Operating Income 329 366 Other Income - net 9 11 Interest Expense 135 124 Income from Continuing Operations Before Income Taxes, Minority Interest 203 253 Income Taxes 32 72 Minority Interest 2 2 Dividends on Preferred Stock 1 1 Income from Continuing Operations 168 178 Loss from Discontinued Operations (net of income taxes) 1 Net Income $ 168 $ 177 Earnings Per Share of Common Stock: Income from Continuing Operations: Basic $ 0.89 $ 1.00 Diluted $ 0.88 $ 0.99 Net income: Basic $ 0.89 $ 1.00 Diluted $ 0.88 $ 0.99 Dividends Declared Per Share of Common Stock $ 0.46 $ 0.41 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the financial statements. PPL Corporation and Subsidiaries (Unaudited) (Millions of Dollars) Three Months Ended 2005 2004 Net Cash Provided by Operating Activities $ 309 $ 317 Cash Flows From Investing Activities Expenditures for property, plant and equipment (169 ) (174 ) Investment in generating assets and electric energy projects (18 ) Proceeds from the sale of minority interest in CGE 123 Purchases of auction rate securities (39 ) Proceeds from the sale of auction rate securities 66 8 Net decrease in restricted cash 16 3 Other investing activities (8 ) (1 ) Net cash used in investing activities (95 ) (98 ) Cash Flows From Financing Activities Issuance of common stock 24 12 Issuance of long-term debt 116 14 Retirement of long-term debt (396 ) (107 ) Payment of common dividends (77 ) (69 ) Payment of preferred dividends (1 ) (1 ) Net increase (decrease) in short-term debt 265 (6 ) Other financing activities (9 ) (1 ) Net cash used in financing activities (78 ) (158 ) Effect of Exchange Rates on Cash and Cash Equivalents 2 4 Net Increase in Cash and Cash Equivalents 138 65 Cash and Cash Equivalents at Beginning of Period 616 466 Cash and Cash Equivalents at End of Period $ 754 $ 531 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the financial statements. PPL Corporation and Subsidiaries (Unaudited) (Millions of Dollars) March 31, December 31, Assets Current Assets Cash and cash equivalents $ 754 $ 616 Restricted cash 53 50 Accounts receivable (less reserve: 2005 and 2004, $88) 576 459 Unbilled revenues 355 407 Fuel, materials and supplies 267 309 Prepayments 160 56 Deferred income taxes 227 162 Price risk management assets 242 115 Other 65 130 2,699 2,304 Investments Investment in unconsolidated affiliates - at equity 54 51 Nuclear plant decommissioning trust fund 405 409 Other 12 12 471 472 Property, Plant and Equipment - net Electric plant in service Transmission and distribution 5,998 5,927 Generation 4,019 4,007 General 456 480 10,473 10,414 Construction work in progress 164 148 Nuclear fuel 158 153 Electric plant 10,795 10,715 Gas and oil plant 213 213 Other property 219 221 11,227 11,149 Regulatory and Other Noncurrent Assets Recoverable transition costs 1,363 1,431 Goodwill 1,137 1,127 Other acquired intangibles 341 336 Other 940 942 3,781 3,836 $ 18,178 $ 17,761 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) (Millions of Dollars) March 31, December 31, Liabilities and Equity Current Liabilities Short-term debt $ 306 $ 42 Long-term debt 840 866 Accounts payable 412 407 Above market NUG contracts 72 73 Taxes 204 164 Interest 121 129 Dividends 88 79 Price risk management liabilities 295 167 Other 463 368 2,801 2,295 Long-term Debt 6,550 6,792 Long-term Debt with Affiliate Trust 89 89 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes and investment tax credits 2,429 2,426 Accrued pension obligations 459 476 Asset retirement obligations 262 257 Above market NUG contracts 188 206 Other 976 874 4,314 4,239 Commitments and Contingent Liabilities Minority Interest 55 56 Preferred Stock without Sinking Fund Requirements 51 51 Shareowners' Common Equity Common stock 2 2 Capital in excess of par value 3,609 3,577 Treasury stock (838 ) (838 ) Earnings reinvested 1,951 1,870 Accumulated other comprehensive loss (378 ) (323 ) Capital stock expense and other (28 ) (49 ) 4,318 4,239 $ 18,178 $ 17,761 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the financial statements. PPL Energy Supply, LLC and Subsidiaries (Unaudited) (Millions of Dollars) Three Months Ended 2005 2004 Operating Revenues Wholesale energy marketing $ 271 $ 278 Wholesale energy marketing to affiliate 415 410 Utility 293 279 Unregulated retail electric and gas 25 31 Net energy trading margins 16 6 Energy related businesses 133 114 Total 1,153 1,118 Operating Expenses Operation Fuel 192 159 Energy purchases 178 213 Energy purchases from affiliate 38 37 Other operation and maintenance 262 236 Depreciation 74 70 Taxes, other than income 25 26 Energy related businesses 139 131 Total 908 872 Operating Income 245 246 Other Income - net 10 11 Interest Expense 65 53 Interest Expense with Affiliate 7 3 Income from Continuing Operations Before Income Taxes and Minority Interest 183 201 Income Taxes 26 52 Minority Interest 2 2 Income from Continuing Operations 155 147 Loss from Discontinued Operations (net of income taxes) 1 Net Income $ 155 $ 146 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the financial statements. PPL Energy Supply, LLC and Subsidiaries (Unaudited) (Millions of Dollars) Three Months Ended 2005 2004 Net Cash Provided by Operating Activities $ 299 $ 272 Cash Flows From Investing Activities Expenditures for property, plant and equipment (123 ) (114 ) Investment in generating assets and electric energy projects (18 ) Proceeds from the sale of minority interest in CGE 123 Purchases of auction rate securities (9 ) Proceeds from the sale of auction rate securities 51 3 Net increase in notes receivable from affiliates (4 ) Net decrease in restricted cash 17 2 Other investing activities (8 ) (1 ) Net cash used in investing activities (63 ) (18 ) Cash Flows From Financing Activities Issuance of long-term debt 14 Contributions from Member 8 Retirement of long-term debt (208 ) (5 ) Distributions to Member (58 ) (63 ) Net increase (decrease) in short-term debt 165 (51 ) Net cash used in financing activities (101 ) (97 ) Effect of Exchange Rates on Cash and Cash Equivalents 2 4 Net Increase in Cash and Cash Equivalents 137 161 Cash and Cash Equivalents at Beginning of Period 357 222 Cash and Cash Equivalents at End of Period $ 494 $ 383 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the financial statements. PPL Energy Supply, LLC and Subsidiaries (Unaudited) (Millions of Dollars) March 31, December 31, Assets Current Assets Cash and cash equivalents $ 494 $ 357 Restricted cash 3 3 Accounts receivable (less reserve: 2005, $66; 2004, $68) 306 259 Unbilled revenues 219 250 Accounts receivable from affiliates 142 152 Collateral on PLR energy supply to affiliate 300 300 Fuel, materials and supplies 229 256 Prepayments 34 42 Deferred income taxes 171 128 Price risk management assets 242 113 Other 49 97 2,189 1,957 Investments Investment in unconsolidated affiliates - at equity 54 51 Nuclear plant decommissioning trust fund 405 409 Other 5 5 464 465 Property, Plant and Equipment - net Electric plant in service Transmission and distribution 3,581 3,523 Generation 4,019 4,007 General 232 254 7,832 7,784 Construction work in progress 128 115 Nuclear fuel 158 153 Electric plant 8,118 8,052 Gas and oil plant 20 21 Other property 154 156 8,292 8,229 Other Noncurrent Assets Goodwill 1,081 1,072 Other acquired intangibles 210 202 Other 559 559 1,850 1,833 $ 12,795 $ 12,484 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) (Millions of Dollars) March 31, December 31, Liabilities and Equity Current Liabilities Short-term debt $ 164 Long-term debt 5 $ 181 Accounts payable 351 338 Accounts payable to affiliates 80 52 Above market NUG contracts 72 73 Taxes 93 101 Interest 83 87 Deferred revenue on PLR energy supply to affiliate 12 12 Price risk management liabilities 287 163 Other 300 262 1,447 1,269 Long-term Debt 3,698 3,694 Note Payable to Affiliate 495 495 Long-term Debt with Affiliate Trust 89 89 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes and investment tax credits 1,293 1,261 Accrued pension obligations 318 341 Asset retirement obligations 262 257 Above market NUG contracts 188 206 Deferred revenue on PLR energy supply to affiliate 43 46 Other 815 720 2,919 2,831 Commitments and Contingent Liabilities Minority Interest 55 56 Member's Equity 4,092 4,050 $ 12,795 $ 12,484 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the financial statements. PPL Electric Utilities Corporation and Subsidiaries (Unaudited) (Millions of Dollars) Three Months Ended 2005 2004 Operating Revenues Retail electric $ 780 $ 732 Wholesale electric 1 4 Wholesale electric to affiliate 38 37 Total 819 773 Operating Expenses Operation Energy purchases 91 55 Energy purchases from affiliate 415 410 Other operation and maintenance 101 78 Amortization of recoverable transition costs 69 71 Depreciation 28 26 Taxes, other than income 47 31 Total 751 671 Operating Income 68 102 Other Income - net 4 1 Interest Expense 53 49 Income Before Income Taxes 19 54 Income Taxes 3 20 Income Before Dividends on Preferred Stock 16 34 Dividends on Preferred Stock 1 1 Income Available to PPL Corporation $ 15 $ 33 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the financial statements. PPL Electric Utilities Corporation and Subsidiaries (Unaudited) (Millions of Dollars) Three Months Ended 2005 2004 Net Cash Provided by Operating Activities $ 4 $ 44 Cash Flows From Investing Activities Expenditures for property, plant and equipment (40 ) (54 ) Purchases of auction rate securities (30 ) Proceeds from the sale of auction rate securities 10 5 Net decrease in restricted cash 2 2 Other investing activities 1 Net cash used in investing activities (28 ) (76 ) Cash Flows From Financing Activities Issuance of long-term debt 116 Retirement of long-term debt (188 ) (102 ) Payment of preferred dividends (1 ) (1 ) Payment of common dividends to PPL Corporation (16 ) (1 ) Net increase in short-term debt 100 45 Other financing activities (5 ) Net cash provided by (used in) financing activities 6 (59 ) Net Decrease in Cash and Cash Equivalents (18 ) (91 ) Cash and Cash Equivalents at Beginning of Period 151 162 Cash and Cash Equivalents at End of Period $ 133 $ 71 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the financial statements. PPL Electric Utilities Corporation and Subsidiaries (Unaudited) (Millions of Dollars) March 31, December 31, Assets Current Assets Cash and cash equivalents $ 133 $ 151 Restricted cash 42 42 Accounts receivable (less reserve: 2005, $20; 2004, $18) 234 179 Unbilled revenues 130 148 Accounts receivable from affiliates 6 17 Note receivable from affiliate 300 300 Prepayments 111 6 Prepayment on PLR energy supply from affiliate 12 12 Other 76 66 1,044 921 Property, Plant and Equipment - net Electric plant in service Transmission and distribution 2,417 2,404 General 219 220 2,636 2,624 Construction work in progress 30 29 Electric plant 2,666 2,653 Other property 4 4 2,670 2,657 Regulatory and Other Noncurrent Assets Recoverable transition costs 1,363 1,431 Intangibles 116 117 Prepayment on PLR energy supply from affiliate 43 46 Other 357 354 1,879 1,948 $ 5,593 $ 5,526 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) (Millions of Dollars) March 31, December 31, Liabilities and Equity Current Liabilities Short-term debt $ 142 $ 42 Long-term debt 485 336 Accounts payable 37 39 Accounts payable to affiliates 153 168 Taxes 60 46 Collateral on PLR energy supply from affiliate 300 300 Other 140 98 1,317 1,029 Long-term Debt 1,987 2,208 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes and investment tax credits 780 776 Other 187 190 967 966 Commitments and Contingent Liabilities Preferred Stock without Sinking Fund Requirements 51 51 Shareowner's Common Equity Common stock 1,476 1,476 Additional paid-in capital 361 361 Treasury stock (912 ) (912 ) Earnings reinvested 353 354 Capital stock expense and other (7 ) (7 ) 1,271 1,272 $ 5,593 $ 5,526 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the financial statements. Income, components of operating losses of the Sundance plant were reclassified from certain line items to "Loss from Discontinued Operations." See Note 8 for further discussion. In addition, based on clarifications of accounting guidance, the March 31, 2005 Statement of Cash Flows has been revised to reflect the purchases and sales of emission allowances, and the purchases and sales of investments in the nuclear decommissioning trust, on a gross basis within "Cash Flows from Investing Activities." Previously, these cash flows were presented on a net basis within "Cash Flows from Operating Activities." current price quotes for the purchase of Enron claims, PPL reduced the associated allowance for doubtful accounts by $15 million, or $9 million after tax ($0.03 per share for PPL). Three Months Ended March 31, PPL PPL Energy Supply 2005 2004 2005 2004 Income Statement Data Revenues from external customers Supply $ 434 $ 417 $ 843 $ 823 International Delivery 310 295 310 295 Pennsylvania Delivery (a) 858 807 1,602 1,519 1,153 1,118 Intersegment revenues Supply 416 410 Pennsylvania Delivery (a) 38 38 Net Income Supply 86 89 93 98 International Delivery (b) 62 48 62 48 Pennsylvania Delivery (a) 20 40 $ 168 $ 177 $ 155 $ 146 PPL PPL Energy Supply March 31, December 31, March 31, December 31, Balance Sheet Data Total assets Supply $ 7,009 $ 6,673 $ 7,389 $ 7,094 International Delivery 5,406 5,390 5,406 5,390 Pennsylvania Delivery (a) 5,763 5,698 $ 18,178 $ 17,761 $ 12,795 $ 12,484 (a) stock options, restricted stock and restricted stock units granted under the incentive compensation plans; stock units representing common stock granted under the directors compensation programs; convertible senior notes. Three Months 2005 2004 Income (Numerator) Income from continuing operations $ 168 $ 178 Loss from discontinued operations (net of income taxes) 1 Net Income $ 168 $ 177 Shares (Denominator) Shares for Basic EPS 189,060 177,150 Add incremental shares: Convertible Senior Notes 584 Stock options and other share-based awards 1,031 607 Shares for Diluted EPS 190,675 177,757 Basic EPS Income from continuing operations $ 0.89 $ 1.00 Loss from discontinued operations (net of income taxes) Net Income $ 0.89 $ 1.00 Diluted EPS Income from continuing operations $ 0.88 $ 0.99 Loss from discontinued operations (net of income taxes) Net Income $ 0.88 $ 0.99 stock. Based upon the current conversion rate of first quarter of 2006. Three Months (Thousands of Shares) 2005 2004 Antidilutive stock options 804 747 Supply) Three Months PPL 2005 2004 Reconciliation of Income Tax Expense Indicated federal income tax on pre-tax income at statutory tax rate - 35% $ 71 $ 89 Increase (decrease) due to: State income taxes (2 ) 4 Amortization of investment tax credit (3 ) (3 ) Difference related to income recognition of foreign affiliates (net of foreign income taxes) (10 ) (3 ) Federal income tax credits (24 ) (14 ) Other (1 ) (39 ) (17 ) Total income tax expense $ 32 $ 72 Effective income tax rate 15.8% 28.5% PPL Energy Supply Reconciliation of Income Tax Expense Indicated federal income tax on pre-tax income at statutory tax rate - 35% $ 64 $ 70 Increase (decrease) due to: State income taxes (1 ) 1 Amortization of investment tax credit (2 ) (2 ) Difference related to income recognition of foreign affiliates (net of foreign income taxes) (10 ) (3 ) Federal income tax credits (24 ) (14 ) Other (1 ) (38 ) (18 ) Total income tax expense $ 26 $ 52 Effective income tax rate 14.2% 25.9% PPL Electric Reconciliation of Income Tax Expense Indicated federal income tax on pre-tax income at statutory tax rate - 35% $ 6 $ 19 Increase (decrease) due to: State income taxes 3 Amortization of investment tax credit (1 ) (1 ) Release of tax reserves (2 ) Other (1 ) (3 ) 1 Total income tax expense $ 3 $ 20 Effective income tax rate 15.8% 37.0% are: Three Months Ended March 31, PPL PPL Energy Supply 2005 2004 2005 2004 Net Income $ 168 $ 177 $ 155 $ 146 Other comprehensive income (loss): Foreign currency translation adjustments 16 79 16 79 Disposition of investment in CGE - foreign currency translation adjustment 10 10 Unrealized loss on available-for-sale securities (5 ) (3 ) (5 ) (3 ) Unrealized loss on qualifying derivatives (66 ) (36 ) (66 ) (33 ) Total other comprehensive income (loss) (55 ) 50 (55 ) 53 Comprehensive Income $ 113 $ 227 $ 100 $ 199 outstanding under its facilities. facility. PPL Energy Supply's obligations under this facility are supported by a $300 million letter of credit issued on PPL Energy Supply's behalf under a separate $300 million five-year letter of credit and reimbursement agreement also expiring in March 2011. upon maturity. least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter. This market price trigger was met in the first quarter of 2006. Therefore, holders of the Convertible Senior Notes are entitled to convert their notes at any time during the second quarter of 2006. As discussed in Note 4, when holders elect to convert the Convertible Senior Notes, PPL Energy Supply is required to settle the principal amount in cash and any conversion premium in cash or PPL common stock. its subsidiaries are involved in negotiations with third parties regarding acquisitions and dispositions of businesses and assets, joint ventures and development projects. Management is in the process of reviewing strategic alternatives for certain of its gas-fired generation assets. Any such transactions may impact future financial results. Income. through 2026. may reach 313 MW. 2006. spend $34 million between 2006 and 2040. matter. a subject of these investigations. proceedings. boroughs. proceeding. will be permanent. In 2005 groups as not being sufficiently strict, and by industry petitioners as being too strict. In addition, several Canadian environmental groups have petitioned the EPA under the Clean Air Act to revise the CAIR to require deeper reductions in sulfur dioxide and mercury emissions, and the Ozone Transport Commission (consisting of Pennsylvania and 11 other states and the District of Columbia) has passed a resolution calling for reductions in sulfur dioxide and nitrogen oxide that are more stringent than those under CAIR. The Pennsylvania DEP, which represents Pennsylvania on the Ozone Transport Commission, has indicated its support for developing regulations for reductions in sulfur dioxide and nitrogen oxide that are more stringent than those under CAIR. Based on preliminary industry estimates, the costs are expected to exceed $150 million. position on New Source Review. In 2003, the EPA issued changes to its of such reductions could be significant. approximately $125 million. Recorded Liability at Exposure at March 31, 2005 December 31, 2004 March 31, 2005 (a) Expiration Date PPL Residual value guarantees of leased equipment $ 7 2006 (b) PPL Energy Supply (c) WPD LLP guarantee of obligations under SIUK Capital Trust I preferred securities 82 (d) 2027 Letters of credit issued on behalf of affiliates 5 (e) 2006 Support agreements to guarantee partnerships' obligations for the sale of coal 9 2007 Retroactive premiums under nuclear insurance programs 38 Nuclear claims under The Price Anderson Amendments Act of 1988 201 (f) Contingent purchase price payments to former owners of synfuel projects $ 12 $ 11 53 2007 Residual value guarantees of leased equipment 3 2006 (b) WPD guarantee of pension and other obligations of unconsolidated entities (g) 4 46 2017 WPD guarantee related to a contract assigned as part of a sale of one of its businesses 20 2005 Indemnifications for entities in liquidation 288 2008 to 2012 WPD guarantee of an unconsolidated entity's lease obligations 1 2008 PPL Electric(c) Guarantee of a portion of an unconsolidated entity's debt 7 (d) 2008 Residual value guarantees of leased equipment 1 1 81 2006 (b) (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 (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. (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. (f) Amount is per incident. (g) PPL Energy Supply records this as affiliated interest income, which is included in "Other Income - net" on the Statement of Income. Three Months Ended March 31, PPL Energy Supply PPL Electric 2005 2004 2005 2004 Direct expenses $ 25 $ 24 $ 14 $ 14 Overhead costs 19 14 7 6 Electric. 2005. Three Months Ended PPL 2005 2004 Other Income Interest income $ 6 $ 3 Equity earnings 1 1 Realized earnings on nuclear decommissioning trust 1 4 Hyder-related activity 2 Gain by WPD on the disposition of property 1 1 Miscellaneous - International 3 3 Miscellaneous - Domestic 1 2 Total 13 16 Other Deductions Charitable contributions 2 2 Miscellaneous - International 1 Miscellaneous - Domestic 2 2 Other Income - net $ 9 $ 11 PPL Energy Supply Other Income Interest income $ 4 $ 2 Affiliated interest income 2 Equity earnings 1 1 Realized earnings on nuclear decommissioning trust 1 4 Hyder-related activity 2 Gain by WPD on the disposition of property 1 1 Miscellaneous - International 3 3 Miscellaneous - Domestic 1 1 Total 13 14 Other Deductions Loss on hedge activity 1 Miscellaneous - International 1 Miscellaneous - Domestic 2 2 Other Income - net $ 10 $ 11 PPL Electric Other Income Interest income $ 2 $ 1 Affiliated interest income 3 Miscellaneous 1 Total 5 2 Other Deductions 1 1 Other Income - net $ 4 $ 1 was: 2013. PPL and PPL Energy Supply denominated in foreign currencies. These forward contracts range in maturity through 2008. Net investment hedge activity is reported in the foreign currency translation adjustments component of other comprehensive income. PPL recorded net investment hedge losses, after tax, of 2005. 2005, PPL and PPL Energy Supply reclassified losses, after tax, of $2 million. Three Months Ended 2005 2004 PPL Beginning accumulated derivative gain (loss) $ (63) $ 41 Net change associated with current period hedging activities and other (79 ) (99 ) Net change from reclassification into earnings 13 63 Ending accumulated derivative gain (loss) $ (129 ) $ 5 PPL Energy Supply Beginning accumulated derivative gain (loss) $ (45) $ 60 Net change associated with current period hedging activities and other (78 ) (94 ) Net change from reclassification into earnings 12 61 Ending accumulated derivative gain (loss) $ (111 ) $ 27 scrubbers PPL is installing at its Brunner Island and Montour generating plants. These contracts qualify for cash flow hedge treatment and will ultimately be recognized on the Statement of Income in "Depreciation." Pension Benefits Other Postretirement Three Months Ended Three Months Ended 2005 2004 2005 2004 Domestic International Domestic International PPL Service cost $ 14 $ 4 $ 12 $ 4 $ 2 $ 1 Interest cost 29 38 28 36 7 6 Expected return on plan assets (40 ) (52 ) (38 ) (53 ) (5 ) (4 ) Amortization of transition obligation (1 ) (1 ) 2 2 Amortization of prior service cost 4 1 4 1 1 Amortization of (gain) loss 6 (2 ) 2 2 2 Net periodic pension and other postretirement benefit cost (credit) prior to termination benefits 6 (3 ) 3 (10 ) 9 7 Termination benefits 5 Net periodic pension and other postretirement benefit cost (credit) $ 6 $ 2 $ 3 $ (10 ) $ 9 $ 7 PPL Energy Supply Service cost $ 1 $ 4 $ 1 $ 4 Interest cost 1 38 1 36 Expected return on plan assets (1 ) (52 ) (1 ) (53 ) Amortization of prior service cost 1 1 Amortization of loss 6 2 Net periodic pension and other postretirement benefit cost (credit) prior to termination benefits 1 (3 ) 1 (10 ) Termination benefits 5 Net periodic pension and other postretirement benefit cost (credit) $ 1 $ 2 $ 1 $ (10 ) March 31, 2005 PPL PPL Energy Supply PPL Electric Current: Collateral for letters of credit (a) $ 42 $ 42 Miscellaneous 11 $ 3 Restricted cash - current 53 3 42 Noncurrent: Required deposit of WPD's insurance subsidiary 20 20 PPL Transition Bond Company Indenture reserves (b) 20 20 Restricted cash - noncurrent 40 20 20 Total restricted cash $ 93 $ 23 $ 62 December 31, 2004 PPL PPL Energy Supply PPL Electric Current: Collateral for letters of credit (a) $ 42 $ 42 Miscellaneous 8 $ 3 Restricted cash - current 50 3 42 Noncurrent: Required deposit of WPD's insurance subsidiary 37 37 PPL Transition Bond Company Indenture reserves (b) 22 22 Restricted cash - noncurrent 59 37 22 Total restricted cash $ 109 $ 40 $ 64 (a) A deposit with a financial institution of funds from the asset-backed commercial paper program to fully collateralize $42 million of letters of credit. See Note 7 for further discussion on the asset-backed commercial paper program. (b) Includes insurance reserves of $17 million and $15 million at March 31, 2006, and December 31, 2005. ARO at December 31, 2004 $ 257 Add: Accretion expense 5 ARO at March 31, 2005 $ 262 was: 2005. 123(R). 2007. PPL and its subsidiaries are currently in the process of more information concerning the material risks and uncertainties that PPL faces in its businesses and with respect to its future earnings. Analysis." Three Months Ended 2005 2004 Net income $ 168 $ 177 EPS - basic $ 0.89 $ 1.00 EPS - diluted $ 0.88 $ 0.99 Three Months Ended Domestic: Eastern U.S. non-trading margins $ 16 Northwestern U.S. non-trading margins (9 ) Net energy trading margins 6 Delivery revenues (net of CTC/ITC amortization, interest expense on transition bonds and ancillary charges) 28 Operation and maintenance expenses (24 ) Depreciation (2 ) Taxes, other than income (excluding gross receipts tax) (8 ) Synfuel earnings 7 Interest expense (2 ) Other (2 ) Total Domestic 10 International: U.K.: Operation and maintenance expenses (8 ) Impact of changes in foreign currency exchange rates 3 Latin America 2 U.S. income taxes 6 Interest expense 3 Total International 6 Unusual items: Sale of CGE (Note 8) 8 PJM billing dispute (Note 9) (27 ) NorthWestern litigation (Note 9) (6 ) $ (9 ) Three Months 2005 2004 Supply $ 86 $ 89 International Delivery 62 48 Pennsylvania Delivery 20 40 Total $ 168 $ 177 was: Three Months 2005 2004 Energy revenues External $ 312 $ 315 Intersegment 416 410 Energy related businesses 122 102 Total operating revenues 850 827 Fuel and energy purchases External 307 318 Intersegment 38 38 Other operation and maintenance 191 171 Depreciation 38 35 Taxes, other than income 12 13 Energy related businesses 142 116 Total operating expenses 728 691 Other Income - net 2 Interest Expense 30 24 Income Taxes 6 25 Total $ 86 $ 89 was: Three Months Ended Eastern U.S. non-trading margins $ 16 Northwestern U.S. non-trading margins (9 ) Net energy trading margins 6 Operation and maintenance expenses (10 ) Synfuel earnings 7 Depreciation (2 ) Interest expense (3 ) Other (2 ) Total 3 Unusual item - NorthWestern litigation (Note 9) (6 ) $ (3 ) status of its synfuel projects as changes in oil prices, legislation and other factors occur. Three Months 2005 2004 Energy revenues $ 293 $ 279 Energy related businesses 17 16 Total operating revenues 310 295 Fuel and energy purchases 63 54 Other operation and maintenance 62 56 Depreciation 38 36 Taxes, other than income 14 13 Energy related businesses 6 21 Total operating expenses 183 180 Other Income - net 5 7 Interest Expense 50 49 Income Taxes 18 22 Minority Interest 2 2 Loss from Discontinued Operations 1 Total $ 62 $ 48 was: Three Months Ended U.K.: Operation and maintenance expenses $ (8 ) Impact of changes in foreign currency exchange rates 3 Latin America 2 U.S. income taxes 6 Interest expense 3 Total 6 Unusual item - Sale of CGE (Note 8) 8 $ 14 currency exchange rates in 2006. Three Months 2005 2004 Operating revenues External $ 858 $ 807 Intersegment 38 38 Total operating revenues 896 845 Fuel and energy purchases External 144 100 Intersegment 416 410 Other operation and maintenance 111 89 Amortization of recoverable transition costs 69 71 Depreciation 29 28 Taxes, other than income 47 31 Total operating expenses 816 729 Other Income - net 4 1 Interest Expense 55 51 Income Taxes 8 25 Dividends on Preferred Stock 1 1 Total $ 20 $ 40 was: Three Months Ended Delivery revenues (net of CTC/ITC amortization, interest expense on transition bonds and ancillary charges) $ 28 Operation and maintenance expenses (13 ) Taxes, other than income (excluding gross receipts tax) (8 ) Total 7 Unusual item - PJM billing dispute (27 ) $ (20 ) Income Analysis -- Three Months Ended Utility $ 66 Unregulated retail electric and gas (6 ) Wholesale energy marketing (7 ) Net energy trading margins 10 Other revenue adjustments (a) (45 ) Total revenues 18 Fuel 40 Energy purchases 2 Other cost adjustments (a) (44 ) Total cost of sales (2 ) Domestic gross energy margins $ 20 (a) Adjusted to exclude the impact of any revenues and costs not associated with domestic gross energy Three Months Ended Eastern U.S. $ 27 Northwestern U.S. (15) Southwestern U.S. (2) Net energy trading 10 Domestic gross energy margins $ 20 Additionally, beginning in 2006, PPL further segregates non-trading activities into two categories: normal non-trading hedge activity and non-trading economic activity. Non-trading economic activity represents the net unrealized effect of derivative transactions that are entered into as economic hedges, but do not qualify for hedge accounting under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and interpreted. marketing activities. energy purchase prices. same period last year. Three Months Ended Domestic: Retail electric revenue (PPL Electric) Electric delivery $ 32 PLR electric generation supply 16 Gas revenue (PPL Gas Utilities) 7 Wholesale electric revenue (PPL Electric) (3 ) International: Retail electric delivery (PPL Global) Chile 7 U.K. 4 El Salvador 3 $ 66 to: Statements for an overall assessment of synthetic fuel tax credits. Three Months Ended Costs associated with severe ice storms in January 2005 $ 19 Accelerated amortization of stock-based compensation (Note 2) 17 Increase in domestic and international pension costs 14 NorthWestern litigation accrual (Note 9) 9 Increase in foreign currency exchange rates 2 Gains on sales of emission allowances (7 ) Reduction in WPD costs that are a pass-through to customer rates (5 ) Other (1 ) $ 48 other income. Three Months Ended Lower Mt. Bethel generation facility, which began commercial operation in May 2004 $ 4 Other additions to PP&E 4 Foreign currency exchange rates 1 Extension of useful lives of certain fossil generation assets (Note 2) (3 ) $ 6 was due to: Three Months Ended Interest expense related to the Lower Mt. Bethel generation facility, which began commercial operation in May 2004 (a) $ 9 Interest accrued for PJM billing dispute (Note 9) 8 Increase in short-term debt interest expense 2 Decrease in interest expense due to the repayment in June 2004 of financing related to the Sundance and University Park generation facilities (b) (6 ) Decrease in other long-term debt interest expense (4 ) Other 2 $ 11 rates. the Sundance power plant. and Capital Resources for general corporate purposes. revisions or ratings affirmations. A downgrade in PPL's or its subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets. debt securities. Three Months Ended March 31, 2005 2004 Fair value of contracts outstanding at the beginning of the period $ (11 ) $ 86 Contracts realized or otherwise settled during the period (7 ) (24 ) Fair value of new contracts at inception Other changes in fair values (88 ) 23 Fair value of contracts outstanding at the end of the period $ (106 ) $ 85 the non-trading contracts. Fair Value of Contracts at Period-End Maturity Maturity Maturity Maturity Total Fair Source of Fair Value Prices actively quoted $ 15 $ 15 $ 1 $ 31 Prices provided by other external sources (17 ) (111 ) (9 ) (137 ) Prices based on models and other valuation methods Fair value of contracts outstanding at the end of the period $ (2 ) $ (96 ) $ (8 ) $ (106 ) means. 2011. Day 1 gain, which is netted against the above fair values. Three Months Ended 2005 2004 Fair value of contracts outstanding at the beginning of the period $ 10 $ 3 Contracts realized or otherwise settled during the period (4 ) (3 ) Fair value of new contracts at inception 3 4 Other changes in fair values 7 7 Fair value of contracts outstanding at the end of the period $ 16 $ 11 contracts. Fair Value of Contracts at Period-End Maturity Maturity Maturity Maturity Total Fair Source of Fair Value Prices actively quoted $ 3 $ 1 $ 4 Prices provided by other external sources 9 4 13 Prices based on models and other valuation methods (1 ) (1 ) Fair value of contracts outstanding at the end of the period $ 11 $ 5 $ 16 means. $46 million. 2006. PPL estimated that its potential additional exposure to a change in the market value of these instruments, through a 10% adverse movement in foreign exchange rates, was $138 million at March 31, 2006. transactions. more information concerning the material risks and uncertainties that PPL Energy Supply faces in its businesses and with respect to its future earnings. are explained in the "Statement of Income Analysis." Three Months Ended Domestic: Eastern U.S. non-trading margins $ 16 Northwestern U.S. non-trading margins (9 ) Net energy trading margins 6 Operation and maintenance expenses (6 ) Interest expense (9 ) Synfuel earnings 7 Other (4 ) Total Domestic 1 International: U.K.: Operation and maintenance expenses (8 ) Impact of changes in foreign currency exchange rates 3 Latin America 2 U.S. income taxes 6 Interest expense 3 Total International 6 Unusual items: Sale of CGE (Note 8) 8 NorthWestern litigation (Note 9) (6 ) $ 9 Three Months 2005 2004 Supply $ 93 $ 98 International Delivery 62 48 Total $ 155 $ 146 was: Three Months 2005 2004 Energy revenues $ 727 $ 725 Energy related businesses 116 98 Total operating revenues 843 823 Fuel and energy purchases 345 355 Other operation and maintenance 200 180 Depreciation 36 34 Taxes, other than income 11 13 Energy related businesses 133 110 Total operating expenses 725 692 Other Income - net 5 4 Interest Expense 22 7 Income Taxes 8 30 Total $ 93 $ 98 was: Three Months Ended Eastern U.S. non-trading margins $ 16 Northwestern U.S. non-trading margins (9 ) Net energy trading margins 6 Operation and maintenance expenses (6 ) Interest expense (9 ) Synfuel earnings 7 Other (4 ) Total 1 Unusual item - NorthWestern litigation (Note 9) (6 ) $ (5 ) status of its synfuel projects as changes in oil prices, legislation and other factors occur. Three Months 2005 2004 Energy revenues $ 293 $ 279 Energy related businesses 17 16 Total operating revenues 310 295 Fuel and energy purchases 63 54 Other operation and maintenance 62 56 Depreciation 38 36 Taxes, other than income 14 13 Energy related businesses 6 21 Total operating expenses 183 180 Other Income - net 5 7 Interest Expense 50 49 Income Taxes 18 22 Minority Interest 2 2 Loss from Discontinued Operations 1 Total $ 62 $ 48 was: Three Months Ended U.K.: Operation and maintenance expenses $ (8 ) Impact of changes in foreign currency exchange rates 3 Latin America 2 U.S. income taxes 6 Interest expense 3 Total 6 Unusual item - Sale of CGE (Note 8) 8 $ 14 Income Analysis -- Three Months Ended Wholesale energy marketing $ (7 ) Wholesale energy marketing to affiliate 5 Unregulated retail electric and gas (6 ) Net energy trading margins 10 Other revenue adjustments (a) 16 Total revenues 18 Fuel 33 Energy purchases (35 ) Energy purchases from affiliate 1 Other cost adjustments (a) (1 ) Total cost of sales (2 ) Domestic gross energy margins $ 20 (a) Adjusted to exclude the impact of any revenues and costs not associated with domestic gross energy Three Months Ended Eastern U.S. $ 27 Northwestern U.S. (15) Southwestern U.S. (2) Net energy trading 10 Domestic gross energy margins $ 20 Additionally, beginning in 2006, PPL Energy Supply further segregates non-trading activities into two categories: normal non-trading hedge activity and non-trading economic activity. Non-trading economic activity represents the net unrealized effect of derivative transactions that are entered into as economic hedges, but do not qualify for hedge accounting under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and interpreted. marketing activities. energy purchase prices. same period last year. Three Months Ended International: Retail electric delivery (PPL Global) Chile $ 7 U.K. 4 El Salvador 3 $ 14 to: Statements for an overall assessment of synthetic fuel tax credits. Three Months Ended Increase in domestic and international pension costs $ 13 Accelerated amortization of stock-based compensation (Note 2) 12 Increase in allocation of corporate service cost (Note 10) 5 NorthWestern litigation accrual (Note 9) 9 Increase in foreign currency exchange rates 2 Gains on sales of emission allowances (7 ) Reduction in WPD costs that are a pass-through to customer rates (5 ) Other (3 ) $ 26 other income. Three Months Ended Lower Mt. Bethel generation facility, which began commercial operation in May 2004 $ 4 Other additions to PP&E 2 Foreign currency exchange rates 1 Extension of useful lives of certain fossil generation assets (Note 2) (3 ) $ 4 Three Months Ended Interest expense related to the Lower Mt. Bethel generation facility, which began commercial operation in May 2004 (a) $ 9 Increase in other long-term debt interest expense 5 Increase in interest expense with affiliate 4 Increase in short-term debt interest expense 2 Decrease in interest expense due to the repayment in June 2004 of financing related to the Sundance and University Park generation facilities(b) (6 ) Other 2 $ 16 rates. the Sundance power plant. and Capital Resources for general corporate purposes. revisions or ratings affirmations. A downgrade in PPL Energy Supply's or its subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets. debt securities. Three Months Ended 2005 2004 Fair value of contracts outstanding at the beginning of the period $ (9 ) $ 86 Contracts realized or otherwise settled during the period (9 ) (24 ) Fair value of new contracts at inception Other changes in fair values (88 ) 22 Fair value of contracts outstanding at the end of the period $ (106 ) $ 84 the non-trading contracts. Fair Value of Contracts at Period-End Maturity Maturity Maturity Maturity Total Fair Source of Fair Value Prices actively quoted $ 15 $ 15 $ 1 $ 31 Prices provided by other external sources (17 ) (111 ) (9 ) (137 ) Prices based on models and other valuation methods Fair value of contracts outstanding at the end of the period $ (2) $ (96 ) $ (8 ) $ (106 ) means. 2011. Day 1 gain, which is netted against the above fair values. Three Months Ended 2005 2004 Fair value of contracts outstanding at the beginning of the period $ 9 $ 3 Contracts realized or otherwise settled during the period (3 ) (3 ) Fair value of new contracts at inception 3 4 Other changes in fair values 7 7 Fair value of contracts outstanding at the end of the period $ 16 $ 11 contracts. Fair Value of Contracts at Period-End Maturity Maturity Maturity Maturity Total Fair Source of Fair Value Prices actively quoted $ 3 $ 1 $ 4 Prices provided by other external sources 9 4 13 Prices based on models and other valuation methods (1 ) (1 ) Fair value of contracts outstanding at the end of the period $ 11 $ 5 $ 16 means. $28 million. 2006. PPL Energy Supply estimated that its potential additional exposure to a change in the market value of these instruments, through a 10% adverse movement in foreign exchange rates, was $138 million at March 31, 2006. transactions. See "Forward-Looking Information," Note 11 to the Financial Statements and the rest of this Item. 2 in this Form 10-Q and "Item 1A. Risk Factors" and the rest of Item 7 in PPL Electric's 2005 Form 10-K for more information concerning the material risks and uncertainties that PPL Electric faces in its business and with respect to its future earnings. 2005. Three Months Ended Delivery revenues (net of CTC/ITC amortization, interest expense on transition bonds and ancillary charges) $ 28 Operation and maintenance expenses (13 ) Taxes, other than income (excluding gross receipts tax) (8 ) Other 2 Total 9 Unusual item - PJM billing dispute (27 ) $ (18 ) "Statement of Income Analysis." Income Analysis -- Three Months Ended Electric delivery $ 32 PLR electric generation supply 16 $ 48 first quarter of 2006 compared to 2005. 2005. accrual. to: PJM billing dispute. income in 2006 relative to 2005. and Capital Resources June 2010 by one year. PPL expects the extension to be effective in June 2006. revisions or ratings affirmations. A downgrade in PPL Electric's or PPL Transition Bond Company's credit ratings could result in higher borrowing costs and reduced access to capital markets. $1 million. accruals. (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, (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 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: Note (a) (b) (c) (d) Period Total Number of Average Price Paid Total Number of Maximum Number (or January 1 to January 31, 2005 February 1 to February 28, 2005 $52.75 March 1 to March 31, 2005 1,618 $54.69 Total 10,668 (1) 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. - *[_]10(b) - - - - - - - - - - - (Registrant) (Registrant) (Registrant) Date: May 4, (principal accounting officer)20052006
of Operations37485760606065 606162636465
OFFICER666870
OFFICER727476British pounds sterling.2001 Senior Secured Bond Indenture - PPL Electric's Indenture, dated as of August 1, 2001, to JPMorgan Chase Bank, as trustee, as supplemented.2004 Form 10-K - Annual Report to the SEC on Form 10-K for the year ended December 31, 2004.APA - Asset Purchase Agreement.ARO - asset retirement obligation.Bcf - billion cubic feet.CGE-Compañia GeneralEmpresa de Electricidad,Luz y Fuerza Electrica Cochabamba S.A., a distributor of electricity and natural gas with other industrial segments in Chile and Argentina,Bolivian electric distribution company in which PPL Global had an 8.7% direct and indirect minorityhas a majority 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.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.EITF - Emerging Issues Task Force, an organization that assists the FASB in improving financial reporting through the identification, discussion and resolution of financial accounting 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.Fitch - Fitch Ratings.FSP - FASB Staff Position.GAAP - generally accepted accounting principles.GWh - gigawatt-hour, one million kilowatt-hours.a. 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. b. 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. c. 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. -London-London Interbank Offered Rate.NPDES - National Pollutant Discharge Elimination System. to oil used in certain electrical equipment up to the late-1970s. It is now classified as a hazardous chemical.stock.PEPS Units, Series B(Premium Equity Participating Security Units, or PEPSSM Units, Series B) - securities issued by PPL and PPL Capital Funding that consisted of an undivided intereststock, which settled in a debt security issued by PPL Capital Funding and guaranteed by PPL, and a forward contract to purchase PPL common stock.PPL - PPL Corporation, the parent holding company of PPL Electric, PPL Energy Funding and other subsidiaries.PPL Capital Funding - PPL Capital Funding, Inc., a wholly owned financing subsidiary of PPL.PPL Capital Funding Trust I - a Delaware statutory business trust created to issue the Preferred Security component of the PEPS 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 that 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 that specializes 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 that owns and operates U.S. generating facilities through various subsidiaries.PPL Global - PPL Global, LLC, a subsidiary of PPL Energy Supply that owns and operates international energy businesses that are focused on the regulated distribution of electricity.PPL Maine - PPL Maine, LLC, a subsidiary of PPL Generation that owns generating operations in Maine.PPL Martins Creek - PPL Martins Creek, LLC, a generating subsidiary of PPL Generation that owns generating operations in Pennsylvania.PPL Montana - PPL Montana, LLC, an indirect subsidiary of PPL Generation that generates electricity for wholesale sales in Montana and the Pacific Northwest.PPL Services - PPL Services Corporation, a subsidiary of PPL that provides shared services for PPL and its subsidiaries.PPL Susquehanna - PPL Susquehanna, LLC, the nuclear generating subsidiary of PPL Generation.PPL Transition Bond Company - PPL Transition Bond Company, LLC, a 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, which solely held debentures of PPL Capital Funding, and by SIUK Capital Trust I, which solely holds debentures of WPD LLP.PURTA - the Pennsylvania Public Utility Realty Tax Act.SCRselective catalytic reduction, a pollution control process.SIUK Capital Trust I - a business trust created to issue preferred securities and whose common securities are held by WPD LLP.aremay be available on qualified synthetic fuel products.WPD - refers collectively to WPDH Limited and WPDL.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."Management'scompanies' 2005 Form 10-K and in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" sections herein,in this Form 10-Q report, 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 conditions affecting customer energy usage and operating costs;competition in retail and wholesale power markets;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 and availability of existing generation facilities and operating costs;transmission and distribution system conditions and operating costs;environmental conditions and requirements;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, federal or foreign investigations applicable to PPL and its subsidiaries and the energy industry;the outcome of litigation against PPL and its subsidiaries;capital market conditions, including changes in interest rates, and decisions regarding capital structure;stock price performance;the market prices of equity securities and the impact on pension income and resultant cash funding requirements for defined benefit pension plans;securities and credit ratings;state, federal and foreign regulatory developments;foreign exchange rates;new state, federal or foreign legislation, including new tax legislation;national or regional economic conditions, including any potential effects arising from terrorist attacks in the U.S., the situation in Iraq and any consequential hostilities or other hostilities; andthe commitments and liabilities of PPL and its subsidiaries.· market demand and prices for energy, capacity and fuel; · market prices for crude oil and the potential impact on synthetic fuel operations, synthetic fuel purchases from third parties and the phase-out of synthetic fuel tax credits; · weather conditions affecting generation production, customer energy usage and operating costs; · competition in retail and wholesale power markets; · liquidity of wholesale power markets; · the effect of any business or industry restructuring; · the profitability and liquidity, including access to capital markets and credit facilities, of PPL and its subsidiaries; · new accounting requirements or new interpretations or applications of existing requirements; · operation and availability of existing generation facilities and operating costs; · transmission and distribution system conditions and operating costs; · current and future environmental conditions and requirements and the related costs of compliance, including environmental capital expenditures and emission allowance and other expenses; · significant delays in the planned installation of pollution control equipment at certain coal-fired generating units in Pennsylvania due to weather conditions, contractor performance or other reasons; · 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; · any impact of hurricanes or other severe weather on PPL and its subsidiaries, including any impact on fuel prices; · receipt of necessary governmental permits, approvals and rate relief; · new state, federal or foreign legislation, including new tax legislation; · state, federal and foreign regulatory developments; · any impact of state, federal or foreign investigations applicable to PPL and its subsidiaries and the energy industry; · capital market conditions, including changes in interest rates, and decisions regarding capital structure; · stock price performance of PPL; · the market prices of equity securities and the impact on pension costs and resultant cash funding requirements for defined benefit pension plans; · securities and credit ratings; · foreign currency exchange rates; · the outcome of litigation against PPL and its subsidiaries; · potential effects of threatened or actual terrorism or war or other hostilities; and · the commitments and liabilities of PPL and its subsidiaries. (Unaudited) Utility $ 1,151 Unregulated retail electric 25 Wholesale energy marketing 268 Net energy trading margins 16 Energy-related businesses 140 Total 1,600 Operation Fuel 244 Energy purchases 266 Other operation and maintenance 364 Amortization of recoverable transition costs 69 Depreciation 103 Taxes, other than income 73 Energy-related businesses 146 Total 1,265 335 Other Income - net 7 Interest Expense 135 207 Income Taxes 34 Minority Interest 2 Dividends on Preferred Stock 1 170 Loss from Discontinued Operations (net of income taxes) 2 $ 168 Income from Continuing Operations: Basic $ 0.45 Diluted $ 0.45 Net income: Basic $ 0.45 Diluted $ 0.44 $ 0.23 (a) Data for 2005 have been adjusted to reflect PPL's 2-for-1 common stock split completed in August 2005. See Note 4 to the Financial Statements for additional information. (Unaudited) Net income $ 168 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 105 Stock compensation expense 22 Amortizations - recoverable transition costs and other 69 Pension expense 7 Pension funding (10 ) Deferred income tax benefits and investment tax credits (22 ) Accrual for PJM billing dispute 47 Unrealized gain on derivatives and other hedging activities (2 ) Other 4 Change in current assets and current liabilities Accounts receivable (116 ) Accounts payable (1 ) Fuel, materials and supplies 42 Other 23 Other operating activities Other assets 5 Other liabilities (34 ) Net cash provided by operating activities 307 Expenditures for property, plant and equipment (169 ) Purchases of emission allowances (27 ) Proceeds from the sale of emission allowances 32 Purchases of nuclear decommissioning trust investments (62 ) Proceeds from the sale of nuclear decommissioning trust investments 59 Purchases of other marketable securities Proceeds from the sale of other marketable securities 66 Net (increase) decrease in restricted cash 16 Other investing activities (8 ) Net cash used in investing activities (93 ) Issuance of long-term debt 116 Retirement of long-term debt (396 ) Issuance of common stock 24 Payment of common dividends (77 ) Net (decrease) increase in short-term debt 265 Other financing activities (10 ) Net cash used in financing activities (78 ) 2 138 Cash and Cash Equivalents at Beginning of Period 616 Cash and Cash Equivalents at End of Period $ 754 (Unaudited) Cash and cash equivalents $ 555 Restricted cash 93 Accounts receivable (less reserve: 2006, $72; 2005, $87) 544 Unbilled revenues 479 Fuel, materials and supplies 346 Prepayments 53 Deferred income taxes 192 Price risk management assets 488 Other acquired intangibles 50 Other 110 Total Current Assets 2,910 Investment in unconsolidated affiliates - at equity 56 Nuclear plant decommissioning trust funds 444 Other 8 Total Investments 508 Electric plant in service Transmission and distribution 7,984 Generation 8,761 General 646 17,391 Construction work in progress 259 Nuclear fuel 327 Electric plant 17,977 Gas and oil plant 349 Other property 289 18,615 Less: accumulated depreciation 7,699 Total Property, Plant and Equipment 10,916 Recoverable transition costs 1,165 Goodwill 1,070 Other acquired intangibles 412 Price risk management assets 84 Other 861 Total Regulatory and Other Noncurrent Assets 3,592 $ 17,926 (Unaudited) Short-term debt $ 214 Long-term debt 1,126 Accounts payable 542 Above market NUG contracts 70 Taxes 168 Interest 112 Dividends 96 Price risk management liabilities 533 Other 479 Total Current Liabilities 3,340 5,955 89 Deferred income taxes and investment tax credits 2,197 Price risk management liabilities 541 Accrued pension obligations 374 Asset retirement obligations 298 Above market NUG contracts 136 Other 471 Total Deferred Credits and Other Noncurrent Liabilities 4,017 56 51 Common stock - $0.01 par value (a) 4 Capital in excess of par value 3,602 Treasury stock (a) (838 ) Earnings reinvested 2,182 Accumulated other comprehensive loss (532 ) Total Shareowners' Common Equity 4,418 $ 17,926 (a) 780 million shares authorized; 380 million shares outstanding, excluding 62 million shares held as treasury stock, at March 31, 2006 and December 31, 2005. (Unaudited) Wholesale energy marketing $ 268 Wholesale energy marketing to affiliate 415 Utility 293 Unregulated retail electric 25 Net energy trading margins 16 Energy-related businesses 134 Total 1,151 Operation Fuel 192 Energy purchases 176 Energy purchases from affiliate 38 Other operation and maintenance 261 Depreciation 71 Taxes, other than income 24 Energy-related businesses 138 Total 900 251 Other Income - net 8 Interest Expense 65 Interest Expense with Affiliates 7 187 Income Taxes 28 Minority Interest 2 157 Loss from Discontinued Operations (net of income taxes) 2 $ 155 (Unaudited) Net income $ 155 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 74 Stock compensation expense 15 Amortizations - energy commitments and other (7 ) Pension expense 5 Pension funding (10 ) Deferred income taxes (benefits) and investment tax credits 30 Unrealized gain on derivatives and other hedging activities (1 ) Other 3 Change in current assets and current liabilities Accounts receivable (32 ) Accounts payable 20 Fuel, materials and supplies 27 Other 44 Other operating activities Other assets 6 Other liabilities (32 ) Net cash provided by operating activities 297 Expenditures for property, plant and equipment (123 ) Purchases of emission allowances (27 ) Proceeds from the sale of emission allowances 32 Purchases of nuclear decommissioning trust investments (62 ) Proceeds from the sale of nuclear decommissioning trust investments 59 Proceeds from the sale of other marketable securities 51 Net (increase) decrease in restricted cash 17 Other investing activities (8 ) Net cash used in investing activities (61 ) Retirement of long-term debt (208 ) Contributions from Member Distributions to Member (58 ) Net (decrease) increase in short-term debt 165 Net decrease in note payable to affiliate Other financing activities Net cash used in financing activities (101 ) 2 137 Cash and Cash Equivalents at Beginning of Period 357 Cash and Cash Equivalents at End of Period $ 494 (Unaudited) Cash and cash equivalents $ 227 Restricted cash 39 Accounts receivable (less reserve: 2006, $49; 2005, $65) 291 Unbilled revenues 300 Accounts receivable from affiliates 149 Collateral on PLR energy supply to affiliate 300 Fuel, materials and supplies 295 Prepayments 39 Deferred income taxes 166 Price risk management assets 487 Other acquired intangibles 50 Other 41 Total Current Assets 2,384 Investment in unconsolidated affiliates - at equity 56 Nuclear plant decommissioning trust funds 444 Other 3 Total Investments 503 Electric plant in service Transmission and distribution 3,950 Generation 8,761 General 272 12,983 Construction work in progress 210 Nuclear fuel 327 Electric plant 13,520 Gas and oil plant 64 Other property 198 13,782 Less: accumulated depreciation 5,871 Total Property, Plant and Equipment 7,911 Goodwill 1,015 Other acquired intangibles 283 Price risk management assets 80 Other 488 Total Other Noncurrent Assets 1,866 $ 12,664 (Unaudited) Short-term debt $ 172 Note payable to affiliate 8 Long-term debt 445 Accounts payable 445 Accounts payable to affiliates 27 Above market NUG contracts 70 Taxes 72 Interest 79 Deferred revenue on PLR energy supply to affiliate 12 Price risk management liabilities 519 Other 313 Total Current Liabilities 2,162 3,506 89 Deferred income taxes and investment tax credits 1,157 Price risk management liabilities 523 Accrued pension obligations 232 Asset retirement obligations 298 Above market NUG contracts 136 Deferred revenue on PLR energy supply to affiliate 35 Other 321 Total Deferred Credits and Other Noncurrent Liabilities 2,702 56 4,149 $ 12,664 (Unaudited) Retail electric $ 780 Wholesale electric 1 Wholesale electric to affiliate 38 Total 819 Operation Energy purchases 91 Energy purchases from affiliate 415 Other operation and maintenance 101 Amortization of recoverable transition costs 69 Depreciation 28 Taxes, other than income 47 Total 751 68 Other Income - net 4 Interest Expense 51 Interest Expense with Affiliate 2 19 Income Taxes 3 16 Dividends on Preferred Stock 1 $ 15 (Unaudited) Net income $ 15 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 28 Stock compensation expense 6 Amortizations - recoverable transition costs and other 74 Deferred income tax benefits and investment tax credits (11 ) Accrual for PJM billing dispute 47 Change in current assets and current liabilities Accounts receivable (44 ) Accounts payable (23 ) Other (97 ) Other operating activities Other assets (2 ) Other liabilities 11 Net cash provided by operating activities 4 Expenditures for property, plant and equipment (40 ) Purchases of other marketable securities Proceeds from the sale of other marketable securities 10 Net increase in note receivable from affiliate Net decrease in restricted cash 2 Other investing activities Net cash used in investing activities (28 ) Issuance of long-term debt 116 Retirement of long-term debt (188 ) Payment of common dividends to PPL Corporation (16 ) Net increase in short-term debt 100 Other financing activities (6 ) Net cash (used in) provided by financing activities 6 (18 ) Cash and Cash Equivalents at Beginning of Period 151 Cash and Cash Equivalents at End of Period $ 133 (Unaudited) Cash and cash equivalents $ 298 Restricted cash 42 Accounts receivable (less reserve: 2006, $21; 2005, $20) 224 Unbilled revenues 174 Accounts receivable from affiliates 10 Note receivable from affiliate 300 Prepayments 4 Prepayment on PLR energy supply from affiliate 12 Other 87 Total Current Assets 1,151 Electric plant in service Transmission and distribution 4,034 General 356 4,390 Construction work in progress 43 Electric plant 4,433 Other property 3 4,436 Less: accumulated depreciation 1,720 Total Property, Plant and Equipment 2,716 Recoverable transition costs 1,165 Acquired intangibles 114 Prepayment on PLR energy supply from affiliate 35 Other 356 Total Regulatory and Other Noncurrent Assets 1,670 $ 5,537 (Unaudited) Short-term debt $ 42 Long-term debt 434 Accounts payable 42 Accounts payable to affiliates 183 Taxes 76 Collateral on PLR energy supply from affiliate 300 Other 147 Total Current Liabilities 1,224 1,977 Deferred income taxes and investment tax credits 771 Other 190 Total Deferred Credits and Other Noncurrent Liabilities 961 51 Common stock - no par value (a) 1,476 Additional paid-in capital 354 Treasury stock (a) (912 ) Earnings reinvested 406 Total Shareowner's Common Equity 1,324 $ 5,537 (a) 170 million shares authorized; 78 million shares outstanding, excluding 79 million shares held as treasury stock, at March 31, 2006 and December 31, 2005.
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2004
2005
2004 Interim Financial Statements1. 2004,2005, is derived from each Registrant's 20042005 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 20042005 Form 10-K. The results of operations for the three months ended March 31, 2005,2006, are not necessarily indicative of the results to be expected for the full year ending December 31, 2005,2006, or other future periods, because results for interim periods can be disproportionately influenced by various factors and developments and seasonal variations.2004,2005 and December 31, 2004,2005 financial statements have been reclassified to conform to the presentation in the March 31, 2005,2006 financial statements.Summary On the Statement of Significant Accounting Policies2. 20042005 Form 10-K.Depreciationperiodically reviewthat settled the depreciable liveslitigation between PPL and Enron regarding the validity and enforceability of their fixed assets. In light of significant planned environmental capital expenditures, PPL Generation conducted studies of depreciable lives of Montour Units 1 and 2 and Brunner Island Unit 3 during the first quarter of 2005. Based on these studies, management determined that the useful lives for these units should be extended from 2025 to 2035. Therefore, effective January 1, 2005, PPL Generation revised the useful lives of these fossil units. The effect of this change for the first quarter of 2005 was to increase net income by approximately $2 million, asEnron Corporation Guarantees. As a result of lower depreciation.GoodwillThe change in the carrying amountBankruptcy Court's approval of "Goodwill," as shown on the Balance Sheet, was due tosettlement of the effectEnron Corporation Guarantees litigation and an assessment of foreign exchange rates.Stock-Based CompensationEffective January 1, 2003, PPL and its subsidiaries prospectively adopted the fair value method of accounting for stock-based compensation. If the fair value method had been used to account for all outstanding stock-based compensation awards in both periods, there would not have been a material impact on reported net income and EPS.1618 for a discussion of SFAS 123 (revised 2004), "Share-Based Payment."In SFAS 123 (revised 2004) the FASB provided additional guidance on the requirement to accelerate expense recognition for employees who are at or near retirement age and who are under a plan that allows for accelerated vesting upon an employee's retirement which is relevant to prior accounting for stock-based compensation. PPL's plans allow for accelerated vesting upon an employee's retirement. Thus, for employees who are retirement eligible when stock-based awards are granted, PPL will recognize the expense immediately. For employees who are not retirement eligible when stock-based awards are granted, PPL will amortize the awards over the shorter of the vesting period or the period up to the employee's attainment of retirement age. Retirement eligible has been defined as the early retirement age of 55 under PPL's primary pension plans.(PPL)In the first quarter of 2005, PPL recorded an adjustment of approximately $10 million after tax, or $0.06 per share, to accelerate stock-based compensation expense for retirement-eligible employees. Approximately $5 million of the total, or $0.03 per share, was related to prior periods. The prior period amounts were not material to previously issued financial statements.(PPL Energy Supply)In the first quarter of 2005, PPL Energy Supply recorded a charge of approximately $7 million after tax to accelerate stock-based compensation expense for retirement-eligible employees. Approximately $4 million of the after-tax total was related to prior periods. The prior period amounts were not material to previously issued financial statements.(PPL Electric)In the first quarter of 2005, PPL Electric recorded a charge of approximately $3 million after tax to accelerate stock-based compensation expense for retirement-eligible employees. Approximately $1 million of the after-tax total was related to prior periods. The prior period amounts were not material to previously issued financial statements.New Accounting StandardsSee Note 16 for information on new accounting standards recently adopted or pending adoption.Segment and Related Information3. 20042005 Form 10-K for a discussion of reportable segments. As of March 31, 2005, there were no changes to the reportable segments except that the segments were renamed to more specifically describe their businesses. The reportable segments are now Supply, International Delivery (formerly International) and Pennsylvania Delivery (formerly Delivery).are as follows:
2005
2004
2005
2004 Revenues from external customers Supply $ 530 $ 431 $ 968 $ 840 International Delivery 344 311 344 311 Pennsylvania Delivery 909 858 1,783 1,600 1,312 1,151 Intersegment revenues Supply 446 416 Pennsylvania Delivery 41 38 Net Income Supply (a) 143 86 149 93 International Delivery 81 62 81 62 Pennsylvania Delivery 56 20 $ 280 $ 168 $ 230 $ 155 Total assets Supply $ 7,159 $ 7,118 $ 7,567 $ 7,575 International Delivery 5,144 5,089 5,144 5,089 Pennsylvania Delivery 5,589 5,719 $ 17,892 $ 17,926 $ 12,711 $ 12,664 The Pennsylvania Delivery segment is not a component2005 includes the operating results of PPL Energy Supply.(b)2004 includes the Sundance plant recorded in "Loss from Discontinued Operations." See Note 8 for additional information.Earnings Per Share4. •••common stock purchase contracts that were a component of the PEPS Units and PEPS Units, Series B; and•are shown below:
Ended March 31, In May 2001, PPL and PPL Capital Funding Trust I issued 23 million PEPS Units that contained a purchase contract component for PPL's common stock. The purchase contracts were only dilutive if the average price of PPL's common stock exceeded a threshold appreciation price, which was adjusted for cash distributions on PPL common stock. The threshold appreciation price was initially set at $65.03 and was adjusted to $63.38 as of April 1, 2004, based on dividends paid on PPL's common stock since issuance. The purchase contracts were settled in May 2004. Since the average price did not exceed the threshold appreciation price, the purchase contracts were excluded from the diluted EPS calculation for 2004.In January 2004, PPL completed an exchange offer resulting in the exchange of approximately four million PEPS Units for PEPS Units, Series B. The primary difference in the units related to the debt component. The purchase contract components of both units, which were potentially dilutive, were identical. The threshold appreciation price for the purchase contract component of the PEPS Units, Series B was adjusted in the same manner as that of the PEPS Units and was $63.38 as a result of the adjustment as of April 1, 2004. These purchase contracts were settled in May 2004. Since the average price did not exceed the threshold appreciation price, the purchase contracts were excluded from the diluted EPS calculation for 2004.In May 2003,are: Income from continuing operations $ 280 $ 170 Loss from discontinued operations (net of income taxes) 2 Net Income $ 280 $ 168 Shares for Basic EPS 379,838 378,119 Add incremental shares: Convertible Senior Notes 2,980 1,169 Restricted stock, stock options and other share-based awards 2,787 2,062 Shares for Diluted EPS 385,605 381,350 Income from continuing operations $ 0.74 $ 0.45 Loss from discontinued operations (net of income taxes) Net Income $ 0.74 $ 0.45 Income from continuing operations $ 0.73 $ 0.45 Loss from discontinued operations (net of income taxes) 0.01 Net Income $ 0.73 $ 0.44 Supply issuedSupply's $400 million of 2.625% Convertible Senior Notes due 2023. Based on the terms at the time of issuance, the Convertible Senior Notes could be settled entirely in cash or shares of PPL common stock. The notes were modified in November 2004 to2023 require cash settlement of the principal amount and permit settlement of any conversion premium in cash or stock and eliminate a provision that required settlement in stock in the event of default. These modifications were made in response to the FASB's ratification in October 2004 of EITF Issue 04-8, "The Effect of Contingently Convertible Instruments on Diluted Earnings per Share," as well as other anticipated rules relating to EPS. EITF Issue 04-8 requires contingently convertible instruments to be included in diluted EPS. It also requires restatement of prior-period diluted EPS, in certain circumstances, based upon the terms of the contingently convertible instruments as of the date of adoption, which was December 31, 2004, for PPL.20.110640.2212 shares per $1,000 principal amount of notes, the Convertible Senior Notes will have a dilutive impact when the average market price of PPL common stock exceeds the conversion price of $49.73. The$24.87.did not have a dilutive impact on EPS forin the three months ended March 31, 2004.8,044,24016,088,480 shares. Based on PPL's common stock price at March 31, 2005,2006, the conversion premium equated to 635,4612,483,038 shares, or approximately $34$73 million.
Ended March 31, Income Taxes Antidilutive stock options 1,335 1,608 5. Supply and PPL Electric)are as follows:
Ended March 31, Indicated federal income tax on Income from Continuing Operations Before Income Taxes, Minority Interest and Dividends on Preferred Stock at statutory tax rate - 35% $ 132 $ 72 Increase (decrease) due to: State income taxes 9 (2 ) Amortization of investment tax credit (3 ) (3 ) Difference related to income recognition of foreign affiliates (net of foreign income taxes) (3 ) (10 ) Transfer of WPD tax items (20 ) Stranded cost securitization (1 ) Federal income tax credits (16 ) (24 ) Other (3 ) 1 (37 ) (38 ) $ 95 $ 34 25.1% 16.4% Indicated federal income tax on Income from Continuing Operations Before Income Taxes and Minority Interest at statutory tax rate - 35% $ 105 $ 65 Increase (decrease) due to: State income taxes 8 (1 ) Amortization of investment tax credit (2 ) (2 ) Difference related to income recognition of foreign affiliates (net of foreign income taxes) (3 ) (10 ) Transfer of WPD tax items (20 ) Federal income tax credits (16 ) (24 ) Other (3 ) (36 ) (37 ) $ 69 $ 28 22.9% 15.0% Indicated federal income tax on Income Before Income Taxes at statutory tax rate - 35% $ 28 $ 6 Increase (decrease) due to: State income taxes 2 Amortization of investment tax credit (1 ) (1 ) Stranded cost securitization (1 ) Deficiency reserves (2 ) Other 1 1 (3 ) $ 29 $ 3 35.8% 15.8% 6. In October 2004, President Bush signed the American Jobs Creation Act of 2004 (the Act). The Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations, and uncertainty remains as to how to interpret numerous provisions in the Act. As such, PPL Energy Supply is not in a position to decide on whether, and to what extent, it might repatriate foreign earnings that have not yet been remitted to the U.S. based on its analysis to date. However, it is reasonably possible that PPL Energy Supply may repatriate some amount between zero and $500 million, with the respective tax liability ranging from zero to $27 million. PPL Energy Supply expects to be in a position to finalize its assessment by December 31, 2005.The Act also provides, beginning in 2005, a tax deduction from income for certain qualified domestic production activities. FSP FAS 109-1, "Application of FASB Statement No. 109, 'Accounting for Income Taxes', to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004," specifies that this tax deduction will be treated as a special deduction and not as a tax rate reduction. During the first quarter of 2005, the Treasury Department and the IRS issued interim guidance related to the tax deduction. Based on the interim guidance, PPL and PPL Energy Supply estimate an annual tax benefit for the year 2005 of approximately $3 million.Comprehensive Income(PPL and PPL Energy Supply)
(Note 8) Net Income $ 280 $ 168 $ 230 $ 155 Other comprehensive income (loss): Foreign currency translation adjustments 12 16 12 16 Net unrealized loss on available-for-sale securities (5 ) (5 ) (5 ) (5 ) Net unrealized gain (loss) on qualifying derivatives 102 (66 ) 94 (66 ) Total other comprehensive income (loss) 109 (55 ) 101 (55 ) Comprehensive Income $ 389 $ 113 $ 331 $ 100 7. and Financing ActivitiesCredit Arrangements PPL Energy Supply and PPL Electric)PPL Energy Supply and maintainmaintains credit facilities in order to enhance liquidity and provide credit support, and as a credit back-stopbackstop to their respectiveits commercial paper programs. program. At March 31, 2006, no cash borrowings were outstanding under any PPL Electric credit facilities.$100$200 million three-year creditfive-year facility maturing in June 20062010 and a $200$100 million five-year creditthree-year facility maturing in June 2009. PPL Energy Supply also maintains two credit facilities: a $300 million three-year credit facility maturing in June 2006 and an $800 million five-year credit facility maturing in June 2009. At March 31, 2005, no cash borrowings were outstanding under any credit facilities of2006. PPL Electric or PPL Energy Supply. Both PPL Electric and PPL Energy Supply havehas the ability to cause the lenders under their respectiveits facilities to issue letters of credit. At March 31, 2005,2006, PPL Electric had no letters of credit outstanding under its credit facilities, and PPL Energy Supply had $396less than $1 million of letters of credit outstanding under its credit facilities.WPD (South West)£100$600 million 364-day creditfive-year facility expiringmaturing in October 2005, a £150June 2010, an $800 million three-year creditfive-year facility expiringalso maturing in October 2007,June 2010, and a £150$500 million five-year credit facility expiringmaturing in October 2009. In December 2004, WPD (South West) borrowed £108 million (approximately $208 million at December 2004 exchange rates)2010. PPL Energy Supply has the ability to cause the lenders under its credit facilities. This borrowing was recorded in January 2005 duethese facilities to the one-month reporting lag. The balance outstanding under the WPD (South West) credit facilities atissue letters of credit. At March 31, 2005, was £852006, PPL Energy Supply had an aggregate of $16 million (approximately $164 million at current exchange rates).WPD also has a £2.5 million uncommitted borrowing line, which has £1.25 million (approximately $2 million at current exchange rates) of letters of credit outstanding.2005,2006, PPL Energy Supply entered into aextended its 364-day bilateral reimbursement agreement with a bank for the purpose of issuing letters of credit.one year through March 2007. Under the agreement, PPL Energy Supply can cause the bank to issue up to $200 million of letters of credit. As ofAt March 31, 2005,2006, there were $64 million of letters of credit and no cash borrowings outstanding under this agreement.agreement.(PPL)April 2005,March 2006, PPL Capital FundingElectric retired all $320$146 million of its 7-3/4% Medium-term Notes due April 2005 at par value. The funds for the retirement were obtained from PPL Energy Supply's August 2004 issuance of $300 million of 5.40% Senior Notes maturing in August 2014.(PPL and PPL Energy Supply)In December 2004, WPD borrowed £108 million (approximately $208 million at December 2004 exchange rates) under its credit facilities to retire $178 million of 6.75% Unsecured6.55% Series First Mortgage Bonds due December 2004 and settle the related $30 million cross currency swap. The total amount is included on the Statement of Cash Flows as "Retirement of long-term debt." This bond retirement was recorded in January 2005 due to the one-month reporting lag.At March 31, 2005, PPL Energy Supply had no commercial paper outstanding under its commercial paper program, but plans to access the commercial paper market in the second quarter of 2005.2005, PPL Energy Supply distributed $58 million to its parent company.(PPL and PPL Electric)At March 31, 2005, $113 million of accounts receivable and $115 million of unbilled revenue were pledged under the credit agreement related to PPL Electric's asset-backed commercial paper program. Also at this date, there was $42 million of short-term debt outstanding under the credit agreement at an interest rate of 2.79%, with such debt being used to cash collateralize letters of credit issued on PPL Electric's behalf. At March 31, 2005, based on the accounts receivable and unbilled revenue pledged, an additional $103 million was available for borrowing. PPL Electric's sale to its subsidiary of the accounts receivable and unbilled revenue is an absolute sale of the assets, and PPL Electric does not retain an interest in these assets. However, for financial reporting purposes, the subsidiary's financial results are consolidated in PPL Electric's financial statements.In the first quarter of 2005,2006, PPL Transition Bond Company made principal payments on transition bonds totaling $73of $76 million.At2005,2006, PPL Electric had $100paid common dividends of $38 million of commercial paper outstanding under its commercial paper program that had an averageto PPL.rate of 2.90%.In February 2005, the Lehigh County Industrial Development Authority (LCIDA) issued $116 million of 4.70% Pollution Control Revenue Refunding Bonds due 2029 on behalfin a share of PPL Electric. The proceedsElectric's 6.25% Series Preference Stock (Preference Shares), totaling $250 million. In connection with the sale of the LCIDA bonds were used in March 2005 to refund the LCIDA's $116 million of 6.40% Pollution Control Revenue Refunding Bonds due 2029. PPL Electric has entered into a loan agreement with the LCIDA pursuant to which the LCIDA has loaned to PPL Electric the proceeds of the LCIDA bonds on payment terms that correspond to the LCIDA bonds. The scheduled principal and interest payments on the LCIDA bonds are insured. In order to secure its obligations to the insurance provider,depositary shares, PPL Electric issued $1162.5 million aggregate principal amountPreference Shares, with a liquidation preference of its Senior Secured Bonds (under its 2001 Senior Secured Bond Indenture), which also have payment terms that correspond$100 per share, to the LCIDA bonds.In April 2005,bank acting as a depositary. PPL Electric retired all $69used the net proceeds of approximately $245 million from the offering to repurchase $200 million of its 6-1/2% First Mortgagecommon stock held by PPL, and for other general corporate purposes. PPL will use the $200 million received from PPL Electric to fund capital expenditures and for general corporate purposes.April 2005to the one-month lag in foreign subsidiary reporting.par value.2005,2006, PPL announced an increase to its quarterly common stock dividend, payable April 1, 2005,2006, to 4627.5 cents per share (equivalent to $1.84$1.10 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.8. DivestituresDomestic Generation2003,March 2006, PPL Maine entered into an agreement in principle with a coalition of government agencies and private groups to sell threeGlobal completed the sale of its nine hydroelectric damsminority interest in Maine. The parties reachedAguaytia Energy, LLC, a final agreementcombined generating and natural gas facility in 2004Peru. PPL Global received $15 million from the sale, and submittedrecorded a pre-tax gain of $4 million, which is included in "Other Income - net" on 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 runsStatement of Atlantic salmon and other migratory fish to the Penobscot River. The agreement requires several approvals by the FERC, and PPL cannot predict whether or when these regulatory approvals will be obtained.2004,May 2005, a subsidiary of PPL Generation agreed to sellcompleted the sale of its 450 MW Sundance power plant located in Pinal County, Arizona, to Arizona Public Service Company for approximately $190 million in cash, subject tocash. The operating losses of the receiptSundance plant of various state and federal regulatory approvals and customary closing conditions. In January 2005, each party waived the remaining contractual obligation for approval by the state regulator, the Arizona Corporation Commission. The sale still requires approvals by the FERC under the Federal Power Act. PPL estimates that a loss on sale or impairment charge of about $47$2 million after tax or $0.25 per share, could be recorded in 2005 depending on the timing and likelihood of obtaining FERC approvals. PPL cannot predict whether or when the FERC approvals for this transaction will be obtained.International Energy ProjectsDiscontinued OperationsIn 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 this non-strategic business was not economically viable. PPL Global sold this investment to local management for a nominal amount in June 2004. The operating results of the Latin American telecommunications company, which were a loss of approximately $1 million for the three months ended March 31, 2004,2005, are reflected as "Loss from Discontinued Operations" on the Statement of Income.SaleCGEIn March 2004,its real estate investments as an environmentally protected area, thus restricting planned development. Although WPD can appeal the notification, an impairment assessment was performed based on a third party appraisal. As a result, PPL Global completed the sale of its minority interest in shares of CGE for approximately $123 million. The sale resulted in arecorded an impairment charge of approximately $15$8 million pre-tax,($6 million after tax), which is included in operating expenses, as "Energy related businesses,""Other Income - net" on the Statement of Income. This charge waswrite-off of the associated cumulative translation adjustment, primarily as a result of the devaluation of the Chilean peso since the original acquisitionone-month lag in 2000.Commitments and Contingent LiabilitiesEnergy Purchases and Sales CommitmentsEnergy Purchase Commitmentsforeign subsidiary reporting.9. Nonvested at January 1, 2006 1,557,123 $20.81 Granted 777,380 30.84 Vested (312,656 ) 18.11 Forfeited (2,392 ) 26.19 Nonvested at March 31, 2006 2,019,455 $25.38 Nonvested at January 1, 2006 671,901 $18.69 Granted 295,780 31.14 Vested (125,626 ) 17.57 Nonvested at March 31, 2006 842,055 $23.99 Nonvested at January 1, 2006 116,260 $23.09 Granted 58,550 31.17 Vested (32,420 ) 17.53 Nonvested at March 31, 2006 142,390 $27.65 PPL $ 16 3.7 years PPL Energy Supply 13 3.4 years PPL Electric 2 1.8 years PPL $ 10 $ 8 PPL Energy Supply 4 2 PPL Electric 1 1 Outstanding at January 1, 2006 5,586,072 $ 21.81 Granted 1,335,420 30.14 Exercised (129,956 ) 19.20 Outstanding at March 31, 2006 6,791,536 23.49 7.6 years $ 41 Options exercisable at March 31, 2006 4,018,514 20.57 6.5 years 36 Weighted-average fair value of options granted $ 4.86 Outstanding at January 1, 2006 1,225,502 $ 21.72 Granted 494,660 30.14 Exercised (112,440 ) 19.37 Outstanding at March 31, 2006 1,607,722 24.48 8.0 years $ 8 Options exercisable at March 31, 2006 743,499 20.15 6.4 years 7 Weighted-average fair value of options granted $ 4.86 Outstanding at January 1, 2006 285,372 $ 22.95 Granted 88,540 30.14 Outstanding at March 31, 2006 373,912 24.65 7.6 years $ 2 Options exercisable at March 31, 2006 204,000 21.95 6.3 years 2 Weighted-average fair value of options granted $ 4.86 PPL $ 1 $ 13 PPL Energy Supply 1 2 PPL Electric 1 PPL and PPL Energy Supply $ 3 2.3 years Risk-free interest rate 4.06% 4.09% Expected option life 6.25 yrs. 7.00 yrs. Expected stock volatility 19.86% 18.09% Dividend yield 3.76% 3.88% 10. Service cost $ 16 $ 14 $ 5 $ 4 $ 2 $ 2 Interest cost 31 29 34 38 7 7 Expected return on plan assets (41 ) (40 ) (48 ) (52 ) (5 ) (5 ) Amortization of transition obligation (1 ) (1 ) 2 2 Amortization of prior service cost 4 4 1 1 2 1 Amortization of loss 11 6 2 2 Net periodic pension and other postretirement benefit costs (credits) prior to special termination benefits 9 6 3 (3 ) 10 9 Special termination benefits (a) 5 Net periodic pension and other postretirement benefit costs $ 9 $ 6 $ 3 $ 2 $ 10 $ 9 Service cost $ 1 $ 1 $ 5 $ 4 Interest cost 1 1 34 38 Expected return on plan assets (1 ) (1 ) (48 ) (52 ) Amortization of prior service cost 1 1 Amortization of loss 11 6 Net periodic pension and other postretirement benefit costs (credits) prior to special termination benefits 1 1 3 (3 ) Special termination benefits (a) 5 Net periodic pension and other postretirement benefit costs $ 1 $ 1 $ 3 $ 2 (a) The $5 million cost of special termination benefits for 2005 was related to the WPD-approved staff reduction plan as a result of the merger of its two control rooms, metering reorganization and other staff efficiencies. Additional pension costs were recognized due to early retirement and pension enhancement provisions granted to the employees. 11. uranium.nuclear fuel. These contracts extend for terms through 2019. PPL and PPL Energy Supply also enter into long-term contracts for the storage and transport of natural gas. These contracts extend through 2014 and 2032, respectively. Additionally, PPL and PPL Energy Supply entersenter into long-term contracts to purchase power to meet load requirements and emissions allowances for its generation facilities. These contractsthat extend for terms through 2010.operation, which is expected by the end of 2005.operation. One of the power purchase agreements is for 10050-100 MW and extends for a term of 15 years, while theyears. The in-service date for this project is under evaluation. The other power purchase agreement is for 2024 MW and extends for a term of 20 years.2005.2006. In accordance with purchase accounting guidelines, PPL Montana recorded a liability of $58 million as the estimated fair value of the agreement at the acquisition date. The liability is being reduced over the term of the agreement, through 2010, as an adjustment to "Energy purchases" on the Statement of Income. The unamortized balance of the liability related to the agreement at March 31, 2005,2006, was $51$45 million and is included in "Deferred Credits and Other Noncurrent Liabilities - Other" on the Balance Sheet.Liability for Above Market NUG Contractsabove marketabove-market contracts with NUGs of $854 million, due to the deregulation of its generation business being deregulated.business. 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, 2005,2006, the remaining liability associated with the above marketabove-market NUG contracts was $260$188 million.As part of the purchase of generation assets from Montana Power, PPL Montana assumed a power sales agreement, which is still in effect at March 31, 2005. In accordance with purchase accounting guidelines, PPL Montana recorded a liability of $7 million as the estimated difference between the fair value and the market value of the agreement at the acquisition date. The 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," which changed its fair value and reclassified it as a derivative instrument. The current liability balance is $6 million as of March 31, 2005.EnergyPlusMontana began to sell to NorthWestern an aggregate of 450 MW of energy supplied by PPL Montana.energy. Under two five-year agreements, PPL EnergyPlusMontana 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.April 2003,2002, PPL began commercial operations of its Edgewood natural gas-fired generating station and its Shoreham oil-fired generating station. Each of these New York plants has a capacity of 79.9 MW. Initially, the Maryland Public Service Commission authorizedLong Island Power Authority contracted to purchase all of Edgewood's capacity and ancillary services as part of a 3-year power purchase agreement with PPL EnergyPlus beginning at commercial operation, and all of Shoreham's capacity and ancillary services as part of a 15-year power purchase agreement with PPL EnergyPlus beginning at commercial operation. In 2005, PPL EnergyPlus extended the competitive provision of the Standard Offer Service (SOS) to allow utilities to procure SOSEdgewood power purchase agreement for customersan additional term that runs through the competitive selection of wholesale supply. October 2008. The Shoreham power purchase agreement remains in effect until 2017.MarchJanuary 2004, PPL EnergyPlus was awardedbegan supplying 12.5% of Connecticut Light & Power Company's (CL&P) Transitional Standard Offer load under a three-year fixed-price contract. During peak hours, PPL EnergyPlus' obligation to supply the Transitional Standard Offer load may reach 625 MW. Additionally, in January 2006, PPL EnergyPlus began to supply an 11-monthadditional 6.25% of CL&P's Transitional Standard Offer load under a one-year fixed-price SOS contract for customercontract. During peak hours, PPL EnergyPlus' obligation to supply the Transitional Standard Offer load (approximately 60 MW) for Potomac Electric Power Company. This contract commenced in July 2004.a 34-month fixed-price BGS contractcontracts for a fixed percentage of customer load (approximately(an aggregate of 1,000 MW) for Atlantic City Electric Company (ACE), Jersey Central Power & Light Company (JCPL) and Public Service Electric & Gas Company. This contractCompany (PSEG). These contracts commenced in August 2003. 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 commenced in June 2004. In the first quarter of 2005, PPL EnergyPlus was awarded a portion of the Commercial Industrial Energy Pricing tranche, which will amountamounts to approximately 85 MW after expected shopping. These 12-month contracts willbegan in June 2005. In February 2006, PPL EnergyPlus was awarded 36-month fixed-price BGS contracts for fixed percentages of customer load (an aggregate of 600 MW) for ACE, JCPL and PSEG. These contracts commence in June 2005.April 2003,December 2005 and January 2006, PPL EnergyPlus entered into an agreementagreements with Arizona Public ServiceDelmarva Power and Light Company to provide capacitya portion of its full requirements service from May 2006 through May 2008.associated electricity. PPL Energy Supply)is to provide 150 MW from June through Septemberspend $19 million between 2006 and 2015, at which point the tribes have the option to purchase, hold and operate the project.2005. See Note 8 for information regardingUnderstanding (MOUs) with state, federal and private entities related to the possible saleissuance in 2000 of the Sundance power plantFERC renewal license for the nine dams for the Missouri-Madison project. The MOUs require PPL Montana to Arizona Public Service Company.In January 2004,implement plans to mitigate the impact of its projects on fish, wildlife and the habitat, and to increase recreational opportunities. The MOUs were created to maximize collaboration between the parties and enhance the possibility for matching funds from relevant federal agencies. Under this arrangement, PPL EnergyPlus began supplying 12.5% of Connecticut Light & Power Company's Transitional Standard Offer load, underMontana has a three-year fixed-price contract. During peak hours, PPL EnergyPlus' obligationremaining commitment to supply the Transitional Standard Offer load may reach 625 MW.1999. Although most of the claims in the complaint are against Montana Power, its board of directors,1999, 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,thus 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 asAmong the result of this alleged illegal sale. In the second claim, plaintiffs requestremedies that the court imposeplaintiffs are seeking is the establishment of a "resulting and/or constructive trust" on both the generation assets themselves and all profits earned by PPL Montana from the generation assets, plus interest on the amounts subject to the trust. This lawsuit is currentlyhas been pending in the U.S. District Court of Montana, Butte Division. In July 2004,Division and the plaintiffs notifiedjudge has placed this proceeding on hold pending the outcome of certain motions currently before the U.S. Bankruptcy Court for the District Court thatof Delaware, the parties had reached an oral partial settlementresolution of the case that would result in the dismissal of PPL Montana as a defendant, and in January 2005 a global settlement agreement was filed with the District Court along with a motion to approve the agreement. Under the terms of the global settlement agreement, the plaintiffs' claims against PPL Montana would be dismissed and PPL Montana would not have to pay any amounts to the plaintiffs. The global settlement agreement must still be approved by the District Court.which may impact this proceeding. PPL and PPL Energy Supply cannot predict whether the global settlement agreement will be approved or the outcome of this matter if it is not approved.NorthWestern CorporationMontana Hydroelectric 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, including a claim for punitive damages. 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.In October 2004, the federal district court in Delaware, where NorthWestern's bankruptcy proceeding had been pending, approved a joint stipulation between PPL Montana and NorthWestern under which NorthWestern agreed to establish a segregated reserve to be used for any distributions to be made to satisfy any final judgment that PPL Montana may be awarded pursuant to PPL Montana's counterclaims. This segregated reserve has been funded with shares of NorthWestern common stock equal to $50 million, valued as of the effective date of NorthWestern's plan of reorganization. Also in October, the federal district court in Delaware confirmed NorthWestern's plan of reorganization, and in November 2004, NorthWestern announced that it had officially emerged from bankruptcy protection.In May 2005, PPL Montana and NorthWestern reached an agreement in principle pursuant to which each of the parties will withdraw its claims in this litigation. Under the terms of this agreement, NorthWestern will retain the CTS and PPL Montana will pay NorthWestern $9 million. The settlement of this matter is subject to the parties' execution of a final agreement and the satisfaction of the terms and conditions of any such agreement, and PPL cannot be certain whether or when the parties will reach a final agreement. PPL and PPL Energy Supply recognized an after-tax charge of approximately $6 million (or $0.03 per share for PPL) in the first quarter of 2005 for a loss contingency related to this matter.If a final agreement between the parties is not reached, the trial for this matter is expected to commence in the Montana federal district court in the last half of 2005. PPL and PPL Energy Supply cannot be certain of the outcome of this matter.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. This motion was granted without objection. The individual plaintiffs, the school districts and the State sought declaratory judgment, compensatory damages and attorneys fees and costs for use of state and/or "school trust" lands by hydropower facilities 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 became state-owned property upon Montana's admission to statehood, and that the use thereof for placement of dam structures, affiliated structures and reservoirs should, under an existing regulatory scheme, trigger lease payments for use of land underneath. The plaintiffs also sought relief on theories of unjust enrichment, trespass and negligence. No specific amount of damages or future rental value has been claimed by the plaintiffs. The defendants filed separate motions to dismiss the individual plaintiffs' and school district's complaint, as well as the complaint of the State of Montana. In September 2004, the federal court granted the motions to dismiss the individual plaintiffs' and school districts' complaint but denied the similar motions as to the State of Montana's complaint. Following the federal court's September decision, PPL Montana and the other defendants filed a motion to dismiss the State of Montana's complaint for lack of diversity jurisdiction and also filed a motion to vacate certain portions of the decision. The federal court has not yet ruled on these motions.thetheir hydropower facilities' use and occupancy of streambeds in Montana can be collected by the State of Montana. The State subsequently filed counterclaims and a motionThis request for summary judgment. In February 2005, the individual plaintiffs and school districts who were dismisseddeclaratory judgment from the federal court proceeding, along with a state teachers' union, filed a motion to intervene as additional defendants in thisMontana state court proceeding, and also filed a proposed answer and counterclaims to be used if their motion to intervene is granted. The state court denied this motion to intervene, but has not yet ruled on anywas brought following the dismissal of the other above-described motions.State of Montana's federal lawsuit in the U.S. District Court of Montana, Missoula Division, due to lack of diversity jurisdiction, seeking such payments or compensation. The State's federal lawsuit was founded on allegations that the bed of Montana's navigable rivers became state-owned property upon Montana's admission to statehood, and that the use of them for placement of dam structures, affiliated structures and reservoirs should, under an existing regulatory scheme, trigger lease payments for use of land underneath. PPL and PPL Energy Supply cannot predict the outcome of either the federal or thethis state court proceeding. approximately $18 million of sales to the California ISO during the period from October 2000 through June 2001, 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 ofAt March 31, 2005,2006, PPL has fully reserved for possible underrecoveries of payments for these sales.and initiated an evidentiary hearing concerning refund amounts. In April 2003,but the FERC changed the manner in which this refund liability is to be computed and ordered further proceedings to determinehas not yet ruled on the exact amounts that the sellers, including PPL Montana, would be required to refund. In September 2004, the U.S. Court of Appeals for the Ninth Circuit held that the FERC had the additional legal authority to order refunds for periods prior to October 2, 2000, and ordered the FERC to determine whether or not it would be appropriate to grant such additional refunds.explained that the totality of the circumstances made refunds unfeasiblealso commenced additional investigations relating to "gaming" 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 had challenged selected long-term contracts that they entered intobidding practices 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. These orders have been appealedbut, to the U.S. Court of Appeals for the Ninth Circuit. 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.PPL Montana was named by aone 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 thatnamed PPL Montana in its cross-complaint; this defendant denied any unlawful unfair or fraudulent conduct occurred but assertsasserted 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. 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 has provided 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,Montana retail electricity market.WhileCalifornia and western markets, PPL and its subsidiaries believe that they have not engaged in any improper trading practices, they cannot predict whether,the outcome of the above-described investigations, lawsuits and proceedings or the extent to which,whether 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.alleges,alleged, 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 2001.2001 and certain breach of contract claims. These boroughs were wholesale customers of PPL Electric. The claims ofIn April 2006, the boroughs are similar to those previously alleged by a single borough in litigation brought in the same court that is still pending. 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 violationsdismissed all of the federal antitrust laws in early 2001. The complaint indicates that ENERCO provides consultingclaims and energy procurement services to clients in Pennsylvania and New Jersey. In September 2004, this complaint was dismissedall of the breach of contract claims except for one breach of contract claim by one of the District Court and the plaintiff has appealed the dismissal to the U.S. Court of Appeals for the Third Circuit.Although PPL, PPL Energy Supply and PPL Electric believe the claims in these complaints are without merit, they cannot predict the outcome of these matters.Subsequently, PPL and other generators were served withhas responded to a data request by OMOI. The data requestof OMOI that 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 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.allegesalleged that PJM mistakenly identified PPL Electric's Elroy substation transformer as belonging to PECO and that, as a consequence, during times of congestion, PECO's bills for transmission congestion from PJM erroneously reflected energy that PPL Electric took from the Elroy substation and used to serve PPL Electric's load. The complaint requestsrequested the FERC, among other things, to direct PPL Electric to refund to PJM $39 million, plus interest of approximately $8 million, and for PJM to refund these same amounts to PECO. In February 2005, PPL Electric filed its response with the FERC stating that neither PPL Electric nor any of its affiliates should be held financially responsible or liable to PJM or PECO as a result of PJM's error. the FERC issued an Order Establishing Hearing and Settlement Judge Proceedings (the Order). In the Order, the FERC determined that PECO is entitled to reimbursement for the transmission congestion charges that PECO asserts PJM erroneously billed to it at the Elroy substation. The FERC set for additional proceedings before a judge the determination of the amount of the overcharge to PECO and which PJM market participants were undercharged and therefore are responsible for reimbursement to PECO. The FERC also ordered procedures before a judge to attempt to reach a settlement of the dispute.PPL and approximately $27 million (or $0.14$0.07 per share for PPL) in the first quarter of 2005 for a loss contingency related to this matter. The pre-tax accrual was approximately $47 million, with $39 million included in "Energy purchases" on the Statement of Income, and $8 million in "Interest Expense."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 itsThe most recent market-based rate authority. PPL EnergyPlus has responded thatfilings with the FERC does not require the economic test suggestedwere made in November 2004 by the intervenors 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 of the schedule adopted by the FERC, PPL EnergyPlus, PPL Electric, PPL Montana and most of PPL Generation's subsidiaries were required to file in November 2004 updated analyses demonstrating that they should continue to maintainsubsidiaries. These filings consisted of a Western market-based rate authority under the new standards. PPL made two filings, onefiling for PPL Montana and onean Eastern market-based rate filing for most of the other PPL subsidiaries.subsidiaries in the PJM region.filed pleadings opposing the filing byis contending in this proceeding that PPL Montana. The Montana Public Service Commission requestedhas market power in NorthWestern's control area, that the FERC hold a hearing onshould deny PPL Montana authority to sell power in NorthWestern's control area at market-based rates and that PPL Montana cannot legally refuse to sell power to NorthWestern at cost-based rates if the FERC denies PPL Montana market-based rate renewal application, while theauthority in NorthWestern's control area. The FERC has not yet acted on PPL Montana's more detailed filing. While PPL Montana Consumer Counsel suggested applying an altered version of the FERC's tests for assessingcontinues to believe that it does not have market power in reviewing the renewal application. The PJM Industrial Customer Coalition, the PP&L Industrial Customer AllianceNorthWestern's control area and the consumer advocatesthat it has no obligations to make additional sales of Maryland and Pennsylvania filed pleadings opposing the filings by the other PPL subsidiaries. These parties challenge the FERC's continued reliance on market-based rates to yield just and reasonable prices for wholesale electric transactions and suggest that the FERC change its tests for market power to include capacity and ancillary services markets. While PPL believes its filings demonstrate that all PPL subsidiaries passNorthWestern regardless of the new tests established by the FERC in June 2004, PPLoutcome of this proceeding, it cannot predict the outcome of these proceedings.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 contained 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 purported 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 requested comments and held 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.Montana Hydroelectric License ContingenciesWallingford Cost-Based Rates(PPL and PPL Energy Supply)PPL Montana has 11 hydroelectric facilities and one storage reservoir licensed by the FERC pursuant to the Federal Power Act under long-term licenses which expire on varying dates from 2009 through 2040. Pursuant to Section 8(e) of the Federal Power Act, the FERC approved the transfer from Montana Power to PPL Montana of all pertinent licenses and any amendments in connection with the Montana APA.The Kerr Dam Project license was jointly issued by the FERC to Montana Power and the Confederated Salish and Kootenai Tribes of the Flathead Reservation in 1985, and required Montana Power to hold and operate the project for 30 years. The license required Montana Power, and subsequently PPL Montana as a result of the purchase of the Kerr Dam from Montana Power, to continue to implement a plan to mitigate the impact of the Kerr Dam on fish, wildlife and the habitat. Under this arrangement, PPL Montana has a remaining commitment to spend approximately $67 million between 2005 and 2035.PPL Montana entered into a Memorandum of Understanding (MOU) with state, federal and private entities related to the issuance in 2000 of the FERC renewal license for the nine dams for the Missouri-Madison project. The MOU requires PPL Montana to implement plans to mitigate the impact of its projects on fish, wildlife and the habitat, and to increase recreational opportunities. The MOU was created to maximize collaboration between the parties and possibilities for matching funds from relevant federal agencies. Under this arrangement, PPL Montana has a remaining commitment to spend approximately $26 million between 2005 and 2040.Wallingford Deactivation (PPL and PPL Energy Supply) - New England that would declare that four of the five units at PPL's Wallingford, Connecticut facility are "reliability must run" (RMR) units and put those units under cost-based rates. This RMR 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 approval of the RMR agreement and cost-based rates, but in light of the FERC's changes to the market and bid mitigation rules of 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 toAugust 2005, the U.S. Court of Appeals for the District of Columbia Circuit.Circuit reversed the FERC's denial and remanded the case to the FERC for further consideration. In April 2006, the FERC conditionally approved the RMR agreement and the cost-based rates for the four Wallingford units, effective February 1, 2003, subject to refund, hearing and settlement procedures. The FERC ordered a hearing to determine whether the Wallingford facility needed the RMR agreement, the proposed cost-based rates under the RMR agreement and the financial accounting for past periods under the RMR agreement. Any rates collected under the RMR agreement prior to the completion of the hearing proceedings will be subject to refund pending the outcome of the proceedings. The hearing will be held in abeyance until about early June 2006, pending the outcome of settlement procedures among PPL and all interested parties. PPL cannot predict the outcome of this matter.unaffiliatedthird-partyunaffiliated third-party purchasers. Section 29 of the Internal Revenue Code provides tax credits for the production and sale of solid synthetic fuels produced from coal. Section 29 tax credits are currently scheduled to expire at the end of 2007.phase-out of the synthetic fuel tax credit to begin to phase out when the relevant annual reference price for crude oil, aswhich is the domestic first purchase price (DFPP), falls within a designated range and to be eliminated when the DFPP exceeds the range. The phase-out range is adjusted annually for inflation, exceeds a certain threshold. The reference priceinflation. Currently, the DFPP is published by the IRS annually in April for the prior year and is calculated based on the annual average wellhead price per barrel for all unregulated domestic crude oil. The averagePPL experienced no phase-out of tax credits in 2005, based on the final DFPP reference price for crude oil in 2004 was $36.75 per barrel, significantly belowand the phase-out level. Accordingly, the tax credit phase-out did not impact results in 2004. range applicable for 2005.that the 2005 tax credit phase-out would startrange for 2006 to begin at about $52$54 per barrel (DFPP) and the tax credit wouldcredits to be totally eliminated at about $65$68 per barrel. Based on market conditions at April 30, 2005, PPL currently does not expect any significant phase-out ofbarrel (DFPP). Due to the synfuel tax credit for 2005. However, given the recent increases in and volatility of crude oil prices, PPL cannot predict with any certainty the final averageDFPP reference price for 2005 and a significant increase incrude oil prices could reduce the synfuel tax credit and adversely impact PPL's 2005 earnings. Forfor 2006 and 2007. However, if the price of crude oil remains at, or increases above, current price levels in 2006 or 2007, under current phase-out provisions, PPL's synthetic fuel tax credits for either or both of those years would be significantly reduced or eliminated.has taken measures to mitigatebegan the impact of a phase-out of the synfuel tax credit due to high oil prices.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 thatsynthetic fuel operations, the synthetic fuel produced at the Somerset facility qualifies for Section 29 tax credits. The Somerset facility uses the Covol technology to produce 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 synthetic fuel produced at the Somerset facility resultingTyrone facilities have resulted in an aggregate recognition of approximately $220$276 million and $66 million of tax credits as of March 31, 2005.PPL owns a limited partnership interest in2006. During the entity that ownsfirst quarter of 2006, the facilities produced $15 million and 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 synthetic fuel to be produced at the Tyrone facility qualifies for Section 29 tax credits. In reliance on this private letter ruling, this entity has sold synthetic fuel produced at the Tyrone facility resulting in an aggregate of approximately $24$12 million of tax credits asbefore phase-out. As of March 31, 2005. The2006, PPL currently estimates the 2006 phase-out to be approximately 44%, resulting in a recognition of $8 million of tax credits for Somerset and $7 million of tax credits for Tyrone.began commercialin mid-2006. At this time, PPL cannot predict the extent to which the Somerset facility or the Tyrone facility will operate in 2006 or 2007, including whether such suspensions in operation in the third quarter of 2004, after being relocated to Kentucky from Pennsylvania.June 2003, the IRS announced2005, PPL's purchases from these third parties resulted in fuel cost savings of approximately $24 million. PPL estimates that itif these third parties had reason to question the scientific validity of certain test procedures and results that have been presented to it by taxpayers with interests indiscontinued their synthetic fuel operations as evidenceand sales to PPL at the end of April 2006 due to the impact of projected oil prices, it would incur additional fuel costs of $16 million for the remainder of 2006.required significant chemical change has occurred,potential phase-out of the synthetic fuel tax credits for 2006 and that it was reviewing information regarding these test procedures and practices. 2007. At this time, PPL cannot predict whether any such legislation will be enacted or the impact of any such legislation on its synthetic fuel operations or tax credits in 2006 or 2007. the IRS announced that it had completed its review 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. The 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 2003 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 the Somerset facility and the Tyrone facility have been operated in compliance with their respective private letter rulings 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.During 2004, certain other owners or operatorssynthetic fuel facilities reported that the IRS had questioned whether their facilities were placed in service before July 1, 1998. Whether or not a facility meets the "placed-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. PPL believes that the Tyrone and Somerset facilities meet the in-service requirement. However, PPL cannot predict the outcome of the IRS's inquiries or the impact of those inquiries on PPL.Environmental Matters - Domestic· The Public Utility Holding Company Act of 1935 has been repealed. PUHCA significantly restricted mergers and acquisitions in the electric utility sector. · The FERC will appoint and oversee an electric reliability organization to establish and enforce mandatory reliability rules regarding the bulk power system. · The FERC will establish incentives for transmission companies, such as performance-based rates, recovery of the costs to comply with reliability rules and accelerated depreciation for investments in transmission infrastructure. · The Price Anderson Amendments Act of 1988, which provides the framework for nuclear liability protection, will be extended by twenty years to 2025. · Federal support will be available for certain clean coal power initiatives, nuclear power projects and renewable energy technologies. which could be significant.fine particulate matter standards and toxic air emissions and visibility in the U.S. PPL's subsidiaries are in substantial compliance withAmendments to the Clean Air Act. The Bush administration's Clear Skies Initiative and proposals of certain members of CongressAct are likely to continue to be brought up for consideration in the U.S. Congress. Past proposed amendments would amend the Clean Air Act. These amendments could requirehave required significant further reductions in emissions of nitrogen oxide and sulfur dioxide and reductions in emissionemissions of mercury.Althoughmercury beyond the Bush administration's Clear Skies Initiative does not include limits onreductions discussed below and some would have included reductions in carbon dioxide emissions, rising concerns about global warming have prompted several states to pass legislation capping carbon dioxide emissions and other bills have been introduced atdioxide.federal level proposing mandatory carbon dioxide reductions. However,Clean Air Act, the Bush administration is promoting a voluntary carbon dioxide reduction program. In support of this voluntary Climate VISION program, the electric power industry has committed to reducing its greenhouse gas emission intensity levels (measured as tons of carbon dioxide equivalent against electric power production in MWh) by 3% to 5% by the 2010 to 2012 period. Furthermore, an initiative is underway in nine Northeast states to propose a cap-and-trade program, the details of which are expected to be released in mid-2005 for carbon dioxide emissions from fossil fuel-fired power plants. Increased pressure for carbon dioxide emissions reduction is also coming from investor organizations and the international community. Pennsylvania and Montana have not, at this time, established any formal programs to address carbon dioxide and other greenhouse gases. As a result of the national and international concerns, PPL has conducted an inventory of its carbon dioxide emissions and is continuing to evaluate various options for reducing, avoiding, off-setting or sequestering its emissions.If the above-described initiatives or other legislative or regulatory initiatives result in mandatory reductions being imposed or if PPL adopts voluntary measures to reduce its carbon dioxide emissions, the cost of such reductions could be significant.The EPA has 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 finalized a rule (now calledpromulgated the Clean Air Interstate Rule - CAIR)(CAIR) for 28 midwestern and eastern states, including Pennsylvania, to reduce national sulfur dioxide emissions by 40% (aboutabout 50% in the CAIR region) by 2010 and to extend the current seasonal program for nitrogen oxide emission reductions to a year-round program (in the CAIR region) starting in 2009. Starting in 2015, the final ruleThe CAIR requires further reductions, starting in 2015, in sulfur dioxide and nitrogen oxide of 30% and 20%, respectively, from 2010 levels. The final ruleCAIR allows these reductions to be achieved through cap-and-trade programs, and is consistent withprograms. Pennsylvania has not challenged the Bush administration's proposed amendments to the Clean Air Act, except that it applies to only the 28 states. PPL expectsCAIR, but the rule to behas been challenged by several states and environmental groups.will need to use its banked sulfur dioxide allowances and to purchase additional allowances. Currently, PPL has enough sulfur dioxide allowances to cover expected consumption through 2006, but will experience shortfalls in some years after 2006. As a result and based on projected allowance prices, PPL plans to completeis proceeding with the installation of sulfur dioxide scrubbers at its Montour Units 1 and 2 and Brunner Island Unit 3 by 2008.2008, and also plans to install a scrubber at Brunner Island Units 1 and 2 by 2009. Based on expected levels of generation, emission allowance shortfalls that would otherwise occur without significant additional purchases of allowances and projected emission allowance prices, PPL alsohas determined that it is evaluating under CAIRmore economic to install these scrubbers than to purchase significant additional emission allowances. PPL's current installation plan for the possible installation of SCR technology to reducescrubbers and other pollution control equipment (primarily aimed at sulfur dioxide, particulate and nitrogen oxide emissions at Brunner Island Unit 3 at a later date. PPL's current planreduction) from 2005 to 2010 reflects a cost of approximately $730 million for$1.6 billion.combined cost ofClean Air Act, the scrubbers at Montour and Brunner Island and of the SCR at Brunner Island. PPL currently is in the process of evaluating vendor proposals for this equipment and will provide updated costs estimates, which are expected to increase, after the completion of that process.The EPA has finalized mercury regulations that affect coal-fired plants. These regulations establish an emission trading program to take effect beginning January 2010, with a second phase to take effect in 2018. At the same time that it finalized these mercury regulations, the EPA determined that it currently does not need to regulate nickel emissions from oil-fired units. PPL is still assessing what measures it will need to take to comply with the mercury regulations. PPL believesexpects that it may be possible to comply with the 2010 requirements with the mercury removal co-benefits that are expectedscrubbers to be achieved from the installation of the scrubbersinstalled at Montour and Brunner Island.Island will provide mercury removal co-benefits. However, PPL believes that it may need to take additional measures to comply with the 2010 requirements of the EPA's mercury regulations and that it expects towill need to take additional measures to comply with the 2018 requirements. The capital costs to PPL of complying with any such additional measuresthese new mercury regulations are not now determinable, but could be significant.about eightten other states have indicated that they will challengechallenged the EPA's new EPA mercury regulations in the D.C. Circuit Court of Appeals as not being inadequate.sufficiently strict. The Pennsylvania Environmental Quality Board (PEQB) is also reviewing(PaEQB) accepted a petition filed by PennFuture, an environmental citizens organization, requesting the PEQBPaEQB to develop significantlymercury rules that would require by 2008 a level of mercury reduction that would be more stringent than the EPA's regulations, and the Pennsylvania DEP (which works with the PaEQB to develop Pennsylvania environmental regulations) has circulated for informal stakeholder input a preliminary draft mercury rule that is more stringent than the EPA's regulations but different from those requested by PennFuture. A proposed rule is expected to be released for formal public comment in May 2006.than those proposed by the EPA.and regulations regarding nitrogen oxide, sulfur dioxide and mercury emissions. PPL cannot predict whether more stringent regulations will ultimately be adopted in Pennsylvania or Montana. The additional costs to PPL of complyingcomply with any such new mercury rulesregulations are not now determinable, but could be significant.Ozone Transport Commission (consisting of Pennsylvaniarule defines Best Available Retrofit Technology requirements for electric generating units, including presumptive limits for sulfur dioxide and 11 othernitrogen oxide controls for large units. The EPA has stated that this rule will not require states and the District of Columbia) has passed a resolution calling forto make reductions in sulfur dioxide or nitrogen oxide and mercury emissionsbeyond those required by CAIR, although states can establish more stringent rules. At this time, PPL cannot predict whether the Pennsylvania DEP will require additional reductions beyond the requirements established through CAIR. If the Pennsylvania DEP establishes regulations to require additional reductions, the additional costs to comply with such regulations, which are not now determinable, could be significant. In states like Montana that are more stringent than those proposed bynot within the EPA or contemplated byCAIR region, the Clear Skies Initiative. Should Pennsylvania implement such reductions, the cost to PPL isneed for and costs of additional controls as a result of this new rule are not now determinable, but could be significant.has sincesubsequently issued notices of violation and commenced enforcement activities against other utilities. The future direction ofHowever, in the EPA's enforcement initiative is presently unclear. However, states and environmental groups have also been bringing enforcement actions alleging violations of "New Source" requirements by coal-fired plants. At this time, PPL is unable to predict whether such EPA, state or citizens enforcement actions will be brought with respect to any of its affiliates' plants. However,past several years, 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 andhas shifted its subsidiaries have responded to the Corette and Martins Creek information requests and 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 or citizens group 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 which are not now determinable, but could be significant."New Source" regulations that clarifyclarified what projects are exempt from "New Source" requirements as routine maintenance and repair. UnderHowever, these clarifications, any project to replace existing equipment with functionally equivalent equipment would be considered routine maintenanceregulations were stayed 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 stayedsubsequently struck down 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 2003 clarifications.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 plant, and the Pennsylvania DEP and PPL are litigating issues relating to the opacity of emissions from the Montour plant. PPL is continuing to discuss these matters 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 could be significant.if and whenupon the EPA promulgates Best Available Retrofit Technology requirements for nitrogen oxide emissions.occurrence of certain triggering events. 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.unfounded. PPL is engaged in settlement negotiations on these matters with the EPA, the Montana Department of Environmental Quality (DEQ)DEQ and the Northern Cheyenne Tribe.Montana DEQrequirements related to emissions of sulfur dioxide, nitrogen oxide and mercury noted above, there is questioning whethera growing concern nationally and internationally about carbon dioxide emissions. In June 2005, the permit limitsU.S. Senate adopted a resolution declaring that mandatory reductions in carbon dioxide are needed. Various legislative proposals are being considered in Congress, and several states already have passed legislation capping carbon dioxide emissions. The Bush administration is promoting a voluntary carbon dioxide reduction program, called the Climate VISION program. In support of this program, the electric power industry has committed to reducing its greenhouse gas emission intensity levels (measured as tons of carbon dioxide equivalent against electric power production in MWh) by 3% to 5% by the 2010 to 2012 period. Separate from the national initiatives, in December 2005, seven northeastern states signed an MOU establishing a cap and trade program commencing in January 2009 for sulfurstabilization of carbon dioxide emissions, at base levels established in 2005, from electric power plants larger than 25 MW in capacity. In April 2006 Maryland's governor signed a bill that will have the state participating in this same program (known as the Regional Greenhouse Gas Initiative) by June 2007. The MOU also provides for a 10% reduction in carbon dioxide emissions from Colstrip Units 3the base levels by the end of 2018. Increased pressure for carbon dioxide emissions reduction also is coming from investor organizations and 4 are too high under provisionsthe international community.Clean Air Act that limit allowable emissions from sources built after 1978. PPL Montana completed an ambient air quality modeling demonstration and, based on that study, voluntarily proposed to the Montana DEQ that the permit include restrictions related to sulfur dioxide emissions. The Montana DEQ has accepted PPL Montana's proposal and has issued an amended operating permitcost to PPL and issued an amended air permit, which PPL expects will resolve this matter.one of theactive and retired wastewater basins at various PPL plants, including the Montour, station,Brunner Island and Martins Creek generating facilities. PPL has completed an assessment of some of the seepages at the Montour and Brunner Island facilities and is working with the Pennsylvania DEP to assess the seepage and develop animplement abatement plan.measures for those seepages. PPL is assessing impacted groundwater at two closed wastewater basinscontinuing to conduct assessments of other seepages at the Montour and Brunner Island stationfacilities as well as seepages at the Martins Creek facility to determine whatthe appropriate abatement actions may be needed.actions. PPL plans to comprehensively address issues related to wastewater basins at all of its Pennsylvania plants, as part of the process to renew the residual waste permits for these basins whichthat expire within the next three years. The cost of addressing seepages at PPL's Pennsylvania plants is not now determinable, but could be significant.PPL Montana continues to undertake certain groundwater investigation and remediation measures at its Colstrip plant to address groundwater contamination. These measures include offering to extend city water to certain residents who live near the plant. addition, in May 2003, approximately 50 plaintiffs brought an action now pending at the Montana Sixteenth Judicial District Court, Rosebud County, against PPL Montana and the other owners of the Colstrip plant alleging property damage from seepage from the freshwater and wastewater ponds at Colstrip. This action could result in PPL Montana has undertaken certain groundwater investigation and remediation measures at the Colstrip plant to address groundwater contamination alleged by the plaintiffs as well as other Colstrip owners being liable for damages and being requiredgroundwater contamination at the plant. These measures include proceeding with extending city water to take additional remedial measures beyond those noted above.certain residents who live near the plant, some of whom are plaintiffs in the litigation. Beyond the original estimated costsreserve of approximately $1 million (PPL Montana's share of the estimated costs,recorded by PPL Montana in 2004 (of which only an insignificant amount remains at March 31, 2006) for which PPL has recorded a contingency reserve) for the proposed settlement of thesethe property damage claims andraised in the litigation, for extending city water and for a portion of the remedial investigation costs, PPL Montana may incur further costs based on its additional groundwater investigations and any related remedial measures, which costs are not now determinable, but could be significant.Brunner Island's NPDES permit contains a provision requiring further studies onimpactdischarges from its Brunner Island plant into the Susquehanna River. The matter has now been settled with PPL's commitment to install mechanical draft cooling towers at the plant. PPL expects construction of the cooling water discharge fromtowers to begin by the plant. These studies are underwayend of 2007 and are expectedfor the towers to be completed in 2006.service in the spring of 2010. The Pennsylvania DEP has stated that it believes the studies to date show that the temperatureexpected capital cost of the discharge must be lowered. The Pennsylvania DEP has also stated that it believesinstallation of the planttowers 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 could be significant.becomesbecame effective in 2006.January 2006 and at this time applies only to drinking water. 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 any such requirements is not now determinable, but could be significant.whichthat may exist at some of PPL Electric's former generating facilities; and potential contamination at abandoned power plant sites owned by PPL Generation. This may also include former coal gas manufacturing facilities and potential mercury contamination from gas meters and regulators at PPL Gas Utilities' sites.2005,2006, PPL Electric and PPL Gas Utilities have 178148 sites to address under the new combined COA. COA, and currently no PPL Generation sites are included on the COA site list. Additional sites formerly owned or operated by PPL Electric, PPL Generation or PPL Gas Utilities are added to the consent orders on a case-by-case basis.2005,2006, PPL Electric and PPL Gas Utilities had accrued approximately $3$2 million and $7$5 million, respectively, representing the estimated amounts 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 and its subsidiaries also could incur other non-remediation costs at sites included in the consent orders or other contaminated sites, the costs of which are not now determinable, but could be significant.2005,2006, a PPL Energy Supply subsidiary had accrued $28 million to cover the costs of pumping and treating groundwater at the two mine sites for 50 years and for operating and maintaining passive wetlands treatment at the third site.Certain of PPL'sA PPL generation subsidiariessubsidiary has minority interests in two generation plants that currently are involved in asbestos-related lawsuits, and certain of itsPPL 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, from time to time have been named as defendants in asbestos-related lawsuits. PPL cannot predict the outcome of any of these existing asbestos-related lawsuits or whether additional claims may be asserted against its subsidiaries or such generation plants in the future. PPL believes that all claims under current asbestos-related lawsuits naming its energy services subsidiaries as defendants are covered by insurance. Even in the absence of insurance coverage for the existing lawsuits naming its subsidiaries as defendants or involving such generation plants, PPL does not expectbelieve at this time that there is a reasonable possibility that the resolution of the currentthese lawsuits will have a material adverse effect on its financial condition or results of operations.electric and/or magnetic fields (EMFs),EMFs, which 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 reviewed this issue. The U.S. National Institute of Environmental Health Sciences concluded in 2002 that, for most health outcomes, there is no evidence of EMFs causing adverse effects. The agency further noted that there is some epidemiological evidence of an association with childhood leukemia, but that this evidence is difficult to interpret without supporting laboratory evidence. The U.K. National Radiological Protection Board concluded in 2004 that, while the research on EMFs does not provide a basis to find that EMFs cause any illness, there is a basis to consider precautionary measures beyond existing exposure guidelines. PPL and its subsidiaries believe the current efforts to determine whether EMFs cause adverse health effects should continue and are taking steps to reduce EMFs, where practical, in the design of new transmission and distribution facilities. PPL and its subsidiaries are unable to predict what effect, if any, the EMF issue might have on their operations and facilities either in the U.S. or abroad, and the associated cost, or what, if any, liabilities they might incur related to the EMF issue.Lower Mt. BethelIn August 2002, the Northampton County Court of Common Pleas issued a decision setting the permissible noise levels for operation of the Lower Mt. Bethel facility. PPL appealed the court's decision to the Commonwealth Court, and an intervenor 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 intervenor appealed this ruling to the Commonwealth Court. In April 2004, the Commonwealth Court affirmed the decision of the Court of Common Pleas, and the Supreme Court of Pennsylvania has denied the intervenor's Petition for Allowance of Appeal.The certificate of occupancy for the Lower Mt. Bethel facility was issued by the local township zoning officer in April 2004, and the facility was placed in service in May 2004. In May 2004, the intervenor in the legal proceedings regarding the facility's permissible noise levels filed an appeal with the township zoning board regarding the issuance of the certificate of occupancy. The hearing on the appeal was held in December 2004, and the intervenor's appeal was denied. The intervenor appealed the zoning board's decision to the Northampton County Court of Common Pleas in February 2005.Environmental Matters - International(PPL and PPL Energy Supply)whichthat 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 whichthat 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, 2005,2006, this maximum assessment was about $38 million.1988.2005. 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 Act Amendments under the Energy Policy Act of 1988,2005, PPL Susquehanna could be assessed up to $201 million per incident, payable at $20$30 million per year.20042005 Form 10-K. Residual value guarantees of leased equipment $ 8 2007 (b) WPD LLP guarantee of obligations under SIUK Capital Trust I preferred securities 82 (d) 2027 Letters of credit issued on behalf of affiliates 7 (e) 2007 Support agreements to guarantee partnerships' obligations for the sale of coal 9 2007 Retroactive premiums under nuclear insurance programs 38 Nuclear claims under The Price-Anderson Act Amendments under The Energy Policy Act of 2005 201 (f) Contingent purchase price payments to former owners of synfuel projects 31 2007 Residual value guarantees of leased equipment 2 2007 (b) Indemnifications for entities in liquidation 274 2008 to 2012 WPD guarantee of pension and other obligations of unconsolidated entities (g) $ 4 $ 4 40 2017 WPD guarantee of an unconsolidated entity's lease obligations 1 2008 Tax indemnification related to unconsolidated WPD affiliates 9 2012 Indemnifications related to the sale of the Sundance plant 1 1 (h) (h) Guarantee of a portion of an unconsolidated entity's debt 7 (d) 2008 Residual value guarantees of leased equipment 73 2007 (b) 2006,2007, equipment of similar value is generally leased and guaranteed on an on-going basis. As a result of the privatization of the utility industry in the U.K., certain electric associations' roles and responsibilities were discontinued or modified. As a result, certain obligations, primarily pension-related, associated with these organizations have been guaranteed by the participating members. Costs are allocated to the members based on predetermined percentages as outlined in specific agreements. However, if a member becomes insolvent, costs can be reallocated to and are guaranteed by the remaining members. At March 31, 2005, WPD has recorded an estimated discounted liability based on its current allocated percentage of the total expected costs. Neither the expiration date nor the maximum amount of potential payments for certain obligations is explicitly stated in the related agreements and, therefore, have been estimated based on the types of obligations.(h) PPL Energy Supply's maximum exposure with respect to these indemnifications and the expiration of the indemnifications cannot be estimated because, in the case of certain of the indemnification provisions, the maximum potential liability is not capped by the transaction documents and the expiration date is based on the applicable statute of limitations. Certain of the indemnifications are triggered only if the purchaser's losses reach $1 million in the aggregate, are capped at 50% of the purchase price (or $95 million), and survive for a period of only 24 months after the May 13, 2005, transaction closing. The indemnification provision for unknown environmental and tort liabilities related to periods prior to PPL Energy Supply's ownership of the real property on which the facility is located are capped at $4 million in the aggregate and survive for a maximum period of five years after the transaction closing. Related Party Transactions12. 2005,2006, and December 31, 2004, PPL2005, PPL's and PPL Energy Supply's Balance Sheets reflectreflected $89 million of "Long-term Debt with Affiliate Trust." This debt represents obligations of PPL Energy Supply under 8.23% subordinated debentures maturing in February 2027 that are held by SIUK Capital Trust I, which is a variable interest entity whose common securities are owned by PPL Energy Supply but which is not consolidated by PPL Energy Supply. Interest expense on this obligation was $3 million for the three months ended March 31, 20052006 and 2004,2005, and is reflected in "Interest Expense" for PPL and "Interest Expense with Affiliate"Affiliates" for PPL Energy Supply on the Statement of Income. See Note 22 in each Registrant's 20042005 Form 10-K for additional information. 1, 2002, to supply all of PPL Electric's PLR load through December 31, 2009. Under these contracts, PPL EnergyPlus provides electricity at the predetermined capped prices that PPL Electric is authorized to charge its PLR customers. For the three months ended March 31, 20052006 and 2004,2005, these purchases totaled $415$446 million and $410 million, including$415 million. These purchases include nuclear decommissioning recovery and amortization of an up-front contract payment. These purchasespayment and are included in the Statement of Income as "Energy purchases from affiliate" by PPL Electric, and as "Wholesale energy marketing to affiliate" revenues by PPL Energy Supply.estimatesestimated that, at March 31, 2005,2006, the market price of electricity would exceed the contract price by approximately $2.3$3.6 billion. Accordingly, at March 31, 2005,2006, 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's deposit with PPL Electric was $300 million at both March 31, 2005,2006, and December 31, 2004.2005. This deposit is shown on the Balance Sheet as "Collateral on PLR energy supply to/from affiliate," a current asset of PPL Energy Supply and a current liability of PPL Electric. PPL Electric pays interest equal to the one-month LIBOR plus 0.5% on this deposit, which is included in "Interest Expense"Expense with Affiliate" on the Statement of Income.$55$44 million at March 31, 2005,2006, and $58$47 million at December 31, 2004. This balance is2005. These current and noncurrent balances are 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.pricesprice to PPL EnergyPlus. For the three months ended March 31, 20052006 and 2004,2005, these NUG purchases totaled $38$39 million and $37 million, and$38 million. These amounts are included in the Statement of Income as "Wholesale electric to affiliate" revenues by PPL Electric, and as "Energy purchases from affiliate" by PPL Energy Supply.Electric: Direct expenses $ 30 $ 25 $ 14 $ 14 Overhead costs 27 19 9 12 2005,2006, and December 31, 2004.2005. Interest earned on cash collateral and loans to affiliates, included in "Other Income - net" on the Statement of Income, was $5 million and $2 million for the three months ended March 31, 2005,2006 and insignificant for the same period in 2004.issued aborrowed $495 million note payable to an affiliate, whichunder this note. There was no outstanding balance at March 31, 2006, and December 31, 2005. Interest is shown on the Balance Sheet as "Note Payable to Affiliate." The note matures in May 2006 with interest payable monthly in arrears at LIBOR plus 1%. Interest expense on this note was insignificant for the three months ended March 31, 2006, and $4 million for the three months ended March 31, 2005, and is reflected in "Interest Expense with Affiliate"Affiliates" on the Statement of Income.madeissued a $300 million demand loannote to an affiliate, with interestaffiliate. In February 2006, the demand note was amended to increase the maximum amount of the note to $450 million. There was a balance of $400 million and $300 million at March 31, 2006, and December 31, 2005. Interest is due quarterly at a rate equal to the 3-month LIBOR plus 1.25%. This loannote is shown on the Balance Sheet as "Note receivable from affiliate."loans to affiliates,the note is included in "Other Income - net" on the Statement of Income, and was $5 million and $3 million for the three months ended March 31, 2005,2006 and insignificant for the same period in 2004.Trademark Royalties2005.both the three months ended March 31, 20052006 and 2004, which is2005. These allocations of the license fee are primarily included in "Other operation and maintenance" on the Statement of Income.Other Income - Net13. was as follows:
March 31, Derivative Instruments and Hedging Activities Interest income $ 8 $ 6 Equity earnings 1 1 Realized earnings on nuclear decommissioning trust 3 1 Gain on sale of investment in an unconsolidated affiliate (Note 8) 4 Miscellaneous - International 2 2 Miscellaneous - Domestic 4 1 Total 22 11 Impairment of investment in U.K. real estate (Note 8) 8 Charitable contributions 2 2 Miscellaneous - Domestic 3 2 $ 9 $ 7 Interest income $ 4 $ 4 Affiliated interest income 5 2 Equity earnings 1 1 Realized earnings on nuclear decommissioning trust 3 1 Gain on sale of investment in an unconsolidated affiliate (Note 8) 4 Miscellaneous - International 2 2 Miscellaneous - Domestic 2 1 Total 21 11 Impairment of investment in U.K. real estate (Note 8) 8 Miscellaneous - Domestic 3 3 $ 10 $ 8 Interest income $ 3 $ 2 Affiliated interest income 5 3 Miscellaneous 1 Total 9 5 1 $ 9 $ 4 14. sales.sales and emissions allowance positions. These contracts range in maturity through 2006.2008. Additionally, PPL and PPL Energy Supply enter into financial contracts to hedge fluctuations in the market value of existing debt issuances. These contracts range in maturity through 2029.did not recognize significant gains or losses resulting from hedges ofalso enter into foreign currency forward contracts to hedge the exchange rates associated with firm commitments that no longer qualified as fair value hedges for the three months ended March 31, 2005 or 2004.During the three months ended March 31, 2005, PPL Electric redeemed the $116 million of 6.40% Pollution Control Revenue Refunding Bonds due 2029. Consequently, PPL recognized a gain of $3 million related to accelerating the amortization of the fair value hedges related to these bonds.PPL and PPL Energy Supply did not recognize any gains or losses resulting from the ineffective portion of fair value hedges for the three months ended March 31, 2005 or 2004.2010.2012. 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. The current contract maturesThese interest rate contracts range in 2006. maturity through 2028.$7$6 million and $4$7 million as of March 31, 20052006 and 2004.Cash flow hedges may be discontinued if it is probable that the original forecasted transaction will not occur by the end of the originally specified time period. PPL and PPL Energy Supply did not discontinue any cash flow hedges during the three months ended March 31, 2005 or 2004.losses,gains, after tax, of $2 million from other comprehensive income (reported in "Wholesale energy marketing" revenues and "Energy purchases" on the Statement of Income) for the three months ended March 31, 2005.2006. For the same period in 2004, the amount was insignificant.2005,2006, the deferred net loss, after tax, on derivative instruments in "Accumulatedaccumulated other comprehensive income"loss that is expected to be reclassified into earnings during the next twelve months was $52$49 million for PPL and $47$46 million for PPL Energy Supply.The following Amounts are reclassified as the energy contracts go to delivery and interest payments are made.after tax, in accumulated other comprehensive incomeloss. Beginning accumulated derivative loss $ (246) $ (63 ) Net change associated with current period hedging activities and other 77 (79 ) Net change from reclassification into earnings 25 13 Ending accumulated derivative loss $ (144 ) $ (129 ) Beginning accumulated derivative loss $ (237 ) $ (45 ) Net change associated with current period hedging activities and other 70 (78 ) Net change from reclassification into earnings 24 12 Ending accumulated derivative loss $ (143 ) $ (111 ) following periods:
March 31, 2005,2006, PPL had a credit exposure of $348$416 million to energy trading partners. Ten counterparties accounted for 70%77% of this exposure. No other individual counterparty accounted for more than 3% of the exposure. Nine of the ten counterparties had an investment grade credit rating from S&P. The non-investment gradeOne counterparty has remainedwas not rated by any of the major credit rating agencies but was current on obligations under its contracts, and has supplied a letter of credit as collateral against its obligations.2005,2006, PPL Energy Supply had a credit exposure of $342$416 million to energy trading partners. Ten counterparties accounted for 71%78% of this exposure. No other individual counterparty accounted for more than 3% of the exposure. Nine of the ten counterparties had an investment grade credit rating from S&P. The non-investment gradeOne counterparty has remainedwas not rated by any of the major credit rating agencies but was current on obligations under its contracts, and has supplied a letter of credit as collateral against its obligations.minimizelimit credit exposure.Energy Supply and Electric)Electric)In past years, PPL Energy SupplyElectric has had an exposure to PPL ElectricEnergy Supply under the long-term contract for PPL EnergyPlus to providesupply PPL Electric's PLR load. However, beginningload, as described in 2004, increases in electricity prices have reversed this position. PPL Electric estimates that, at March 31, 2005, the market price of electricity would exceed the contract price by approximately $2.3 billion. In accordance with the terms of one of the PLR contracts, PPL Energy Supply provided PPL Electric with cash collateral in the amount of $300 million, the maximum amount required under the contract.Note 12. 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 cost (credit) were as follows:
Benefits
March 31,
March 31, Restricted Cash15. type: Collateral for letters of credit (a) $ 42 $ 42 Deposits for trading purposes with NYMEX broker 39 $ 39 Counterparty collateral 4 4 Client deposits 13 Miscellaneous 2 2 Restricted cash - current 100 45 42 Required deposits of WPD (b) 17 17 PPL Transition Bond Company Indenture reserves (c) 30 30 Restricted cash - noncurrent 47 17 30 Total restricted cash $ 147 $ 62 $ 72 Collateral for letters of credit (a) $ 42 $ 42 Deposits for trading purposes with NYMEX broker 29 $ 29 Counterparty collateral 9 9 Client deposits 12 Miscellaneous 1 1 Restricted cash - current 93 39 42 Required deposits of WPD (b) 16 16 PPL Transition Bond Company Indenture reserves (c) 32 32 Restricted cash - noncurrent 48 16 32 Total restricted cash $ 141 $ 55 $ 74 (c) Credit enhancement for PPL Transition Bond Company's $2.4 billion Series 1999-1 Bonds to protect against losses or delays in scheduled payments. Asset Retirement Obligations16. Balance at December 31, 2005 $ 94 $ 921 $ 1,015 $ 55 $ 1,070 Effect of foreign currency exchange rates 10 10 10 Purchase accounting adjustments (a) (15 ) (15 ) (15 ) Balance at March 31, 2006 $ 94 $ 916 $ 1,010 $ 55 $ 1,065 (a) Adjustments pursuant to EITF Issue 93-7, "Uncertainties Related to Income Taxes in a Purchase Business Combination." See Note 5 for a discussion of a $12 million goodwill adjustment related to the transfer of WPD tax items. 17. was as follows: AROs at December 31, 2005 $ 298 Add: Accretion expense 5 AROs at March 31, 2006 $ 303 fundfunds was $405$463 million as of March 31, 2005,2006, and $409$444 million as of December 31, 2004.See Note 16 for a discussion of FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143," and its potential impact on PPL and its subsidiaries.New Accounting Standards18. was originally effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. However, in April 2005, the SEC issued a rule that amended Regulation S-X to change this effective date to the beginning of an entity's fiscal year that begins on or after June 15, 2005.SFAS 123(R) requires public entities to applyJanuary 1, 2006. PPL and its subsidiaries applied the modified prospective application transition method of adoption. Under this application, entities must recognize compensation expense based on the grant-date fair value for new awards granted or modified after the effective date and for unvested awards outstanding on the effective date. Additionally, public entities may choose to apply modified retrospective application to periods before the effective date of SFAS 123(R). This application may be applied either to all prior years for which SFAS 123 was effective or only to prior interim periods in the year of initialThe adoption of SFAS 123(R). Under modified retrospective application, prior periods would be adjusted to recognize did not have a significant impact on PPL and its subsidiaries, since PPL and its subsidiaries adopted the fair value method of accounting for stock-based compensation, expense as though stock-based awards granted, modified or settled in cash in fiscal years beginning after December 15, 1994, had been accounteddescribed by SFAS 123, effective January 1, 2003. See Note 9 for underthe disclosures required by SFAS 123.123(R)155 no later than January 1, 2006. PPL and its subsidiaries do not plan to apply modified retrospective application to any periods prior to the date of adoption. In addition, PPL and its subsidiaries adopted the fair-value method of accounting for stock-based compensation under SFAS 123 effective January 1, 2003. Therefore, the adoption of SFAS 123(R) is not expected to have a material impact on PPL and its subsidiaries.FIN 47In March 2005, the FASB issued Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143." FIN 47 clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47 also clarifies when an entity would be expected to have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for fiscal years ending after December 15, 2005. The impact of initially applying FIN 47 is required to be recognized as a cumulative effect of a change in accounting principle. Retrospective application of interim financial information is permitted but not required.reviewing (i) certain obligations to perform asset retirement activitiesperforming a complete assessment of SFAS 155. However, since PPL and its subsidiaries do not have any interests in securitized financial assets or hybrid financial instruments with embedded derivatives that are conditional upon a future event occurring and (ii) certain legal retirement obligations that were identified but are not measurable at this time due to indeterminable datesrequire bifurcation, the impact from the adoption of retirement. The potential impact of applying the guidance in FIN 47 to these itemsSFAS 155 is not yet determinable, but couldexpected to be material.20042005 Form 10-K, descriptions of its major segmentsdomestic and international businesses are found in "Item 1. Business - Background" and the current corporate organizational structure is shown in Exhibit 99.99(a). 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. PPL's reportable segments are Supply, International Delivery and Pennsylvania Delivery. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" - Overview" in PPL's 20042005 Form 10-K for an overview of PPL's strategy and the risks and the challenges that it faces in its business.PPL's reportable segments are Supply, International Delivery and Pennsylvania Delivery. See "Forward-Looking Information," Note 311 to the Financial Statements and the rest of this Item 2 in this Form 10-Q and "Item 1A. Risk Factors" and the rest of Item 7 in PPL's 2005 Form 10-K for further segment information.earningsearnings. "Results of Operations" continues with a summary of results by reportable segment and a description of key factors by segment that management expects may impact future earnings. "Results of Operations" continues with a summary of results by reportable segment andThis section ends with explanations of significant changes in principal items on PPL's Statement of Income, comparing the three months ended March 31, 2005,2006, to the comparable period in 2004.WPD's results, as consolidated2005. Net income $ 280 $ 168 EPS - basic $ 0.74 $ 0.45 EPS - diluted $ 0.73 $ 0.44 PPL's Statementnet income from period to period were, in part, attributable to several significant items that management considers unusual. Details of these unusual items are provided within the review of each segment's earnings.are impacted by changes in foreign currency exchange rates. For the three months ended March 31, 2005, as compared with the same period in 2004, changes in foreign exchange rates increased WPD's portion of revenue and expense line items by about 5%.EarningsNet income and the related EPS were as follows:
March 31, The after-tax change in net income was due to:
March 31, 2005 vs. March 31, 2004 The period-to-period changes in earnings components, including domestic gross energy margins by region and income statement line items, are discussed following the future earnings factors and segment results.PPL's future earnings could be, or will be, impacted by a number of key factors, including the following:Supply Segment:PPL's future energy margins and, consequently, its future earnings, will be impacted by changes in market prices for electricity, as well as fluctuations in fuel prices, fuel transportation costs and emission allowance expenses. For instance, although PPL expects market prices for electricity in 2005 to be higher than in 2004, PPL is not expecting an increase in its 2005 energy margins due to expected increases in the cost of fuel, fuel transportation and emissions allowances. See Note 9 to the Financial Statements for a discussion of the status of PPL's sulfur dioxide emission allowances.A key part of PPL's overall strategy is to enter into long-term and intermediate-term energy supply agreements in order to mitigate market price and supply risk. PPL's ability to continue to enter into such agreements, and to renew existing energy supply agreements, may affect its future earnings. See Note 9 to the Financial Statements for more information regarding PPL's wholesale energy commitments and Note 10 for more information regarding the PLR contracts.Due to current electricity and natural gas price levels, there is a risk that PPL may be unable to recover its investment in certain 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 earnings impact of this issue, based upon future energy and fuel 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 Arizona Public Service Company. Each party has waived the remaining contractual conditions for approval of the transaction by the Arizona Corporation Commission. The sale still requires approvals of the FERC under the Federal Power Act. PPL cannot predict whether or when these approvals will be obtained. PPL estimates that a loss on sale or an impairment charge of about $47 million, after tax, or $0.25 per share, could be recorded in 2005 depending on the timing and likelihood of obtaining the FERC approvals.PPL's ability to manage operational risk with respect to its generation plants is critical to its financial performance. Specifically, depending on the timing and duration of both planned and unplanned outages (in particular, if such outages are during peak periods or periods of severe weather), PPL's revenue from energy sales could be adversely affected and its need to purchase power to satisfy its energy commitments could be significantly increased. PPL has been successful in the past several years in increasing fleet-wide equivalent availability (i.e., the percentage of time in a year that a generating unit is capable of producing power) from the low 80% range to over 90%. However, since many of its generating units are reaching mid-life, PPL is faced with the potential for outages of longer duration to accommodate significant investments in major component replacements.PPL has interests in two synthetic fuel facilities and receives tax credits pursuant to Section 29 of the Internal Revenue Code based on its sale of synthetic fuel to unaffiliated third-party purchasers. PPL has estimated that these facilities will contribute approximately $0.21 to annual EPS through 2007, when the availability of such tax credits is scheduled to expire. See Note 9 to the Financial Statements for a discussion of the requirements to receive the Section 29 tax credits, the IRS review of synthetic fuel production procedures and the impact of higher oil prices on the Section 29 tax credits.To comply with existing and future environmental requirements and as a result of voluntary pollution control measures it may take, PPL expects to spend significant amounts on environmental control and compliance in the future. The costs of such measures, in most cases, are not now determinable with certainty. For instance, PPL's current cost estimates for sulfur dioxide reduction at its generating plants are preliminary and PPL could incur significantly higher capital and operating expenses due to more stringent environmental requirements, changing market conditions with respect to the cost of pollution control equipment or emissions allowances, delays in the installation of pollution control equipment or other factors. See Note 9 to the Financial Statements for more information regarding current environmental requirements and initiatives, including those relating to air emissions, and PPL's anticipated capital expenditure program to meet the sulfur dioxide reduction requirements of the Clean Air Act.International Delivery Segment:Earnings in 2005 and beyond are expected to continue to be adversely affected by increased pension costs. Specifically, WPD will experience increased pension costs due to a recent actuarial valuation of WPD's plans that reflects higher pension obligations. The increase in pension costs in 2005 is forecasted to be approximately $24 million, after tax, and the increase in pension costs is expected to continue to be significant in 2006. An additional $4 million of expense, after tax, was recognized in the first quarter related to termination benefits.Pennsylvania Delivery Segment:In December 2004, the PUC approved an increase in PPL Electric's distribution rates of approximately $137 million (based on a return on equity of 10.7%), and approved PPL Electric's proposed mechanism for collecting an additional $57 million in transmission-related charges, for a total increase of approximately $194 million, effective January 1, 2005.PPL Electric has agreed to provide electricity supply to its PLR customers at predetermined rates through 2009 and has entered into PUC-approved, full requirements energy supply agreements with PPL EnergyPlus to fulfill its PLR obligation. The predetermined charges for generation supply which PPL Electric collects from its PLR customers and pays to PPL EnergyPlus under the energy supply agreements provide for annual increases in each year commencing in 2006 and continuing through 2009. PPL Electric's PLR obligation after 2009 will be determined by the PUC pursuant to rules that have not yet been promulgated. See Note 10 to the Financial Statements for more information regarding the PLR contracts.In January 2005, severe ice storms hit PPL Electric's service territory. PPL Electric had to restore service to about 238,000 customers. Although the actual cost of these storms and the specific allocation of such cost between operation and maintenance expense and capital costs is not yet finalized, PPL Electric currently estimates a total cost of $22 million, with approximately $19 million, or $0.06 per share, being recorded as an expense on PPL Electric's income statement for the first quarter of 2005.On February 11, 2005, PPL Electric filed a petition with the PUC for authority to defer and amortize for regulatory accounting and reporting purposes its actual cost of these storms, excluding capitalized costs of approximately $3 million and regular payroll expenses of approximately $2 million (pursuant to PUC precedent on this issue). If the PUC grants this petition, PPL Electric's management will assess the recoverability of these costs in PPL Electric's next general rate increase proceeding, in accordance with SFAS 71, "Accounting for the Effects of Certain Types of Regulation." Depending on the likelihood of such recovery based on this assessment, most of the first quarter expense could be reversed in that future period. At this time, PPL Electric cannot predict the outcome of its deferral petition or the likelihood of recovery of these storm costs.All Segments: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 2004, future impairments may occur due to determinations of carrying value exceeding the fair value of these investments.From time to time, PPL and its subsidiaries are involved in negotiations with third parties regarding acquisitions and dispositions of businesses and assets. Any such transactions may impact future earnings.See Note 9 to the Financial Statements for potential commitments and contingent liabilities that may impact future earnings.See Note 16 to the Financial Statements for new accounting standards that have been issued but not yet adopted by PPL that may impact future earnings.was as follows:
Ended March 31, Supply $ 143 $ 86 International Delivery 81 62 Pennsylvania Delivery 56 20 Total $ 280 $ 168 The Supply segment owns and operates power plants to generate electricity, markets this electricity and other power purchases to deregulated wholesale and retail markets and acquires and develops domestic generation projects. activitiesdomestic energy marketing, domestic generation and domestic development operations of PPL Generation and PPL EnergyPlus.SegmentEnergy Supply.was as follows:
Ended March 31, Energy revenues External $ 372 $ 309 Intersegment 446 416 Energy-related businesses 158 122 Total operating revenues 976 847 Fuel and energy purchases External 339 304 Intersegment 41 38 Other operation and maintenance 166 191 Depreciation 37 36 Taxes, other than income 9 11 Energy-related businesses 154 140 Total operating expenses 746 720 Interest Expense 27 30 Income Taxes 60 9 Loss from Discontinued Operations 2 Total $ 143 $ 86 factors:
March 31, 2005 vs. March 31, 2004 Eastern U.S. non-trading margins $ 26 Northwestern U.S. non-trading margins 14 Southwestern U.S. non-trading margins 1 Net energy trading margins (3 ) Operation and maintenance expenses (8 ) Earnings from synfuel projects 3 Energy-related businesses 2 Taxes, other than income 1 Other 2 Unusual items 19 $ 57 Reduction in Enron reserve (Note 2) $ 9 1 Settlement of NorthWestern litigation $ (6 ) Acceleration of stock-based compensation expense for periods prior to 2005 (Note 9) (3 ) Total $ 10 $ (9 ) · See "Domestic Gross Energy Margins" for an explanation of non-trading margins by geographic region and for an explanation of net energy trading margins. · Higher operation and maintenance expenses were primarily due to the nuclear refueling outage and inspection costs at the Susquehanna station and outages at the Brunner Island and Martins Creek plants in 2006. The costs of these outages exceeded the costs of the 2005 planned outage at Montour and a short-duration outage at the Susquehanna station. · The improved earnings contribution from synfuel projects resulted from an unrealized gain on options purchased to hedge a portion of the risk associated with the phase-out of the synthetic fuel tax credits for 2006 and 2007, partially offset by the lower recognition of synthetic fuel tax credits due to the anticipated phase-out of synthetic fuel tax credits starting in 2006. · In the first quarter of 2006, PPL lowered its reserve on claims related to the Enron bankruptcy. This adjustment increased earnings by $9 million after-tax (or $0.03 per share). See Note 2 to the Financial Statements for additional information. · In the first quarter of 2005, PPL recognized a charge of $6 million after tax (or $0.02 per share) for a loss contingency related to litigation with NorthWestern. In September 2005, PPL and NorthWestern reached a final agreement to settle this litigation. explanation of non-trading margins8.4% increase in PLR sale prices. Higher generation output and higher-priced wholesale energy contracts that replace expiring contracts also are expected to improve energy margins. These benefits are expected to be partially offset by geographic regionincreased fuel and for an explanation on net energy trading margins.Higherfuel transportation expenses, higher operation and maintenance expenses were primarily due to accelerated amortization of stock-based compensation for retirement-eligible employees, which resultedand reduced earnings from additional accounting guidance. synfuel projects.211 to the Financial Statements for additional information.The improveda discussion of the tax credits that PPL has earned in connection with its synfuel projects and the impact of higher oil prices on future tax credits. In early April 2006, PPL suspended operations at one of its two synfuel projects based upon increased oil prices and the potential phase-out of these tax credits under existing tax rules. For these same reasons, PPL currently expects to suspend operations at its other synfuel project in mid-2006.resultedas discussed above and assuming the continued suspension for the remainder of 2006, PPL's earnings from the Tyrone facilitycombination of synfuel projects and synthetic fuel-related hedges would be $19 million (or $0.05 per share) in 2006.began commercial operation duringif these third parties had discontinued their synthetic fuel operations and sales to PPL at the third quarterend of 2004.The change in net income was also attributableApril 2006 due to an accrualthe impact of approximately $6projected oil prices, the company would incur additional fuel costs of $16 million ($9 million after tax, or $0.02 per share) for the loss contingency relatedremainder of 2006.NorthWestern litigation. See Note 9volatility in oil prices as well as the potential impact of pending legislation, which could result in an impairment of the synfuel project assets that would otherwise be depreciated or amortized in 2006 and 2007. PPL will continue to assess the Financial Statements for additional information on the accrual.owns and operatesincludes operations of the international energy businesses of PPL Global that are primarily focused on the distribution of electricity. The segment primarily consists of the operations of the regulated international energy businesses of PPL Global. The majoritySubstantially all of PPL Global's international businesses are located in the U.K., Chile, El Salvador and Bolivia.Segmentwas as follows:
Ended March 31, Utility revenues $ 323 $ 293 Energy-related businesses 21 18 Total operating revenues 344 311 Energy purchases 81 63 Other operation and maintenance 67 61 Depreciation 41 38 Taxes, other than income 12 14 Energy-related businesses 9 6 Total operating expenses 210 182 Other Income - net 3 Interest Expense 48 50 Income Taxes 3 18 Minority Interest 2 2 Total $ 81 $ 62 factors:
March 31, 2005 vs. March 31, 2004 The U.K.'s earnings were negativelyfactors. U.K.: Delivery margins $ 17 Operation and maintenance expenses (7 ) Income taxes 21 Impact of changes in foreign currency exchange rates (7 ) Impairment of investment in U.K. real estate (Note 8) (6 ) Other 4 Latin America 5 U.S. income taxes (6 ) Other (3 ) Unusual item - collection of receivable from Enron 1 $ 19 · The U.K.'s earnings were positively impacted by higher delivery margins, primarily due to price increases and 2.9% higher sales volumes. · Lower U.K. income taxes were due to the transfer of WPD tax items. See Note 5 to the Financial Statements for additional information. · Changes in foreign exchange rates decreased WPD's portion of revenue and expense line items by 8% in the three months ended March 31, 2006, compared with the same period in 2005. due to increasedresulting from higher pension costs and termination benefit expenses.on dividends from WPD decreased primarily due to greater utilization ofand a potential unfavorable change in foreign tax credits.Lower interest expense was due to lower affiliate debt.Segmentwas as follows:
Ended March 31, Operating revenues External $ 909 $ 858 Intersegment 41 38 Total operating revenues 950 896 Fuel and energy purchases External 129 143 Intersegment 446 416 Other operation and maintenance 99 112 Amortization of recoverable transition costs 72 69 Depreciation 30 29 Taxes, other than income 50 48 Total operating expenses 826 817 Other Income - net 9 4 Interest Expense 44 55 Income Taxes 32 7 Dividends on Preferred Stock 1 1 Total $ 56 $ 20 factors:
March 31, 2005 vs. March 31, 2004
(Note 9) Delivery revenues (net of CTC/ITC amortization, interest expense on transition bonds and ancillary charges) $ (1 ) Operation and maintenance expenses 7 Other 1 Unusual items 29 $ 36 PJM billing dispute (Note 11) $ (27 ) Acceleration of stock-based compensation expense for periods prior to 2005 (Note 9) (2 ) Total $ (29 ) · PPL Electric recognized an after-tax charge of $27 million (or $0.07 per share) in the first quarter of 2005 for a loss contingency related to the PJM billing dispute. See Note 11 to the Financial Statements for an update on this matter. PPL cannot be certain of the outcome of this matter or the impact on PPL and its subsidiaries. · Lower operation and maintenance expenses in the first quarter of 2006 were primarily due to the costs incurred in January 2005, when severe ice storms hit PPL Electric's service territory. The total cost of restoring service to 238,000 customers, excluding capitalized costs and regular payroll expenses, was $16 million (or $0.02 per share). In August 2005, the PUC issued an order granting PPL Electric's petition for authority to defer and amortize for regulatory accounting and reporting purposes these storm costs subject to certain conditions. As a result of the PUC Order and in accordance with SFAS 71, "Accounting for the Effects of Certain Types of Regulation," in the third quarter of 2005, PPL Electric deferred $12 million (or $0.02 per share) of its previously expensed storm costs. The deferral was based on its assessment of the timing and likelihood of recovering the deferred costs in PPL Electric's next distribution base rate case. At this time, PPL Electric cannot be certain that it will recover the storm costs, nor can it predict whether future incidents of severe weather will cause significant facility damage and service disruptions that would also result in significant costs. increased as a result of higher transmission and distribution customer rates effective January 1,in 2006 compared with 2005 due to favorable weather impacts in 2005 and a 3.7% increase in electricity delivery sales volumes.Thean increase in operation and maintenance expenses was primarily due to the costs incurred in January 2005 to restore electric service to customers as a resultexpenses.severe ice storms that affected portions of PPL Electric's service territory. The increase was also due to accelerated amortization of stock-based compensation for retirement-eligible employees, which resulted from additional accounting guidance. See Note 2 to the Financial Statements for additional information on stock-based compensation.Taxes, other than income, benefited in 2004 from the reversal of 1998 and 1999 PURTA tax accruals related to the PPL Susquehanna tax appeals.The change in net income was also attributable to an accrual of approximately $27 million after tax for the loss contingency related to the PJM billing dispute. See Note 9 to the Financial Statements for additional information on the accrual.margins:
March 31, 2005 vs. March 31, 2004 Utility $ 81 Wholesale energy marketing 69 Net energy trading margins (6 ) Other revenue adjustments (a) (41 ) Total revenues 103 Fuel (4 ) Energy purchases 43 Other cost adjustments (a) (1 ) Total cost of sales 38 Domestic gross energy margins $ 65 margins,margins; in particular, revenues and energy costs related to the international operations of PPL Global, the domestic delivery operations of PPL Electric and PPL Gas Utilities and an accrual for the loss contingency related to the PJM billing dispute in 2005 (see Note 911 to the Financial Statements for additional information). Also adjusted to include the margins of the Sundance plant, which were included in "Loss from Discontinued Operations," prior to its sale in May 2005, and gains or losses on sales of emission allowances, which are included in "Other operation and maintenance" expenses, on the Statement of Income.
March 31, 2005 vs. March 31, 2004 Non-trading Eastern U.S. $ 45 Northwestern U.S. 24 Southwestern U.S. 2 Net energy trading (6 ) Domestic gross energy margins $ 65 a greater portion of PPL's supply came from its own generation, instead of purchased power. This wasan 8.4% increase in PLR sale prices in accordance with the schedule established by the PUC Final Order. Also contributing to the increase in margins were higher sales prices and lower reliance on higher-cost oil and gas units in 2006. Partially offsetting these improvements were higher wholesale energy purchase prices and higher coal prices, which were up 49% and 18%, respectively.the timing of plant outages as well as the operation of the Lower Mt. Bethel plant, which began commercial operation in May 2004. The increase was achieved despite higher supply costs, which were driven by increased fossil fuelcommodity price movements on forward energy purchase and power purchase prices. Power purchase prices increased by 4% primarily duesale contracts used to higher market prices for fossil fuel; however, this increase was more than offset by a 10% increase in the average sales price forhedge wholesale transactions. Fuel costs increased 23% due to a 6% increase in generation across a diverse mix of low-cost coal-fired, nuclear and hydroelectric plants and a 17% increase in the average consumed cost of fossil fuels. In addition, PPL also benefited from favorable transmission congestion positions, and gains on sales of emission allowances.lowerhigher in the first quarter of 2006 compared with the same period in 2005, primarily due to an 8% reductionhigher average sales prices, which were up 18%. Also contributing was a 35% increase in coal and hydroelectric generation output. GenerationPartially offsetting these improvements was adversely affected by outagesa 22% increase in average coal prices and reduced river flows. Additionally, thea 4% increase in average consumed cost of coal increased by 10% primarily due to an unfavorable arbitration ruling effective April 2004. The $10increase wasin the first quarter of 2006 compared with the same period in 2005, primarily due to an increase in realized gainslosses on electricity positions as well as an increase in wholesale physical gas trading. and oil financial instruments.2005,2006 were 2,085 GWh and 4.3 Bcf, compared with 1,066 GWh and 4.5 Bcf in the same period last year. The amount of energy trading margins from unrealized transactions was a $4 million gain in the first quarter of 2006 compared with 994 GWh and 2.4 Bcf forto a $5 million gain in the three months ended March 31, 2004.to the following:
March 31, 2005 vs. March 31, 2004 Retail electric revenue (PPL Electric) PLR electric generation supply $ 34 Electric delivery (3 ) Gas revenue (PPL Gas Utilities) 19 Other 1 Retail electric delivery (PPL Global) U.K. 25 Chile 9 El Salvador 3 Bolivia 2 Foreign currency exchange rates (9 ) $ 81 higher delivery revenues resulting from higher transmission and distribution customer rates effective January 1, 2005, and a 3.7% increase in sales volumes;higher PPL Electric PLR revenues due to higher energy and capacity rates, and a 5.6% 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;higher revenues in Chile, primarily due to a 7.3% increase in sales volumes, primarily attributable to regulated customers;higher WPD revenues, primarily due to the change in foreign currency exchange rates, partially offset by a reduction in certain charges which had been a pass-through to customer rates; andhigher revenues in El Salvador, due to a 5.3% increase in sales volumes of all customer types.Energy Related· higher PLR revenues attributable to an increase of 8.4% in prices, offset by a 2.5% decrease in volume, due in part to milder weather in the first quarter 2006 compared to 2005; · a decrease in electric delivery revenues resulting primarily from the impact of milder weather on residential and commercial sales in the first quarter of 2006 compared to 2005; · higher gas revenues primarily due to the increase in natural gas prices, which are passed through to customers; · higher U.K. revenues primarily due to a 2.9% increase in sales volumes and increases in prices; · a 7% increase in sales volumes and higher average prices overall in Chile; and · an 8% increase in sales volumes and higher average prices overall in El Salvador. Energy related$10$22 million more to operating income for the three months ended March 31, 2005,2006, compared with the same period in 2004.2005. The increase was primarily attributable to:$15$20 million higher pre-tax loss in 2004, relatedcontribution from synfuel projects. This reflects a $23 million net unrealized gain on options purchased to hedge a portion of the salerisk associated with the phase-out of CGE (seethe synthetic fuel tax credits for 2006 and 2007, offset by $3 million of additional operating expenses due to higher production levels.811 to the Financial Statements); anda $2 million increase from mechanical contracting and engineering subsidiaries due to a favorable closeout on a major project; partially offset bya $6 million higher pre-tax operating loss from synfuel projects due to increased production levels which improve after-tax earnings.increasedecrease in other operation and maintenance expenses was due to:
March 31, 2005 vs. March 31, 2004 Costs associated with severe ice storms in January 2005 $ (16 ) Reduction in Enron reserve (Note 2) (15 ) NorthWestern litigation accrual in March 2005 (9 ) Higher gains on sales of emission allowances (6 ) Stock-based compensation (Note 9) (6 ) Martins Creek ash basin remediation adjustment (Note 11) (3 ) Susquehanna plant refueling and inspection costs 5 Outage costs at Martins Creek and Brunner Island plants 4 PUC reportable storm costs in 2006 4 Increase in international operation and maintenance expenses 3 Increase in domestic and international pension and postretirement costs 3 Other 4 $ (32 ) $14 million increase in net pension costsdepreciation expense was primarily attributable to a reduction in the discount rate assumptions for PPL's domestic pension plans at December 31, 2004, and increased amortization of prior year actuarial losses for WPD's pension plans. These events will result in PPL's recognition of increaseddue to: Additions to PP&E $ 6 Reduction of useful lives of certain assets 2 Foreign currency exchange rates (2 ) Extension of useful lives of certain generation assets (1 ) $ 5 pension costs in 2005. the costs of PPL's pension plans.Depreciationincreasedecrease in depreciationinterest expense was due to:
March 31, 2005 vs. March 31, 2004 Increase in interest expense due to hedging activities accounted for under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" $ 10 Decrease in long-term debt interest expense (9 ) Interest accrued in 2005 for PJM billing dispute (Note 11) (8 ) Decrease in foreign currency exchange rates (3 ) Decrease in short-term debt interest expense (2 ) Increase in capitalized interest (2 ) Other (2 ) $ (16 ) Other Than IncomeIn the first quarter of 2004, PPL Electric reversed a $14 million accrued liability for 1998 and 1999 PURTA taxes that had been accrued based on potential exposure in the proceedings regarding the Susquehanna nuclear station tax assessment. rights of third-party intervenors to further appeal expired in 2004. The reversal is the primary reason for the $16 million increase in income taxes other than income.Other Income - net Higher pre-tax book income $ 65 Reduction in tax benefits related to nonconventional fuel tax credits 8 Increase in tax expense on foreign earnings 8 Transfer of WPD tax items in 2006 (Note 5) (20 ) $ 61 115 to the Financial Statements for details of other income.Interest ExpenseThe increase in interest expense was due to:
March 31, 2005 vs. March 31, 2004 (a)Prior to commercial operation, interest related to the Lower Mt. Bethel financing was capitalized as part of the cost of the facility.(b)In June 2004, subsidiaries of PPL Energy Supply purchased the Sundance and University Park generation facilities from the lessor that was consolidated by PPL Energy Supply under FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." In connection with the purchase, the related financing was repaid.Income TaxesIncome taxes decreased by $40 million. The decrease was primarily attributable to:a $10 million tax benefit recognized in 2005 related to additional nonconventional fuel tax credits in excess of credits recognized in 2004;a $7 million decrease in tax expense on foreign earnings in 2005 relative to 2004; anda $22 million decrease ineffective income tax expense due to lower pre-tax book income.lossoperating losses of $1$2 million, after tax, recorded in the first quarter of 2004 related2005 prior to PPL Global's plan ofthe May 2005 sale of its investment in a Latin American telecommunications company.2005,2006, PPL had $754$343 million of cash, cash equivalents and short-term investments and $306$179 million of short-term debt. At December 31, 2004,2005, PPL had $682$618 million inof cash, cash equivalents and short-term investments and $42$214 million of short-term debt. The increase$275 million decrease in PPL's cash, cash equivalents and short-term investmentinvestments position was primarily the net result of:$309· the retirement of $225 million of long-term debt; · a net decrease in short-term debt of $36 million (excluding a $1 million impact of currency translation adjustments); · the payment of $95 million of common stock dividends; and · $198 million of capital expenditures; offset by · $297 million of cash provided by operating activities. cashits common stock held by PPL, and for other general corporate purposes. PPL will use the $200 million received from PPL Electric to fund capital expenditures and for general corporate purposes.operating activities;issuancePreference Shares will be paid when, as and if declared by the Board of $116Directors at a fixed annual rate of 6.25%, or $1.5625 per depositary share per year, and are not cumulative. PPL Electric may not pay dividends on, or redeem, purchase or make a liquidation payment with respect to any of its common stock, except in certain circumstances, unless full dividends on the Preference Shares have been paid for the then-current dividend period.tax-exempt long-termletters of credit, to March 2007. PPL Energy Supply is currently pursuing extending the maturity of its syndicated credit facilities aggregating $1.4 billion that expire in June 2010 and the maturity of its $500 million syndicated credit facility that expires in December 2010 by one year. PPL Electric is also currently pursuing extending the maturity of its $200 million credit facility that expires in June 2010 by one year. PPL Energy Supply and PPL Electric expect the extensions to be effective in June 2006.atand equity securities. PPL Electric;the issuance of $24Energy Supply currently plans to issue $300 million of common stock;debt in the second quarter of 2006, subject to market conditions. PPL Energy Supply expects to use the proceeds of the offering to fund capital expenditures, primarily for pollution control equipment, andan increase in short-term debt of $265 million; offset bythe retirement of $396 million of long-term debt;the payment of $78 million of common and preferred dividends; and$169 million of capital expenditures. Moody's and Fitch periodically review the credit ratings on the debt and preferred securities of PPL and its subsidiaries. Based on their respective independent reviews, the rating agencies may make certain ratings revisions. 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 thethese agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to theirthe securities.JanuaryMarch 2006, Moody's took the following actions related to the credit ratings of PPL and its subsidiaries:· PPL - assigned a Baa2 issuer rating; · PPL Capital Funding - upgraded the ratings of its senior unsecured debt and Medium Term Notes to Baa2 from Baa3 and subordinated debt to Baa3 from Ba1; and · PPL Electric - upgraded the issuer rating to Baa1 from Baa2 and upgraded the ratings of its First Mortgage Bonds and Senior Secured Bonds to A3 from Baa1 and preferred stock to Baa3 from Ba1. A-/A-2 corporate credit ratings.favorably revisedFitch's revision of its outlookratings on the companyfollowing securities currently outstanding at WPD and its affiliates:· WPDH Limited IDR of BBB- and senior unsecured rating to BBB from BBB-; · WPD LLP IDR of BBB, senior unsecured rating to BBB+ from BBB and preferred stock rating to BBB from BBB-; and · WPD (South Wales) and WPD (South West) IDR of BBB+ and senior unsecured debt rating to A- from BBB+. Generating facilities $ 256 $ 216 $ 167 $ 200 $ 174 Transmission and distribution facilities 511 526 511 552 615 Environmental 374 573 346 114 82 Other 85 75 37 29 29 Total Construction Expenditures 1,226 1,390 1,061 895 900 Nuclear fuel 81 92 97 97 99 Total Capital Expenditures $ 1,307 $ 1,482 $ 1,158 $ 992 $ 999 (a) Construction expenditures include AFUDC and capitalized interest, which are expected to be $162 million for the 2006-2010 period. stablereflect changes in market and regulatory conditions. The above schedule has been revised from negative followingthat which was presented in PPL's 2005 Form 10-K to reflect the authorizationinstallation costs of a $194 million rate increase bycooling towers at the PUC. S&P indicated thatBrunner Island plant. See Note 11 to the outlook revision reflects its expectations that the rate increase, effective January 1, 2005, will allowFinancial Statements for material improvement in additional information.Electric's financial profile, which had lagged S&P's expectations in recent years. S&P indicated that the stable outlook reflects its expectations that PPL Electric "will rapidly improve and then maintain financial metrics more consistent with its ratings." S&P indicated that it expects PPL Electric's operationsplans to remain stable through the expiration of the PLR agreement.Additionally, in January 2005, S&P revised its outlooks on the WPD companies to stable from negative. S&P attributes this positive change to financial profile improvements resulting from the final regulatory outcome published by Ofgem in November 2004. At the same time, S&P affirmed the WPD companies' long-term and short-term credit ratings.Also in January 2005, Fitch announced that it downgraded the WPD companies' senior unsecured credit ratings by one notch as follows:WPDH Limited to BBB- from BBBWPD LLP to BBB from BBB+WPD (South West) and WPD (South Wales) to BBB+/F2 from A-/F1Fitch has a stable outlook onfund all of its capital expenditures in 2006 with cash on hand, cash from operations and, when necessary, the WPD companies.Fitch stated that its downgrade was prompted by the high levelissuance of pension-adjusted leverage at WPD. Fitch acknowledged that WPD's funding plan should reduce its pension deficit over time and it expects WPD to proceed with its de-leveraging program. However, Fitch indicated that it is not certain enough, due to the unpredictability in future pension valuations, that pension-adjusted leverage will support a BBB rating at WPDH Limited. Fitch indicated that WPD (South West) and WPD (South Wales) have been downgraded to maintain a two-notch differential with WPDH Limited because Fitch does not believe that WPD's financial ring-fencing is restrictive enough to support a three-notch differential.20042005 Form 10-K. that qualify for hedge accounting treatment mature at various times through 2010.2012. PPL segregates its non-trading activities as either hedge or economic. Transactions that are accounted for as hedge activity qualify for special hedge accounting treatment under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and interpreted. The non-trading economic category includes transactions that address a specific risk, but are not eligible for hedge accounting or hedge accounting is not elected. Included in the non-trading economic category are certain load-following energy obligations and related supply contracts, financial transmission rights, crude oil swaps to hedge rail transportation charges and hedges of synthetic fuel tax credits. The fair value of these non-trading economic contracts as of March 31, 2006, including net premiums on related options, was $73 million. The following chart sets forth PPL's net fair value of these contracts: Fair value of contracts outstanding at the beginning of the period $ (284 ) $ (11 ) Contracts realized or otherwise settled during the period 11 (7 ) Fair value of new contracts at inception Other changes in fair values 162 (88 ) Fair value of contracts outstanding at the end of the period $ (111 ) $ (106 ) that qualify for hedge accounting treatment at March 31, 2005,2006, based on whether the fair values are determined by quoted market prices or other more subjective means:
Gains (Losses)
Less Than
1 Year
1-3 Years
3-5 Years
in Excess
of 5 Years
Value Prices actively quoted $ 12 $ 4 $ 2 $ 18 Prices provided by other external sources (60 ) (147 ) (14 ) (221 ) Prices based on models and other valuation methods 51 41 92 Fair value of contracts outstanding at the end of the period $ 3 $ (102 ) $ (12 ) $ (111 ) New York Mercantile Exchange (NYMEX).NYMEX. The NYMEX has currently quoted prices through 2010.aan internally developed price curve was developed by PPL due toconstructed 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, thisThis category includes "strip"reflects the fair value of transactions whosecompleted in auction markets, where contract prices are obtainedrepresent the market value for load-following, bundled energy prices delivered at specific, illiquid delivery points. The transaction prices associated with the contracts did not equal the wholesale bilateral market prices at inception (Day 1). However, EITF 02-3, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities," does not generally permit Day 1 gains and losses to be recognized unless the fair value is derived principally from external sources and thenobservable market inputs. Therefore, PPL recorded a reserve for the modeled to monthly prices as appropriate.2005,2006, PPL estimated that a 10% adverse movement in market prices of both electricity and fuel across all geographic areas and time periods, excluding the effect of any commodity price correlations, would have decreased the value of the commodity contracts in its non-trading portfolio by approximately $202$263 million. For purposes of this calculation, an increase in the market price for electricity is considered an adverse movement because PPL's electricity portfolio is generally in a net sales position, and athe decrease in the market price for fuel is considered an adverse movement because PPL's commodity fuels portfolio is generally in a net purchase position. PPL enters into these commodity contracts to reduce the market risk inherent in the generation of electricity.not have a material impact ondecrease expected 20052006 gross margins.margins by $14 million. Similarly, a 10% adverse movement in all fossil fuel prices would decrease 20052006 gross margins by $14$31 million.Commodity Price Risk (Trading)2008.2009. The following chart sets forth PPL's net fair value of trading contracts:
March 31, Fair value of contracts outstanding at the beginning of the period $ 5 $ 10 Contracts realized or otherwise settled during the period (11 ) (4 ) Fair value of new contracts at inception 4 3 Other changes in fair values 14 7 Fair value of contracts outstanding at the end of the period $ 12 $ 16 approximately $1$4 million of the $16$12 million unrealized trading gains over the next three months of 20052006 as the transactions are realized.2005,2006, based on whether the fair values are determined by quoted market prices or other more subjective means:
Gains (Losses)
Less Than
1 Year
1-3 Years
3-5 Years
in Excess
of 5 Years
Value Prices actively quoted $ 12 $ 1 $ 13 Prices provided by other external sources (2 ) $ (1 ) (3 ) Prices based on models and other valuation methods (1 ) 3 2 Fair value of contracts outstanding at the end of the period $ 9 $ 2 $ 1 $ 12 2005,2006, PPL estimated that a 10% adverse movement in market prices across all geographic areas and time periods, excluding the effect of any commodity price correlations, would have decreased the value of the commodity contracts in its trading portfolio by $10$20 million.U.S. Treasurytreasury 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.2005,2006, PPL's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was estimated at $5$7 million.2005,2006, 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 approximately $212$189 million.intoin equity and then reclassified into earnings in the same period during which the item being hedged affects earnings. At March 31, 2005,2006, the market value of these instruments, representing the amount PPL would payreceive upon their termination, was approximately $1$39 million. At March 31, 2005,2006, PPL estimated that its potential exposure to a change in the fair value of these instruments, through a 10% adverse movement in the hedged exposure, was insignificant.2005,2006, 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 $18$12 million.America and Europe.America. In addition, PPL may make purchases of equipment in currencies other than U.S. dollars.£32£88 million. These forwards and options terminate in November 2006. At March 31, 2005,2006, the market value of these positions, representing the amount PPL would receive upon their termination, was approximately $1$2 million.To protect expected income PPL estimated that its potential additional exposure to a change in Chilean pesos, PPL entered into average rate options for 4 billion Chilean pesos. At March 31, 2005, the market value of these positions, representing the amount PPL would receive upon their termination,instruments, through a 10% adverse movement in foreign exchange rates, was insignificant.PPL executed net forward sale transactions for £10$4 million to hedge a portion of its net investment in WPDH Limited. The estimated value of these agreements as ofat March 31, 2005, was $1 million, being the amount PPL would pay to terminate the transactions.heldholds a net position in cross-currency swaps totaling $1.1 billion to hedge the interest payments and value of its U.S. dollar-denominated bonds.bonds with maturity dates ranging from December 2006 to December 2028. The estimated value of this position at March 31, 2005,2006, being the amount PPL would pay to terminate it, including accrued interest, was $255$178 million.FundTrust Funds - Securities Price Risk2005,2006, 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 in the trusts 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, 2005,2006, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $30$35 million reduction in the fair value of the trust assets. See the "Nuclear"Asset Retirement Obligations and Nuclear Decommissioning" Note in the 20042005 Form 10-K for more information regarding the nuclear decommissioning trust funds.1012 to the Financial Statements.other arrangementsdevelopment projects, which may or may not result in definitive agreements.Management is in the process of reviewing strategic alternatives for certain of its gas-fired generation assets. Any such transactions may impact future financial results. See Note 8 to the Financial Statements for information regarding recent development and divestiture activities.255270 MW at several existing domestic generating facilities.911 to the Financial Statements for a discussion of environmental matters.1618 to the Financial Statements for information ona discussion of new accounting standards recently adopted or pending adoption.contingenciesaccruals and asset retirement obligations.20042005 Form 10-K 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.20042005 Form 10-K, a descriptiondescriptions of PPL Energy Supply'sits domestic and international businesses isare found in "Item 1. Business - Background" and a listing of its principal subsidiaries is shown in Exhibit 99.99(a). 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. PPL Energy Supply's reportable segments are Supply and International Delivery. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" - Overview" in PPL Energy Supply's 20042005 Form 10-K for an overview of PPL Energy Supply's strategy and the risks and the challenges that it faces in its business.PPL Energy Supply's reportable segments are Supply and International Delivery. See "Forward-Looking Information," Note 311 to the Financial Statements and the rest of this Item 2 in this Form 10-Q and "Item 1A. Risk Factors" and the rest of Item 7 in PPL Energy Supply's 2005 Form 10-K for further segment information.earningsearnings. "Results of Operations" continues with a summary of results by reportable segment and a description of key factors by segment that management expects may impact future earnings. "Results of Operations" continues with a summary of results by reportable segment andThis section ends with explanations of significant changes in principal items on PPL Energy Supply's Statement of Income, comparing the three months ended March 31, 2005,2006, to the comparable period in 2004.WPD's results, as consolidated in PPL Energy Supply's Statement of Income, are impacted by changes in foreign currency exchange rates. For2005.2005, as2006, compared with $155 million for the same period in 2004,three months ended March 31, 2005.foreign exchange rates increased WPD's portionnet income from period to period were, in part, attributable to several significant items that management considers unusual. Details of revenuethese unusual items are provided within the review of each segment's earnings.expensesignificant income statement line items, by about 5%.EarningsNet income was $155 million for the three months ended March 31, 2005, and $146 million for the same period in 2004. The after-tax change in net income was due to:
March 31, 2005 vs. March 31, 2004 The period-to-period changes in earnings components, including domestic gross energy margins by region and income statement line items, are discussed following the future earnings factors and segment results.PPL Energy Supply's future earnings could be, or will be, impacted by a number of key factors, including the following:Supply Segment:PPL Energy Supply's future energy margins and, consequently, its future earnings, will be impacted by changes in market prices for electricity, as well as fluctuations in fuel prices, fuel transportation costs and emission allowance expenses. For instance, although PPL Energy Supply expects market prices for electricity in 2005 to be higher than in 2004, PPL Energy Supply is not expecting an increase in its 2005 energy margins due to expected increases in the cost of fuel, fuel transportation and emissions allowances. See Note 9 to the Financial Statements for a discussion of the status of PPL Energy Supply's sulfur dioxide emission allowances.A key part of PPL Energy Supply's overall strategy is to enter into long-term and intermediate-term energy supply agreements in order to mitigate market price and supply risk. PPL Energy Supply's ability to continue to enter into such agreements, and to renew existing energy supply agreements, may affect its future earnings. See Note 9 to the Financial Statements for more information regarding PPL Energy Supply's wholesale energy commitments and Note 10 for more information regarding the PLR contracts.PPL Electric has agreed to provide electricity supply to its PLR customers at predetermined rates through 2009 and has entered into PUC-approved, full requirements energy supply agreements with PPL EnergyPlus to fulfill its PLR obligation. The predetermined charges for generation supply which PPL Electric collects from its PLR customers and pays to PPL EnergyPlus under the energy supply agreements provide for annual increases in each year commencing in 2006 and continuing through 2009. PPL Electric's PLR obligation after 2009 will be determined by the PUC pursuant to rules that have not yet been promulgated. See Note 10 to the Financial Statements for more information regarding the PLR contracts.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 certain 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 earnings impact of this issue, based upon future energy price and fuel 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 Arizona Public Service Company. Each party has waived the remaining contractual conditions for approval of the transaction by the Arizona Corporation Commission. The sale still requires approvals of the FERC under the Federal Power Act. PPL Energy Supply cannot predict whether or when these approvals will be obtained. PPL Energy Supply estimates that a loss on sale or an impairment charge of about $47 million, after tax, could be recorded in 2005 depending on the timing and likelihood of obtaining the FERC approvals.PPL Energy Supply's ability to manage operational risk with respect to its generation plants is critical to its financial performance. Specifically, depending on the timing and duration of both planned and unplanned outages (in particular, if such outages are during peak periods or periods of severe weather), PPL Energy Supply's revenue from energy sales could be adversely affected and its need to purchase power to satisfy its energy commitments could be significantly increased. PPL Energy Supply has been successful in the past several years in increasing fleet-wide equivalent availability (i.e., the percentage of time in a year that a generating unit is capable of producing power) from the low 80% range to over 90%. However, since many of its generating units are reaching mid-life, PPL Energy Supply is faced with the potential for outages of longer duration to accommodate significant investments in major component replacements.PPL Energy Supply has interests in two synthetic fuel facilities and receives tax credits pursuant to Section 29 of the Internal Revenue Code based on its sale of synthetic fuel to unaffiliated third-party purchasers. PPL Energy Supply has estimated that these facilities will contribute approximately $40 million per year to earnings through 2007, when the availability of such tax credits is scheduled to expire. See Note 9 to the Financial Statements for a discussion of the requirements to receive the Section 29 tax credits, the IRS review of synthetic fuel production procedures and the impact of higher oil prices on the Section 29 tax credits.To comply with existing and future environmental requirements and as a result of voluntary pollution control measures it may take, PPL Energy Supply expects to spend significant amounts on environmental control and compliance in the future. The costs of such measures, in most cases, are not now determinable with certainty. For instance, PPL Energy Supply's current cost estimates for sulfur dioxide reduction at its generating plants are preliminary and PPL Energy Supply could incur significantly higher capital and operating expenses due to more stringent environmental requirements, changing market conditions with respect to the cost of pollution control equipment or emissions allowances, delays in the installation of pollution control equipment or other factors. See Note 9 to the Financial Statements for more information regarding current environmental requirements and initiatives, including those relating to air emissions, and PPL Energy Supply's anticipated capital expenditure program to meet the sulfur dioxide reduction requirements of the Clean Air Act.International Delivery Segment:Earnings in 2005 and beyond are expected to continue to be adversely affected by increased pension costs. Specifically, WPD will experience increased pension costs due to a recent actuarial valuation of WPD's plans that reflects higher pension obligations. The increase in pension costs in 2005 is forecasted to be approximately $24 million, after tax, and the increase in pension costs is expected to continue to be significant in 2006. An additional $4 million of expense, after tax, was recognized in the first quarter related to termination benefits.All Segments: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 2004, future impairments may occur due to determinations of carrying value exceeding the fair value of these investments.From time to time, PPL Energy Supply and its subsidiaries are involved in negotiations with third parties regarding acquisitions and dispositions of businesses and assets. Any such transactions may impact future earnings.See Note 9 to the Financial Statements for potential commitments and contingent liabilities that may impact future earnings.See Note 16 to the Financial Statements for new accounting standards that have been issued but not yet adopted by PPL Energy Supply that may impact future earnings.was as follows:
Ended March 31, Supply $ 149 $ 93 International Delivery 81 62 Total $ 230 $ 155 The Supply segment owns and operates power plants to generate electricity, markets this electricity and other power purchases to deregulated wholesale and retail markets and acquires and develops domestic generation projects. activitiesdomestic energy marketing, domestic generation and domestic development operations of PPL Generation and PPL EnergyPlus.SegmentEnergy Supply.was as follows:
Ended March 31, Energy revenues $ 818 $ 724 Energy-related businesses 150 116 Total operating revenues 968 840 Fuel and energy purchases 379 343 Other operation and maintenance 178 200 Depreciation 34 33 Taxes, other than income 9 10 Energy-related businesses 147 132 Total operating expenses 747 718 Other Income - net 10 5 Interest Expense 16 22 Income Taxes 66 10 Loss from Discontinued Operations 2 Total $ 149 $ 93 factors:
March 31, 2005 vs. March 31, 2004 Eastern U.S. non-trading margins $ 26 Northwestern U.S. non-trading margins 14 Southwestern U.S. non-trading margins 1 Net energy trading margins (3 ) Operation and maintenance expenses (6 ) Earnings from synfuel projects 3 Other 2 Unusual items 19 $ 56 Reduction in Enron reserve (Note 2) $ 9 1 Settlement of NorthWestern litigation $ (6 ) Acceleration of stock-based compensation expense for periods prior to 2005 (Note 9) (3 ) Total $ 10 $ (9 ) · See "Domestic Gross Energy Margins" for an explanation of non-trading margins by geographic region and for an explanation of net energy trading margins. · Higher operation and maintenance expenses were primarily due to nuclear refueling outage and inspection costs at the Susquehanna station and outages at the Brunner Island and Martins Creek plants in 2006. The costs of these outages exceeded the costs of the 2005 planned outage at Montour and a short-duration outage at the Susquehanna station. · The improved earnings contribution from synfuel projects resulted from an unrealized gain on options purchased to hedge a portion of the risk associated with the phase-out of the synthetic fuel tax credits for 2006 and 2007, partially offset by the lower recognition of synthetic fuel tax credits due to the anticipated phase-out of synthetic fuel tax credits starting in 2006. · In the first quarter of 2006, PPL Energy Supply lowered its reserve on claims related to the Enron bankruptcy. This adjustment increased earnings by $9 million after-tax. See Note 2 to Financial Statements for additional information. · In the first quarter of 2005, PPL Energy Supply recognized a charge of $6 million after tax for a loss contingency related to the litigation with NorthWestern. In September 2005, PPL Energy Supply and NorthWestern reached a final agreement to settle this litigation. Margins"Supply is projecting higher energy margins for its Supply segment in 2006 compared with 2005. This increase is primarily driven by an explanation of non-trading margins8.4% increase in PLR sale prices. Higher generation output and higher-priced wholesale energy contracts that replace expiring contracts also are expected to improve energy margins. These benefits are expected to be partially offset by geographic regionincreased fuel and for an explanation on net energy trading margins.Higherfuel transportation expenses, higher operation and maintenance expenses were primarily due to accelerated amortization of stock-based compensation for retirement-eligible employees, which resultedand reduced earnings from additional accounting guidance. synfuel projects.211 to the Financial Statements for additional information.The improveda discussion of the tax credits that PPL Energy Supply has earned in connection with its synfuel projects and the impact of higher oil prices on future tax credits. In early April 2006, PPL Energy Supply suspended operations at one of its two synfuel projects based upon increased oil prices and the potential phase-out of these tax credits under existing tax rules. For these same reasons, PPL Energy Supply currently expects to suspend operations at its other synfuel project in mid-2006.resultedas discussed above and assuming the continued suspension for the remainder of 2006, PPL Energy Supply's earnings from the Tyrone facilitycombination of synfuel projects and synthetic fuel-related hedges would be $19 million in 2006.began commercial operation duringif these third parties had discontinued their synthetic fuel operations and sales to PPL Energy Supply at the third quarterend of 2004.Higher interest expense was incurred in the first quarter of 2005April 2006 due to the issuanceimpact of projected oil prices, the company would incur additional debt, interestfuel costs of $16 million ($9 million after tax) for the remainder of 2006.Lower Mt. BethelPPL Energy Supply's two synfuel projects was $12 million at March 31, 2006. As of March 31, 2006, the estimated phase-out of synthetic fuel tax credits, based on forward oil prices as of that is no longerdate, did not result in these assets being capitalized since commercial operation commenced in May 2004 and interest on loans from affiliated companies.Theimpaired. However, these estimates can change in net income was also attributable to an accrual of approximately $6 million after tax for the loss contingency relatedsignificantly due to the NorthWestern litigation. See Note 9volatility in oil prices as well as the potential impact of pending legislation, which could result in an impairment of the synfuel project assets that would otherwise be depreciated or amortized in 2006 and 2007. PPL Energy Supply will continue to assess the Financial Statements for additional information on the accrual.owns and operatesincludes operations of the international energy businesses of PPL Global that are primarily focused on the distribution of electricity. The segment primarily consists of the operations of the regulated international energy businesses of PPL Global. The majoritySubstantially all of PPL Global's international businesses are located in the U.K., Chile, El Salvador and Bolivia.Segmentwas as follows:
Ended March 31, Utility revenues $ 323 $ 293 Energy-related businesses 21 18 Total operating revenues 344 311 Energy purchases 81 63 Other operation and maintenance 67 61 Depreciation 41 38 Taxes, other than income 12 14 Energy-related businesses 9 6 Total operating expenses 210 182 Other Income - net 3 Interest Expense 48 50 Income Taxes 3 18 Minority Interest 2 2 Total $ 81 $ 62 factors:
March 31, 2005 vs. March 31, 2004 The U.K.'s earnings were negativelyfactors. U.K.: Delivery margins $ 17 Operation and maintenance expenses (7 ) Income taxes 21 Impact of changes in foreign currency exchange rates (7 ) Impairment of investment in U.K. real estate (Note 8) (6 ) Other 4 Latin America 5 U.S. income taxes (6 ) Other (3 ) Unusual item - collection of receivable from Enron 1 $ 19 · The U.K.'s earnings were positively impacted by higher delivery margins, primarily due to price increases and 2.9% higher sales volumes. · Lower U.K. income taxes were due to the transfer of WPD tax items. See Note 5 to the Financial Statements for additional information. · Changes in foreign exchange rates decreased WPD's portion of revenue and expense line items by 8% in the three months ended March 31, 2006, compared with the same period in 2005. due to increasedresulting from higher pension costs and termination benefit expenses.on dividends from WPD decreased primarily due to greater utilizationand a potential unfavorable change in foreign currency exchange rates in 2006.foreign tax credits.Lower interest expense was due to lower affiliate debt.margins:
March 31, 2005 vs. March 31, 2004 �� Wholesale energy marketing $ 69 Wholesale energy marketing to affiliate 31 Net energy trading margins (6 ) Other revenue adjustments (a) 9 Total revenues 103 Fuel (24 ) Energy purchases 77 Energy purchases from affiliate 1 Other cost adjustments (a) (16 ) Total cost of sales 38 Domestic gross energy margins $ 65 margins,margins; in particular, revenues and energy costs related to the international operations of PPL Global. Also adjusted to include the margins of the Sundance plant, which were included in "Loss from Discontinued Operations," prior to its sale in May 2005, and gains or losses on sales of emission allowances, which are included in "Other operation and maintenance" expenses, on the Statement of Income.
March 31, 2005 vs. March 31, 2004 Non-trading Eastern U.S. $ 45 Northwestern U.S. 24 Southwestern U.S. 2 Net energy trading (6 ) Domestic gross energy margins $ 65 a greater portion of PPL Energy Supply's supply came from its own generation, instead of purchased power. This wasan 8.4% increase in PLR sale prices in accordance with the schedule established by the PUC Final Order. Also contributing to the increase in margins were higher sales prices and lower reliance on higher-cost oil and gas units in 2006. Partially offsetting these improvements were higher wholesale energy purchase prices and higher coal prices, which were up 49% and 18%, respectively.the timing of plant outages as well as the operation of the Lower Mt. Bethel plant, which began commercial operation in May 2004. The increase was achieved despite higher supply costs, which were driven by increased fossil fuelcommodity price movements on forward energy purchase and power purchase prices. Power purchase prices increased by 4% primarily duesale contracts used to higher market prices for fossil fuel; however, this increase was more than offset by a 10% increase in the average sales price forhedge wholesale transactions. Fuel costs increased 23% due to a 6% increase in generation across a diverse mix of low-cost coal-fired, nuclear and hydroelectric plants and a 17% increase in the average consumed cost of fossil fuels. In addition, PPL Energy Supply also benefited from favorable transmission congestion positions, and gains on sales of emission allowances.lowerhigher in the first quarter of 2006 compared with the same period in 2005, primarily due to an 8% reductionhigher average sales prices, which were up 18%. Also contributing was a 35% increase in coal and hydroelectric generation output. GenerationPartially offsetting these improvements was adversely affected by outagesa 22% increase in average coal prices and reduced river flows. Additionally, thea 4% increase in average consumed cost of coal increased by 10% primarily due to an unfavorable arbitration ruling effective April 2004. The $10increase wasin the first quarter of 2006 compared with the same period in 2005, primarily due to an increase in realized gainslosses on electricity positions as well as an increase in wholesale physical gas trading. and oil financial instruments.2005,2006, were 2,085 GWh and 4.3 Bcf, compared with 1,066 GWh and 4.5 Bcf in the same period last year. The amount of energy trading margins from unrealized transactions was a $4 million gain in the first quarter of 2006 compared with 994 GWh and 2.4 Bcf forto a $5 million gain in the three months ended March 31, 2004.to the following:
March 31, 2005 vs. March 31, 2004 Retail electric delivery (PPL Global) U.K. $ 25 Chile 9 El Salvador 3 Bolivia 2 Foreign currency exchange rates (9 ) $ 30 was primarily due to:higher revenues in Chile, primarily due to a 7.3% increase in sales volumes, primarily attributable to regulated customers;higher WPD revenues, primarily due to the change inexcluding foreign currency exchange rates partially offset by a reduction in certain charges which had been a pass-through to customer rates; andhigher revenues in El Salvador,impacts, was primarily due to a 5.3% increase in sales volumes of all customer types.Energy Relatedto:· higher U.K. revenues primarily due to a 2.9% increase in sales volumes and increases in prices; · a 7% increase in sales volumes and higher average prices overall in Chile; and · an 8% increase in sales volumes and higher average prices overall in El Salvador. Energy related$11$19 million more to operating income for the three months ended March 31, 2005,2006, compared with the same period in 2004.2005. The increase was primarily attributable to:$15$20 million higher pre-tax loss in 2004, relatedcontribution from synfuel projects. This reflects a $23 million net unrealized gain on options purchased to hedge a portion of the salerisk associated with the phase-out of CGE (seethe synthetic fuel tax credits for 2006 and 2007, offset by $3 million of additional operating expenses due to higher production levels.811 to the Financial Statements); anda $2 million increase from mechanical contracting and engineering subsidiaries due to a favorable closeout on a major project; partially offset bya $6 million higher pre-tax operating loss from synfuel projects due to increased production levels which improve after-tax earnings.increasedecrease in other operation and maintenance expenses was due to:
March 31, 2005 vs. March 31, 2004 Reduction in Enron reserve (Note 2) $ (15 ) NorthWestern litigation accrual in March 2005 (9 ) Higher gains on sales of emission allowances (6 ) Martins Creek ash basin remediation adjustment (Note 11) (3 ) Susquehanna plant refueling and inspection costs 5 Outage costs at Martins Creek and Brunner Island plants 4 Increase in international operation and maintenance expenses 3 Increase in domestic and international pension and postretirement costs 2 Other 3 $ (16 ) $13 million increase in net pension costsdepreciation expense was due to: Additions to PP&E $ 5 Reduction of useful lives of certain assets 2 Foreign currency exchange rates (2 ) Extension of useful lives of certain generation assets (1 ) $ 4 attributablerelated to WPD's successful appeal of certain property taxes and the subsequent receipt of a reduction$2 million rebate in the discount rate assumptions for PPL Energy Supply's domestic pension plans at December 31, 2004, and increased amortization of prior year actuarial losses for WPD's pension plans. These events will result in PPL Energy Supply's recognition of increased2006. pension costs in 2005. the costs of PPL Energy Supply's pension plans.Depreciation Increase in long-term debt interest expense $ 4 Decrease in interest expense with affiliates (4 ) Decrease in foreign currency exchange rates (3 ) Decrease in short-term debt interest expense (2 ) Increase in capitalized interest (2 ) Other (1 ) $ (8 ) depreciation expenseincome taxes was due to:
March 31, 2005 vs. March 31, 2004 Other Income - net Higher pre-tax book income $ 46 Reduction in tax benefits related to nonconventional fuel tax credits 8 Increase in tax expense on foreign earnings 8 Transfer of WPD tax items in 2006 (Note 5) (20 ) Other (1 ) $ 41 115 to the Financial Statements for details of other income.Interest ExpenseThe increase in interest expense was due to:
March 31, 2005 vs. March 31, 2004 (a)Prior to commercial operation, interest related to the Lower Mt. Bethel financing was capitalized as part of the cost of the facility.(b)In June 2004, subsidiaries of PPL Energy Supply purchased the Sundance and University Park generation facilities from the lessor that was consolidated by PPL Energy Supply under FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." In connection with the purchase, the related financing was repaid.Income TaxesThe $26 million decrease in income taxes was primarily attributable to:a $10 million tax benefit recognized in 2005 related to additional nonconventional fuel tax credits in excess of credits recognized in 2004;a $7 million decrease in tax expense on foreign earnings in 2005 relative to 2004; andan $8 million decrease ineffective income tax expense due to lower pre-tax book income.lossoperating losses of $1$2 million, after tax, recorded in the first quarter of 2004 related2005 prior to PPL Global's plan ofthe May 2005 sale of its investment in a Latin American telecommunications company.$494$260 million of cash, cash equivalents and short-term investments and $164$180 million of short-term debt. At December 31, 2004, PPL Energy Supply had $408debt (including a note payable to an affiliate). The $128 million in cash and short-term investments and no short-term debt. The increasedecrease in PPL Energy Supply's cash, cash equivalents and short-term investmentinvestments position was primarily the net result of:$299· a net decrease in short-term debt of $137 million (excluding a $1 million impact of currency translation adjustments); · distributions to Member of $58 million; and · $147 million of capital expenditures; offset by · $225 million of cash provided by operating activities. cash providedletters of credit, to March 2007. PPL Energy Supply is currently pursuing extending the maturity of its syndicated credit facilities aggregating $1.4 billion that expire in June 2010 and the maturity of its $500 million syndicated credit facility that expires in December 2010 by operating activities;one year. PPL Energy Supply expects the extensions to be effective in June 2006.$165 million increase in short-term debt; offset bydistributionscombined omnibus registration statement registering various debt and equity securities. PPL Energy Supply currently plans to Member of $58 million;the retirement of $208issue $300 million of long-term debt;debt in the second quarter of 2006, subject to market conditions. PPL Energy Supply expects to use the proceeds of the offering to fund capital expenditures, primarily for pollution control equipment, and$123 million of capital expenditures. Moody's and Fitch periodically review the credit ratings on the debt and preferred securities of PPL Energy Supply and its subsidiaries. Based on their respective independent reviews, the rating agencies may make certain ratings revisions. 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 thethese agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to theirthe securities.January 2005, S&P revisedMarch 2006, Moody's reviewed the credit ratings of PPL Energy Supply and concluded that its outlooksratings remain unchanged.companiesand its affiliates:· WPDH Limited IDR of BBB- and senior unsecured rating to BBB from BBB-; · WPD LLP IDR of BBB, senior unsecured rating to BBB+ from BBB and preferred stock rating to BBB from BBB-; and · WPD (South Wales) and WPD (South West) IDR of BBB+ and senior unsecured debt rating to A- from BBB+. Generating facilities $ 256 $ 216 $ 167 $ 200 $ 174 Transmission and distribution facilities 288 285 290 298 310 Environmental 374 573 346 114 82 Other 37 37 1 Total Construction Expenditures 955 1,111 804 612 566 Nuclear fuel 81 92 97 97 99 Total Capital Expenditures $ 1,036 $ 1,203 $ 901 $ 709 $ 665 (a) Construction expenditures include AFUDC and capitalized interest, which are expected to be $147 million for the 2006-2010 period. stablereflect changes in market and regulatory conditions. The above schedule has been revised from negative. S&P attributes this positive changethat which was presented in PPL Energy Supply's 2005 Form 10-K to financial profile improvements resulting fromreflect the final regulatory outcome published by Ofgem in November 2004. Atinstallation costs of cooling towers at the same time, S&P affirmedBrunner Island plant. See Note 11 to the WPD companies' long-term and short-term credit ratings.Also in January 2005, Fitch announced that it downgraded the WPD companies' senior unsecured credit ratings by one notch as follows:WPDH LimitedFinancial Statements for additional information.BBB- from BBBWPD LLP to BBB from BBB+WPD (South West) and WPD (South Wales) to BBB+/F2 from A-/F1Fitch has a stable outlook onfund all of its capital expenditures in 2006 with cash on hand, cash from operations and, when necessary, the WPD companies.Fitch stated that its downgrade was prompted by the high levelissuance of pension-adjusted leverage at WPD. Fitch acknowledged that WPD's funding plan should reduce its pension deficit over time and it expects WPD to proceed with its de-leveraging program. However, Fitch indicated that it is not certain enough, due to the unpredictability in future pension valuations, that pension-adjusted leverage will support a BBB rating at WPDH Limited. Fitch indicated that WPD (South West) and WPD (South Wales) have been downgraded to maintain a two-notch differential with WPDH Limited because Fitch does not believe that WPD's financial ring-fencing is restrictive enough to support a three-notch differential.20042005 Form 10-K. that qualify for hedge accounting treatment mature at various times through 2010.2012. PPL segregates its non-trading activities as either hedge or economic. Transactions that are accounted for as hedge activity qualify for special hedge accounting treatment under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and interpreted. The non-trading economic category includes transactions that address a specific risk, but are not eligible for hedge accounting or hedge accounting is not elected. Included in the non-trading economic category are certain load-following energy obligations and related supply contracts, financial transmission rights, crude oil swaps to hedge rail transportation charges and hedges of synthetic fuel tax credits. The fair value of these non-trading economic contracts as of March 31, 2006, including net premiums on related options, was $73 million. The following chart sets forth PPL Energy Supply's net fair value of these contracts:
March 31, Fair value of contracts outstanding at the beginning of the period $ (278 ) $ (9 ) Contracts realized or otherwise settled during the period 9 (9 ) Fair value of new contracts at inception Other changes in fair values 173 (88 ) Fair value of contracts outstanding at the end of the period $ (96 ) $ (106 ) that qualify for hedge accounting treatment at March 31, 2005,2006, based on whether the fair values are determined by quoted market prices or other more subjective means:
Gains (Losses)
Less Than
1 Year
1-3 Years
3-5 Years
in Excess
of 5 Years
Value Prices actively quoted $ 12 $ 4 $ 2 $ 18 Prices provided by other external sources (49 ) (143 ) (14 ) (206 ) Prices based on models and other valuation methods 51 41 92 Fair value of contracts outstanding at the end of the period $ 14 $ (98 ) $ (12 ) $ (96 ) New York Mercantile Exchange (NYMEX).NYMEX. The NYMEX has currently quoted prices through 2010.aan internally developed price curve was developed by PPL Energy Supply due toconstructed 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, thisThis category includes "strip"reflects the fair value of transactions whosecompleted in auction markets, where contract prices are obtainedrepresent the market value for load-following, bundled energy prices delivered at specific, illiquid delivery points. The transaction prices associated with the contracts did not equal the wholesale bilateral market prices at inception (Day 1). However, EITF 02-3, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities," does not generally permit Day 1 gains and losses to be recognized unless the fair value is derived principally from external sources and thenobservable market inputs. Therefore, PPL Energy Supply recorded a reserve for the modeled to monthly prices as appropriate.2005,2006, PPL Energy Supply estimated that a 10% adverse movement in market prices of both electricity and fuel across all geographic areas and time periods, excluding the effect of any commodity price correlations, would have decreased the value of the commodity contracts in its non-trading portfolio by approximately $202$263 million. For purposes of this calculation, an increase in the market price for electricity is considered an adverse movement because PPL Energy Supply's electricity portfolio is generally in a net sales position, and athe decrease in the market price for fuel is considered an adverse movement because PPL Energy Supply's commodity fuels portfolio is generally in a net purchase position. PPL Energy Supply enters into these commodity contracts to reduce the market risk inherent in the generation of electricity.not have a material impact ondecrease expected 20052006 gross margins.margins by $14 million. Similarly, a 10% adverse movement in all fossil fuel prices would decrease 20052006 gross margins by $14$31 million.Commodity Price Risk (Trading)2008.2009. The following chart sets forth PPL Energy Supply's net fair value of trading contracts:
March 31, Fair value of contracts outstanding at the beginning of the period $ 5 $ 9 Contracts realized or otherwise settled during the period (11 ) (3 ) Fair value of new contracts at inception 4 3 Other changes in fair values 14 7 Fair value of contracts outstanding at the end of the period $ 12 $ 16 approximately $1$4 million of the $16$12 million unrealized trading gains over the next three months of 20052006 as the transactions are realized.2005,2006, based on whether the fair values are determined by quoted market prices or other more subjective means:
Gains (Losses)
Less Than
1 year
1-3 years
3-5 years
in Excess
of 5 Years
Value Prices actively quoted $ 12 $ 1 $ 13 Prices provided by other external sources (2 ) $ (1 ) (3 ) Prices based on models and other valuation methods (1 ) 3 2 Fair value of contracts outstanding at the end of the period $ 9 $ 2 $ 1 $ 12 2005,2006, PPL Energy Supply estimated that a 10% adverse movement in market prices across all geographic areas and time periods, excluding the effect of any commodity price correlations, would have decreased the value of the commodity contracts in its trading portfolio by $10$20 million.managesand PPL Energy Supply manage interest rate risk for PPL Energy Supply by using various financial derivative products to adjust the mix of fixed and floating interest rates in itsPPL Energy Supply's debt portfolio, adjust the duration of its debt portfolio and lock in U.S. Treasurytreasury 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.2005,2006, PPL Energy Supply's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was estimated at $1$2 million.2005,2006, 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 approximately $157$140 million.utilizesand PPL Energy Supply utilize various risk management instruments to reduce itsPPL Energy Supply's exposure to the expected future cash flow variability of its debt instruments. These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing. While PPL Energy Supply is exposed to changes in the fair value of these instruments, any changes in the fair value of these instruments are recorded intoin equity and then reclassified into earnings in the same period during which the item being hedged affects earnings. At March 31, 2005,2006, the market value of these instruments, representing the amount PPL Energy Supply would payreceive upon their termination, was approximately $1$23 million. At March 31, 2005,2006, PPL Energy Supply estimated that its potential exposure to a change in the fair value of these instruments, through a 10% adverse movement in the hedged exposure, was insignificant.2005,2006, 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 approximately $1$2 million.America and Europe.America. In addition, PPL Energy Supply may make purchases of equipment in currencies other than U.S. dollars.hasand PPL Energy Supply have 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 and PPL Energy Supply enter into financial instruments to protect against foreign currency translation risk.£32£88 million. In connection with these transactions, PPL Energy Supply entered into average rate forwards and average rate options with PPL that have terms identical to those executed by PPL. These forwards and options terminate in November 2006. At March 31, 2005,2006, the market value of these positions, representing the amount PPL Energy Supply would receive upon their termination, was approximately $1$2 million.To protect expected income in Chilean pesos, PPL Energy Supply entered into average rate options for 4 billion Chilean pesos. At March 31, 2005,estimated that its potential additional exposure to a change in the market value of these positions, representing the amount PPL would receive upon their termination,instruments, through a 10% adverse movement in foreign exchange rates, was insignificant.PPL executed net forward sale transactions for £10$4 million to hedge a portion of its net investment in WPDH Limited. The estimated value of these agreements as ofat March 31, 2005, was $1 million, being the amount PPL would pay to terminate the transactions.heldholds a net position in cross-currency swaps totaling $1.1 billion to hedge the interest payments and value of its U.S. dollar-denominated bonds.bonds with maturity dates ranging from December 2006 to December 2028. The estimated value of this position at March 31, 2005,2006, being the amount PPL and PPL Energy Supply would pay to terminate it, including accrued interest, was $255$178 million.FundTrust Funds - Securities Price Risk2005,2006, 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 in the trusts 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, 2005,2006, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $30$35 million reduction in the fair value of the trust assets. See the "Nuclear"Asset Retirement Obligations and Nuclear Decommissioning" Note in the 20042005 Form 10-K for more information regarding the nuclear decommissioning trust funds.1012 to the Financial Statements.other arrangementsdevelopment projects which may or may not result in definitive agreements.Management is in the process of reviewing strategic alternatives for certain of its gas-fired generation assets. Any such transactions may impact future financial results. See Note 8 to the Financial Statements for information regarding recent development and divestiture activities.255270 MW at several existing domestic generating facilities.911 to the Financial Statements for a discussion of environmental matters.1618 to the Financial Statements for information ona discussion of new accounting standards recently adopted or pending adoption.contingenciesaccruals and asset retirement obligations.20042005 Form 10-K 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.20042005 Form 10-K, a description of its business is found in "Item 1. Business - Background" and an overview of its strategy and the risks and the challenges that it faces in its business are discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.Operations - Overview."thePPL Electric's Statement of Income, compares the three months ended March 31, 2005,2006, with the comparable period in 2004.$15$51 million for the three months ended March 31, 2005, and $332006, compared with $15 million for the same period in 2004. 2005.changechanges in income available to PPL waswere due to:
March 31, 2005 vs. March 31, 2004
(Note 9) Delivery revenues (net of CTC/ITC amortization, interest expense on transition bonds and ancillary charges) $ (1 ) Operation and maintenance expenses 7 Other 1 Unusual items 29 $ 36 PJM billing dispute (Note 11) $ (27 ) (2 ) Total $ (29 ) discussed followingexplained in the future earnings factors.futureperiod-to-period earnings could be, or will be, impactedwere affected by a number of factors, including the following:In December 2004, the PUC approvedincluding:· PPL Electric recognized an after-tax charge of $27 million in the first quarter of 2005 for a loss contingency related to the PJM billing dispute. See Note 11 to the Financial Statements for an update on this matter. PPL Electric cannot be certain of the outcome of this matter or the impact on PPL Electric. · Lower operation and maintenance expenses in the first quarter of 2006 were primarily due to the costs incurred in January 2005, when severe ice storms hit PPL Electric's service territory. The total cost of restoring service to 238,000 customers, excluding capitalized costs and regular payroll expenses, was $16 million. In August 2005, the PUC issued an order granting PPL Electric's petition for authority to defer and amortize for regulatory accounting and reporting purposes these storm costs subject to certain conditions. As a result of the PUC Order and in accordance with SFAS 71, "Accounting for the Effects of Certain Types of Regulation," in the third quarter of 2005, PPL Electric deferred $12 million of its previously expensed storm costs. The deferral was based on its assessment of the timing and likelihood of recovering the deferred costs in PPL Electric's next distribution base rate case. At this time, PPL Electric cannot be certain that it will recover the storm costs, nor can it predict whether future incidents of severe weather will cause significant facility damage and service disruptions that would also result in significant costs. PPL Electric's distribution rates of approximately $137 million (based on a return on equity of 10.7%), and approved PPL Electric's proposed mechanism for collecting an additional $57 million in transmission-related charges, for a total increase of approximately $194 million, effective January 1, 2005.PPL Electric has agreed to provide electricity supply to its PLR customers at predetermined rates through 2009 and has entered into PUC-approved, full requirements energy supply agreements with PPL EnergyPlus to fulfill its PLR obligation. The predetermined charges for generation supply which PPL Electric collects from its PLR customers and pays to PPL EnergyPlus under the energy supply agreements provide for annual increases in each year commencing in 2006 and continuing through 2009. PPL Electric's PLR obligation after 2009 will be determined by the PUC pursuant to rules that have not yet been promulgated. See Note 10 to the Financial Statements for more information regarding the PLR contracts.In January 2005, severe ice storms hit PPL Electric's service territory. PPL Electric had to restore service to about 238,000 customers. Although the actual cost of these storms and the specific allocation of such cost between operation and maintenance expense and capital costs is not yet finalized, PPL Electric currently estimates a total costexpenses.$22 million, with approximately $19 million being recorded as an expense on PPL Electric's income statement for the first quarter of 2005.On February 11, 2005, PPL Electric filed a petition with the PUC for authority to defer and amortize for regulatory accounting and reporting purposes its actual cost of these storms, excluding capitalized costs of approximately $3 million and regular payroll expenses of approximately $2 million (pursuant to PUC precedent on this issue). If the PUC grants this petition, PPL Electric's management will assess the recoverability of these costs in PPL Electric's next general rate increase proceeding, in accordance with SFAS 71, "Accounting for the Effects of Certain Types of Regulation." Depending on the likelihood of such recovery based on this assessment, most of the first quarter expense could be reversed in that future period. At this time, PPL Electric cannot predict the outcome of its deferral petition or the likelihood of recovery of these storm costs.See Note 9 to the Financial Statements for potential commitments and contingent liabilities that may impact future earnings.See Note 16 to the Financial Statements for new accounting standards that have been issued but not yet adopted by PPL Electric that may impact future earnings. PLR electric generation supply $ 34 Electric delivery (3 ) Other 1 $ 32 following:
March 31, 2005 vs. March 31, 2004 increasedecrease in electric delivery revenues resulted primarily from higher transmissionthe impact of milder weather on residential and distribution customer rates effective January 1, 2005, and a 3.7% increasecommercial sales in sales volumes. Higher PLR revenues were duethe first quarter of 2006 compared to higher energy and capacity rates, and a 5.6% increase in volumes, in part due to the return of customers previously served by alternate suppliers.increaseddecreased by $36$35 million, primarily due to a $39 million pre-tax loss accrual for the PJM billing dispute offset slightly by lower ancillary service costsrecorded in connection with the power supply contracts with PPL EnergyPlus.first quarter of 2005. See Note 911 to the Financial Statements for additional information regarding the loss accrual recorded for the PJM billing dispute.$5$31 million reflects an 8.4% increase in PLR load, as well as higher prices for energy purchased under the power supply contracts with PPL EnergyPlus needed to support PLR load, partially offset by a decrease in that load.Otherexpense increased by $23 million, primarilyexpenses was due to $19 million of costs associated with severe ice storms that hit PPL Electric's service territory in January 2005 and a $5 million charge for accelerated amortization of stock-based compensation for retirement-eligible employees, which resulted from additional accounting guidance. See Note 2 to the Financial Statements for additional information on stock-based compensation.Taxes, Other Than IncomeIn the first quarter of 2004, PPL Electric reversed a $14 million accrued liability for 1998 and 1999 PURTA taxes that had been accrued based on potential exposure in the proceedings regarding the Susquehanna nuclear station tax assessment. The rights of third-party intervenors to further appeal expired in 2004. The reversal is the primary reason for the $16 million increase in taxes, other than income. Costs associated with severe ice storms in January 2005 $ (16 ) PUC reportable storm costs in 2006 4 Other (2 ) $ (14 ) 1113 to the Financial Statements for details of other income.increasedincluding interest expense with affiliate, decreased by $4$11 million, primarily due tobecause 2005 included $8 million of interest accrued for the PJM billing dispute and additional interest paid on collateral held by PPL Electric relating to the PLR contract. This increase was partially offset by the net impact of long-term debt retirements.retirements and new issuances. Over the last 12 months, $480$593 million of long-term debt retirements have occurred, while new issuances over the same period totaled $116$308 million. See Note 1011 to the Financial Statements for further discussion of collateral held underadditional information on the PLR contract.Incomedecreased by $17 million,was primarily as athe result of lowerhigher pre-tax book income.2005,2006, PPL Electric had $133$39 million of cash and short-term investmentscash equivalents and $142 million of short-term debt. At December 31, 2004,2005, PPL Electric had $161$323 million inof cash, cash equivalents and short-term investments and $42 million of short-term debt. The $284 million decrease in PPL Electric'sPPL's cash, cash equivalents and short-term investmentinvestments position was primarily the net result of:· the retirement of $222 million of long-term debt; · a net increase of $100 million in a note receivable from an affiliate; · the payment of $38 million of common stock dividends to PPL Corporation; and · $43 million of capital expenditures; offset by · a net increase in short-term debt of $100 million; and · $15 million of cash provided by operating activities. retirementsale of $188the depositary shares, PPL Electric issued 2.5 million Preference Shares, with a liquidation preference of $100 per share, to the bank acting as a depositary. The net proceeds of approximately $245 million from the offering were used to repurchase $200 million of long-term debt;paymentdepositary shares are entitled to all proportional rights and preferences of $17 million ofthe Preference Shares, including dividend, voting, redemption and liquidation rights, exercised through the depositary. The Preference Shares rank senior to PPL Electric's common stock and junior to its outstanding preferred dividends;stock, and$40 million of capital expenditures; partially offset by$4 million of cash they have no voting rights, except as provided by operating activities;issuancePreference Shares will be paid when, as and if declared by the Board of $116Directors at a fixed annual rate of 6.25%, or $1.5625 per depositary share per year, and are not cumulative. PPL Electric may not pay dividends on, or redeem, purchase or make a liquidation payment with respect to any of its common stock, except in certain circumstances, unless full dividends on the Preference Shares have been paid for the then-current dividend period.of tax-exempt long-term debt; andan increase of $100 millionsyndicated credit facility that expires in short-term debt. Moody's and Fitch periodically review the credit ratings on the debt and preferred securities of PPL Electric.Electric and its subsidiary, PPL Transition Bond Company. Based on their respective independent reviews, the rating agencies may make certain ratings revisions. Moody's and Fitch are not a recommendation to buy, sell or hold any securities of PPL Electric.Electric or PPL Transition Bond Company. Such ratings may be subject to revisions or withdrawal by thethese agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to theirthe securities.January 2005,March 2006, Moody's upgraded the issuer rating of PPL Electric to Baa1 from Baa2, upgraded the ratings of its First Mortgage Bonds and Senior Secured Bonds to A3 from Baa1 and upgraded the rating of its preferred stock to Baa3 from Ba1. Moody's stated that the upgrades were prompted by (i) expectations for higher earnings and cash flow over the next three years, (ii) the generally constructive regulatory situation for PPL Electric, which includes a pass through of generation-based energy costs related to its long-term, full-requirements power supply agreements that enable PPL Electric to meet its obligations as a PLR over the 2006-2009 period, and (iii) moderate expected growth in the volume of energy deliveries, which it indicated supports the expected stability of cash flows from regulated operations until the end of the regulatory transition period in 2009. Moody's acknowledged that the upgrade of PPL Electric takes into consideration the risk that PPL Electric may need to seek large rate increases in 2010, after the expiration of its current supply contracts, if market prices for wholesale power remain at or above current levels. Moody's indicated that the upgrade assumes that regulatory treatment will provide for reasonably timely recovery of increased costs and expenditures.A-/A-2 corporate credit ratings and favorably revised its outlook on the company to stable from negative following the authorization of a $194 million rate increase by the PUC. S&P indicated that the outlook revision reflects its expectations that the rate increase, effective January 1, 2005, will allow for material improvement in PPL Electric's financial profile, which had lagged S&P's expectations in recent years. S&P indicated that the stable outlook reflects its expectations that PPL Electric "will rapidly improve and then maintain financial metrics more consistent with its ratings." S&P indicated that it expects PPL Electric's operations to remain stable through the expiration of the PLR agreement.20042005 Form 10-K.1012 to the Financial Statements for information on the PLR contracts.2005,2006, PPL Electric's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was insignificant.2005,2006, 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 $45$35 million.1012 to the Financial Statements.911 to the Financial Statements for a discussion of environmental matters.1618 to the Financial Statements for information ona discussion of new accounting standards recently adopted or pending adoption.contingencies.20042005 Form 10-K 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.2005,2006, 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.controlscontrol over financial reporting during the registrants' first fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrants' internal control over financial reporting. •· "Item 3. Legal Proceedings" in PPL's, PPL Energy Supply's and PPL Electric's 20042005 Form 10-K; and•911 of the registrants' "Combined Notes to Condensed Consolidated Financial Statements" in Part I of this report.There have been no material changes in PPL's, PPL Energy Supply's and PPL Electric's risk factors from those disclosed in "Item 1A . Risk Factors" of the 2005 Form 10-K.
Shares (or Units)
Purchased (1)
per Share
(or Unit)
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs (2)
Approximate Dollar Value) of
Shares (or Units) that May Yet Be
Purchased Under the Plans
or Programs (2) 9,050 January 1 to January 31, 2006 February 1 to February 28, 2006 25,817 $30.92 March 1 to March 31, 2006 Total 25,817 3(a) - Amended and Restated Articles of Incorporation of PPL Electric Utilities Corporation 10(a) -Bylaws of PPL Electric Utilities Corporation, as amended and restated effective March 30, 2006 (PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated March 30, 2006) *10(a) - Third Amendment to Reimbursement Agreement, dated as of March 31, 2005,30, 2006, among PPL Energy Supply, LLC, The Bank of Nova Scotia, as Issuer and Administrative Agent, and the Lenders party thereto from time to time (Exhibit 10(a) to PPL Energy Supply, LLC Form 8-K Report (File No. 333-74794) dated April 5, 2006)- Short-term Incentive Plan (Schedule A to Proxy Statement of PPL Corporation, dated March 20, 2006) *[_]10(c) - Establishment of 2006 annual performance goals and business criteria for incentive awards to PPL Corporation Named Executive Officers (PPL Corporation Form 8-K Report (File No. 1-11459) dated March 23, 2006) *[_]10(d) - Establishment of 2006 annual performance goals and business criteria for incentive awards to PPL Electric Utilities Corporation Named Executive Officers (PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated March 23, 2006) -PPL Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends -PPL Energy Supply, LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges -PPL Electric Utilities Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends * - Previously filed [_] - Filed or listed pursuant to Item 601(b)(10)(iii) of Regulation S-K
March 31, 2005,2006, filed by the following officers for the following companies: -William F. Hecht for PPL Corporation -John R. Biggar for PPL Corporation -William F. Hecht for PPL Energy Supply, LLC -James E. Abel-Paul A. Farr for PPL Energy Supply, LLC -John F. Sipics for PPL Electric Utilities Corporation -James E. Abel-Paul A. Farr for PPL Electric Utilities Corporation
March 31, 2005,2006, furnished by the following officers for the following companies: -William F. Hecht for PPL Corporation -John R. Biggar for PPL Corporation -William F. Hecht for PPL Energy Supply, LLC -James E. Abel-Paul A. Farr for PPL Energy Supply, LLC -John F. Sipics for PPL Electric Utilities Corporation -James E. Abel-Paul A. Farr for PPL Electric Utilities Corporation 2005John R. BiggarMatt Simmons John R. Biggar Executive Vice President and Chief Financial Officer(PPL Corporation)(principal financial officer)/s/ James E. Abel James E. AbelVice President and Treasurer(PPL Energy Supply, LLC)(principal financial officer)/s/ Paul A. Farr Paul A. FarrVice President and Controller(PPL Electric Utilities Corporation)