UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549


Form 10-Q




[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period endedMarch 31, 20052006

OR

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _________ to ___________


Commission File
Number

Registrant; State of Incorporation;
Address and Telephone Number

IRS Employer
Identification No.

1-11459

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

23-2758192

333-74794

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

23-3074920

1-905

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

23-0959590



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



 

PPL Corporation

Yes X   

No       

 

PPL Energy Supply, LLC

Yes X   

No       

 

PPL Electric Utilities Corporation

Yes X   

No       

 


Indicate by check mark whether the Registrants are large accelerated filers, accelerated filers, or non-accelerated filers. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerAccelerated filerNon-accelerated filer
PPL Corporation[ X ][     ][     ]
PPL Energy Supply, LLC[     ][     ][ X ]
PPL Electric Utilities Corporation[     ][     ][ X ]

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


 

PPL Corporation

Yes
No  X   

No

 

PPL Energy Supply, LLC

Yes       

No X   

 

PPL Electric Utilities Corporation

Yes       

No X   


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


 

PPL Corporation

Common stock, $.01 par value, 189,753,784380,495,159 shares outstanding at April 29, 2005,28, 2006, excluding 31,056,52162,139,729 shares held as treasury stock

stock.
   
 

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, 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

stock.
   


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




PPL CORPORATION
PPL ENERGY SUPPLY, LLC
PPL ELECTRIC UTILITIES CORPORATION

FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 20052006

Table of Contents

Page

GLOSSARY OF TERMS AND ABBREVIATIONS

i

FORWARD-LOOKING INFORMATION

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PPL Corporation and Subsidiaries

2

3

4

PPL Energy Supply, LLC and Subsidiaries

6

7

8

PPL Electric Utilities Corporation and Subsidiaries

10

11

12

14

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

37

39

48

51

57

61

60

65

60

65

PART II. OTHER INFORMATION

60

65

65

60

65

61

66

62

67

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

63

68

64

69

65

70

CERTIFICATES OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL
OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

66

71

68

73

70

75

CERTIFICATES OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL
OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

72

77

74

79

76

81






GLOSSARY OF TERMS AND ABBREVIATIONS

£


PPL Corporation and its current and former subsidiaries

Elfec - British 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:

  1. 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.
  2. 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.
  3. 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.

interest.


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


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 Development Company - PPL Development Company, LLC, a subsidiary of PPL Services that has responsibility for PPL's acquisition, divestiture and development activities.

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 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.

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

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.


Other terms and abbreviations

£ - British pounds sterling.

2005 Form 10-K - Annual Report to the SEC on Form 10-K for the year ended December 31, 2005.

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

APA - Asset Purchase Agreement.

ARO - asset retirement obligation.

Bcf - billion cubic feet.

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:
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.

DIG- Derivatives Implementation Group.

DOE - Department of Energy, a U.S. government agency.

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, Inc.

FSP - FASB Staff Position.

FTR - financial transmission rights, which are financial instruments established to manage price risk related to electricity transmission congestion.

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

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


ISO - Independent System Operator.


ITC - intangible transition charge on customer bills to recover intangible transition costs associated with securitizing stranded costs under the Customer Choice Act.


LIBOR-London-London Interbank Offered Rate.


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


Moody's - Moody's Investors Service, Inc.


MW - megawatt, one thousand kilowatts.


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

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

NPDES - National Pollutant Discharge Elimination System.


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


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


NYMEX - New York Mercantile Exchange.

Ofgem - Office of Gas and Electricity Markets, the British agency that regulates transmission, distribution and wholesale sales of electricity and related matters.


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


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

PEPS Units, Series B(Premium Equity Participating Security Units, or 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.

May 2004.


PJM(PJM Interconnection, L.L.C.) - operator of the electric transmission network and electric energy market in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.


PLR (Provider of Last Resort) - The role of PPL Electric in providing electricity to retail customers within its delivery territory who have not chosen to select an alternative electricity supplier under the Customer Choice Act.


PP&E- property, plant and equipment.

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

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


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


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

PUHCA - Public Utility Holding Company Act of 1935, legislation passed by the U.S. Congress. Repealed effective February 2006 by the Energy Policy Act of 2005.

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

PURTA - the Pennsylvania Public Utility Realty Tax Act.


Regulation S-X - SEC regulation governing the form and content of and requirements for financial statements required to be filed pursuant to the federal securities laws.

SCR


Sarbanes-Oxley 404- selective catalytic reduction, a pollution control process.

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.


SEC - Securities and Exchange Commission, a U.S. government agency whose primary mission is to protect investors and maintain the integrity of the securities markets.


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

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


S&P - Standard & Poor's Ratings Services.


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


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


Tolling agreement- agreement whereby the owner of an electric generating facility agrees to use that facility to convert fuel provided by a third party into electric energy for delivery back to the third party.

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.



FORWARD-LOOKING INFORMATION

Statements contained in this Form 10-Q concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical facts are "forward-looking statements" within the meaning of the federal securities laws. Although PPL, PPL Energy Supply and PPL Electric believe that the expectations and assumptions reflected in these statements are reasonable, there can be no assurance that these expectations will prove to be correct. These forward-looking statements involve a number of risks and uncertainties, and actual results may differ materially from the results discussed in the forward-looking statements. In addition to the specific factors discussed in "Item 1A. Risk Factors" in the "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;
·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.

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


New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time to time, and it is not possible for PPL, PPL Energy Supply or PPL Electric to predict all of such factors, or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made, and PPL, PPL Energy Supply and PPL Electric undertake no obligations to update the information contained in such statement to reflect subsequent developments or information.

Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, except per share data)
  
Three Months Ended
March 31,
  
2006
 
2005
Operating Revenues
      
Utility 
$
1,232
  $1,151 
Unregulated retail electric  
25
   25 
Wholesale energy marketing  
337
   268 
Net energy trading margins  
10
   16 
Energy-related businesses  
179
   140 
Total  
1,783
   1,600 
         
Operating Expenses
        
Operation        
Fuel  
240
   244 
Energy purchases  
309
   266 
Other operation and maintenance  
332
   364 
Amortization of recoverable transition costs  
72
   69 
Depreciation  
108
   103 
Taxes, other than income  
71
   73 
Energy-related businesses  
163
   146 
Total  
1,295
   1,265 
         
Operating Income
  
488
   335 
         
Other Income - net  
9
   7 
         
Interest Expense  
119
   135 
         
Income from Continuing Operations Before Income Taxes, Minority Interest and Dividends on Preferred Stock
  
378
   207 
         
Income Taxes  
95
   34 
         
Minority Interest  
2
   2 
         
Dividends on Preferred Stock  
1
   1 
         
Income from Continuing Operations
  
280
   170 
         
Loss from Discontinued Operations (net of income taxes)      2 
         
Net Income
 
$
280
  $168 
         
Earnings Per Share of Common Stock: (a)
        
Income from Continuing Operations:        
Basic 
$
0.74
  $0.45 
Diluted 
$
0.73
  $0.45 
Net income:        
Basic 
$
0.74
  $0.45 
Diluted 
$
0.73
  $0.44 
         
Dividends Declared Per Share of Common Stock (a)
 
$
0.275
  $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.
 
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
March 31,
  
2006
 
2005
Cash Flows from Operating Activities
        
Net income 
$
280
  $168 
Adjustments to reconcile net income to net cash provided by operating activities        
Depreciation  
108
   105 
Stock compensation expense  
16
   22 
Amortizations - recoverable transition costs and other  
77
   69 
Pension expense  
10
   7 
Pension funding  
(22
)
  (10)
Deferred income tax benefits and investment tax credits  
(48
)
  (22)
Accrual for PJM billing dispute      47 
Unrealized gain on derivatives and other hedging activities  
(40
)
  (2)
Other  
(10
)
  4 
Change in current assets and current liabilities        
Accounts receivable  
(99
)
  (116)
Accounts payable  
(15
)
  (1)
Fuel, materials and supplies  
(20
)
  42 
Other  
52
   23 
Other operating activities        
Other assets  
(15
)
  5 
Other liabilities  
23
   (34)
Net cash provided by operating activities  
297
   307 
         
Cash Flows from Investing Activities
        
Expenditures for property, plant and equipment  
(198
)
  (169)
Purchases of emission allowances  
(53
)
  (27)
Proceeds from the sale of emission allowances  
29
   32 
Purchases of nuclear decommissioning trust investments  
(73
)
  (62)
Proceeds from the sale of nuclear decommissioning trust investments  
69
   59 
Purchases of other marketable securities  
(39
)
    
Proceeds from the sale of other marketable securities  
97
   66 
Net (increase) decrease in restricted cash  
(6
)
  16 
Other investing activities  
15
   (8)
Net cash used in investing activities  
(159
)
  (93)
         
Cash Flows from Financing Activities
        
Issuance of long-term debt      116 
Retirement of long-term debt  
(225
)
  (396)
Issuance of common stock  
2
   24 
Payment of common dividends  
(95
)
  (77)
Net (decrease) increase in short-term debt  
(36
)
  265 
Other financing activities  
(1
)
  (10)
Net cash used in financing activities  
(355
)
  (78)
         
Effect of Exchange Rates on Cash and Cash Equivalents
      2 
         
Net (Decrease) Increase in Cash and Cash Equivalents
  
(217
)
  138 
Cash and Cash Equivalents at Beginning of Period  
555
   616 
Cash and Cash Equivalents at End of Period 
$
338
  $754 
 
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,
2006
 
December 31,
2005
Assets
        
         
Current Assets
        
Cash and cash equivalents 
$
338
  $555 
Restricted cash  
100
   93 
Accounts receivable (less reserve: 2006, $72; 2005, $87)  
644
   544 
Unbilled revenues  
414
   479 
Fuel, materials and supplies  
366
   346 
Prepayments  
150
   53 
Deferred income taxes  
191
   192 
Price risk management assets  
425
   488 
Other acquired intangibles  
154
   50 
Other  
46
   110 
Total Current Assets  
2,828
   2,910 
         
Investments
        
Investment in unconsolidated affiliates - at equity  
47
   56 
Nuclear plant decommissioning trust funds  
463
   444 
Other  
8
   8 
Total Investments  
518
   508 
         
Property, Plant and Equipment
        
Electric plant in service        
Transmission and distribution  
8,101
   7,984 
Generation  
8,794
   8,761 
General  
648
   646 
   
17,543
   17,391 
Construction work in progress  
295
   259 
Nuclear fuel  
353
   327 
Electric plant  
18,191
   17,977 
Gas and oil plant  
353
   349 
Other property  
295
   289 
   
18,839
   18,615 
Less: accumulated depreciation  
7,805
   7,699 
Total Property, Plant and Equipment  
11,034
   10,916 
         
Regulatory and Other Noncurrent Assets
        
Recoverable transition costs  
1,093
   1,165 
Goodwill  
1,065
   1,070 
Other acquired intangibles  
346
   412 
Price risk management assets  
148
   84 
Other  
860
   861 
Total Regulatory and Other Noncurrent Assets  
3,512
   3,592 
         
Total Assets
 
$
17,892
  $17,926 
 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the financial statements.

CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
  
March 31,
2006
 
December 31,
2005
Liabilities and Equity
        
         
Current Liabilities
        
Short-term debt 
$
179
  $214 
Long-term debt  
985
   1,126 
Accounts payable  
529
   542 
Above market NUG contracts  
69
   70 
Taxes  
290
   168 
Interest  
111
   112 
Dividends  
106
   96 
Price risk management liabilities  
482
   533 
Other  
428
   479 
Total Current Liabilities  
3,179
   3,340 
         
Long-term Debt
  
5,865
   5,955 
         
Long-term Debt with Affiliate Trust
  
89
   89 
         
Deferred Credits and Other Noncurrent Liabilities
        
Deferred income taxes and investment tax credits  
2,227
   2,197 
Price risk management liabilities  
416
   541 
Accrued pension obligations  
366
   374 
Asset retirement obligations  
303
   298 
Above market NUG contracts  
119
   136 
Other  
498
   471 
Total Deferred Credits and Other Noncurrent Liabilities  
3,929
   4,017 
         
Commitments and Contingent Liabilities
        
         
Minority Interest
  
57
   56 
         
Preferred Stock
  
51
   51 
         
Shareowners' Common Equity
        
Common stock - $0.01 par value (a)  
4
   4 
Capital in excess of par value  
3,622
   3,602 
Treasury stock (a)  
(839
)
  (838)
Earnings reinvested  
2,357
   2,182 
Accumulated other comprehensive loss  
(422
)
  (532)
Total Shareowners' Common Equity  
4,722
   4,418 
         
Total Liabilities and Equity
 
$
17,892
  $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.
 
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
March 31,
  
2006
 
2005
Operating Revenues
        
Wholesale energy marketing 
$
337
  $268 
Wholesale energy marketing to affiliate  
446
   415 
Utility  
323
   293 
Unregulated retail electric  
25
   25 
Net energy trading margins  
10
   16 
Energy-related businesses  
171
   134 
Total  
1,312
   1,151 
         
Operating Expenses
        
Operation        
Fuel  
168
   192 
Energy purchases  
253
   176 
Energy purchases from affiliate  
39
   38 
Other operation and maintenance  
245
   261 
Depreciation  
75
   71 
Taxes, other than income  
21
   24 
Energy-related businesses  
156
   138 
Total  
957
   900 
         
Operating Income
  
355
   251 
         
Other Income - net  
10
   8 
         
Interest Expense  
61
   65 
         
Interest Expense with Affiliates  
3
   7 
         
Income from Continuing Operations Before Income Taxes and Minority Interest
  
301
   187 
         
Income Taxes  
69
   28 
         
Minority Interest  
2
   2 
         
Income from Continuing Operations
  
230
   157 
         
Loss from Discontinued Operations (net of income taxes)      2 
         
Net Income
 
$
230
  $155 
 
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
March 31,
  
2006
 
2005
Cash Flows from Operating Activities
        
Net income 
$
230
  $155 
Adjustments to reconcile net income to net cash provided by operating activities        
Depreciation  
75
   74 
Stock compensation expense  
12
   15 
Amortizations - energy commitments and other  
(2
)
  (7)
Pension expense  
6
   5 
Pension funding  
(22
)
  (10)
Deferred income taxes (benefits) and investment tax credits  
(1
)
  30 
Unrealized gain on derivatives and other hedging activities  
(42
)
  (1)
Other  
(10
)
  3 
Change in current assets and current liabilities        
Accounts receivable  
(64
)
  (32)
Accounts payable  
(1
)
  20 
Fuel, materials and supplies  
(36
)
  27 
Other  
85
   44 
Other operating activities        
Other assets  
(11
)
  6 
Other liabilities  
6
   (32)
Net cash provided by operating activities  
225
   297 
         
Cash Flows from Investing Activities
        
Expenditures for property, plant and equipment  
(147
)
  (123)
Purchases of emission allowances  
(53
)
  (27)
Proceeds from the sale of emission allowances  
29
   32 
Purchases of nuclear decommissioning trust investments  
(73
)
  (62)
Proceeds from the sale of nuclear decommissioning trust investments  
69
   59 
Proceeds from the sale of other marketable securities  
33
   51 
Net (increase) decrease in restricted cash  
(7
)
  17 
Other investing activities  
13
   (8)
Net cash used in investing activities  
(136
)
  (61)
         
Cash Flows from Financing Activities
        
Retirement of long-term debt  
(3
)
  (208)
Contributions from Member  
15
     
Distributions to Member  
(58
)
  (58)
Net (decrease) increase in short-term debt  
(136
)
  165 
Net decrease in note payable to affiliate  
(1
)
    
Other financing activities  
(1
)
    
Net cash used in financing activities  
(184
)
  (101)
         
Effect of Exchange Rates on Cash and Cash Equivalents
      2 
         
Net (Decrease) Increase in Cash and Cash Equivalents
  
(95
)
  137 
Cash and Cash Equivalents at Beginning of Period  
227
   357 
Cash and Cash Equivalents at End of Period 
$
132
  $494 
         
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,
2006
 
December 31,
2005
Assets
        
         
Current Assets
        
Cash and cash equivalents 
$
132
  $227 
Restricted cash  
45
   39 
Accounts receivable (less reserve: 2006, $49; 2005, $65)  
354
   291 
Unbilled revenues  
258
   300 
Accounts receivable from affiliates  
151
   149 
Collateral on PLR energy supply to affiliate  
300
   300 
Fuel, materials and supplies  
331
   295 
Prepayments  
36
   39 
Deferred income taxes  
153
   166 
Price risk management assets  
424
   487 
Other acquired intangibles  
154
   50 
Other  
9
   41 
Total Current Assets  
2,347
   2,384 
         
Investments
        
Investment in unconsolidated affiliates - at equity  
47
   56 
Nuclear plant decommissioning trust funds  
463
   444 
Other  
4
   3 
Total Investments  
514
   503 
         
Property, Plant and Equipment
        
Electric plant in service        
Transmission and distribution  
4,033
   3,950 
Generation  
8,794
   8,761 
General  
262
   272 
   
13,089
   12,983 
Construction work in progress  
249
   210 
Nuclear fuel  
353
   327 
Electric plant  
13,691
   13,520 
Gas and oil plant  
64
   64 
Other property  
203
   198 
   
13,958
   13,782 
Less: accumulated depreciation  
5,949
   5,871 
Total Property, Plant and Equipment  
8,009
   7,911 
         
Other Noncurrent Assets
        
Goodwill  
1,010
   1,015 
Other acquired intangibles  
214
   283 
Price risk management assets  
133
   80 
Other  
484
   488 
Total Other Noncurrent Assets  
1,841
   1,866 
         
Total Assets
 
$
12,711
  $12,664 
 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the financial statements.

CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
  
March 31,
2006
 
December 31,
2005
Liabilities and Equity
        
         
Current Liabilities
        
Short-term debt 
$
37
  $172 
Note payable to affiliate  
7
   8 
Long-term debt  
445
   445 
Accounts payable  
465
   445 
Accounts payable to affiliates  
20
   27 
Above market NUG contracts  
69
   70 
Taxes  
143
   72 
Interest  
87
   79 
Deferred revenue on PLR energy supply to affiliate  
12
   12 
Price risk management liabilities  
458
   519 
Other  
273
   313 
Total Current Liabilities  
2,016
   2,162 
         
Long-term Debt
  
3,508
   3,506 
         
Long-term Debt with Affiliate Trust
  
89
   89 
         
Deferred Credits and Other Noncurrent Liabilities
        
Deferred income taxes and investment tax credits  
1,215
   1,157 
Price risk management liabilities  
387
   523 
Accrued pension obligations  
218
   232 
Asset retirement obligations  
303
   298 
Above market NUG contracts  
119
   136 
Deferred revenue on PLR energy supply to affiliate  
32
   35 
Other  
330
   321 
Total Deferred Credits and Other Noncurrent Liabilities  
2,604
   2,702 
         
Commitments and Contingent Liabilities
        
         
Minority Interest
  
57
   56 
         
Member's Equity
  
4,437
   4,149 
         
Total Liabilities and Equity
 
$
12,711
  $12,664 
 
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
March 31,
  
2006
 
2005
Operating Revenues
        
Retail electric 
$
812
  $780 
Wholesale electric  
1
   1 
Wholesale electric to affiliate  
39
   38 
Total  
852
   819 
         
Operating Expenses
        
Operation        
Energy purchases  
56
   91 
Energy purchases from affiliate  
446
   415 
Other operation and maintenance  
87
   101 
Amortization of recoverable transition costs  
72
   69 
Depreciation  
28
   28 
Taxes, other than income  
49
   47 
Total  
738
   751 
         
Operating Income
  
114
   68 
         
Other Income - net  
9
   4 
         
Interest Expense  
38
   51 
         
Interest Expense with Affiliate  
4
   2 
         
Income Before Income Taxes
  
81
   19 
         
Income Taxes  
29
   3 
         
Income Before Dividends on Preferred Stock
  
52
   16 
         
Dividends on Preferred Stock  
1
   1 
         
Income Available to PPL Corporation
 
$
51
  $15 
 
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
March 31,
  
2006
 
2005
         
Cash Flows from Operating Activities
        
Net income 
$
51
  $15 
Adjustments to reconcile net income to net cash provided by operating activities        
Depreciation  
28
   28 
Stock compensation expense  
3
   6 
Amortizations - recoverable transition costs and other  
78
   74 
Deferred income tax benefits and investment tax credits  
(3
)
  (11)
Accrual for PJM billing dispute      47 
Change in current assets and current liabilities        
Accounts receivable  
(27
)
  (44)
Accounts payable  
(35
)
  (23)
Other  
(84
)
  (97)
Other operating activities        
Other assets  
(6
)
  (2)
Other liabilities  
10
   11 
Net cash provided by operating activities  
15
   4 
         
Cash Flows from Investing Activities
        
Expenditures for property, plant and equipment  
(43
)
  (40)
Purchases of other marketable securities  
(39
)
    
Proceeds from the sale of other marketable securities  
64
   10 
Net increase in note receivable from affiliate  
(100
)
    
Net decrease in restricted cash  
2
   2 
Other investing activities  
3
     
Net cash used in investing activities  
(113
)
  (28)
         
Cash Flows from Financing Activities
        
Issuance of long-term debt      116 
Retirement of long-term debt  
(222
)
  (188)
Payment of common dividends to PPL Corporation  
(38
)
  (16)
Net increase in short-term debt  
100
   100 
Other financing activities  
(1
)
  (6)
Net cash (used in) provided by financing activities  
(161
)
  6 
         
Net Decrease in Cash and Cash Equivalents
  
(259
)
  (18)
Cash and Cash Equivalents at Beginning of Period  
298
   151 
Cash and Cash Equivalents at End of Period 
$
39
  $133 
         
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,
2006
 
December 31,
2005
Assets
        
         
Current Assets
        
Cash and cash equivalents 
$
39
  $298 
Restricted cash  
42
   42 
Accounts receivable (less reserve: 2006, $21; 2005, $20)  
250
   224 
Unbilled revenues  
152
   174 
Accounts receivable from affiliates  
9
   10 
Note receivable from affiliate  
400
   300 
Prepayments  
105
   4 
Prepayment on PLR energy supply from affiliate  
12
   12 
Other  
70
   87 
Total Current Assets  
1,079
   1,151 
         
Property, Plant and Equipment
        
Electric plant in service        
Transmission and distribution  
4,069
   4,034 
General  
361
   356 
   
4,430
   4,390 
Construction work in progress  
41
   43 
Electric plant  
4,471
   4,433 
Other property  
3
   3 
   
4,474
   4,436 
Less: accumulated depreciation  
1,744
   1,720 
Total Property, Plant and Equipment  
2,730
   2,716 
         
Regulatory and Other Noncurrent Assets
        
Recoverable transition costs  
1,093
   1,165 
Acquired intangibles  
113
   114 
Prepayment on PLR energy supply from affiliate  
32
   35 
Other  
356
   356 
Total Regulatory and Other Noncurrent Assets  
1,594
   1,670 
         
Total Assets
 
$
5,403
  $5,537 
 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the financial statements.

CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
  
March 31,
2006
 
December 31,
2005
Liabilities and Equity
        
         
Current Liabilities
        
Short-term debt 
$
142
  $42 
Long-term debt  
292
   434 
Accounts payable  
32
   42 
Accounts payable to affiliates  
159
   183 
Taxes  
89
   76 
Collateral on PLR energy supply from affiliate  
300
   300 
Other  
129
   147 
Total Current Liabilities  
1,143
   1,224 
         
Long-term Debt
  
1,897
   1,977 
         
Deferred Credits and Other Noncurrent Liabilities
        
Deferred income taxes and investment tax credits  
774
   771 
Other  
200
   190 
Total Deferred Credits and Other Noncurrent Liabilities  
974
   961 
         
Commitments and Contingent Liabilities
        
         
Preferred Stock
  
51
   51 
         
Shareowner's Common Equity
        
Common stock - no par value (a)  
1,476
   1,476 
Additional paid-in capital  
354
   354 
Treasury stock (a)  
(912
)
  (912)
Earnings reinvested  
420
   406 
Total Shareowner's Common Equity  
1,338
   1,324 
         
Total Liabilities and Equity
 
$
5,403
  $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.
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of the financial statements.


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENT OF INCOME

PPL Corporation and Subsidiaries

(Unaudited)

(Millions of Dollars, except per share data)

  

Three Months Ended
March 31,

 
  

 
  

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
  and Dividends on Preferred Stock

  

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.




CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

PPL Corporation and Subsidiaries

(Unaudited)

(Millions of Dollars)

Three Months Ended
March 31,

  

 

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.




CONDENSED CONSOLIDATED BALANCE SHEET

PPL Corporation and Subsidiaries

(Unaudited)

(Millions of Dollars)

  

March 31,
2005

  

December 31,
2004

 

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,
2005

  

December 31,
2004

 

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.




CONDENSED CONSOLIDATED STATEMENT OF INCOME

PPL Energy Supply, LLC and Subsidiaries

(Unaudited)

(Millions of Dollars)

  

Three Months Ended
March 31,

 
  

 
  

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.




CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

PPL Energy Supply, LLC and Subsidiaries

(Unaudited)

(Millions of Dollars)

  

Three Months Ended
March 31,

 
  

 
  

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.




CONDENSED CONSOLIDATED BALANCE SHEET

PPL Energy Supply, LLC and Subsidiaries

(Unaudited)

(Millions of Dollars)

  

March 31,
2005

  

December 31,
2004

 

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,
2005

  

December 31,
2004

 

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.




CONDENSED CONSOLIDATED STATEMENT OF INCOME

PPL Electric Utilities Corporation and Subsidiaries

(Unaudited)

(Millions of Dollars)

  

Three Months Ended
March 31,

 
  

 
  

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.




CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

PPL Electric Utilities Corporation and Subsidiaries

(Unaudited)

(Millions of Dollars)

Three Months Ended
March 31,

  

 
  

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.




CONDENSED CONSOLIDATED BALANCE SHEET

PPL Electric Utilities Corporation and Subsidiaries

(Unaudited)

(Millions of Dollars)

  

March 31,
2005

  

December 31,
2004

 

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,
2005

  

December 31,
2004

 

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.




Combined Notes to Condensed Consolidated Financial Statements (Unaudited)


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

  1. Interim Financial Statements


1.  
Interim Financial Statements

(PPL, PPL Energy Supply and PPL Electric)


The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, all adjustments (including normal, recurring accruals) considered necessary for a fair presentation in accordance with accounting principles generally accepted in the U.S. are reflected in the condensed consolidated financial statements. The Balance Sheet as of December 31, 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.


(PPL and PPL Electric)

The three months ended March 31, 2005, included costs in "Other Operation and Maintenance" on the Statement of Income of $16 million associated with severe ice storms that hit PPL Electric's service territory in January 2005. 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 a portion of 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.

(PPL and PPL Energy Supply)

Certain amounts in the March 31, 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 Policies

    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."


  • 2.  
    Summary of Significant Accounting Policies

    The following accounting policy disclosures represent updates to the "Summary of Significant Accounting Policies" Note in each Registrant's 20042005 Form 10-K.


    Allowance for Doubtful Accounts (PPL and PPL Energy Supply)

    Depreciation


    PPL's and PPL Energy Supply's significant specific reserves relate to receivables from Enron Corporation (Enron), which filed for bankruptcy in 2001, and from the California ISO, which has withheld payment pending the outcome of regulatory proceedings arising from the California electricity supply situation that began in 2000.

    The reserves related to Enron are claims against Enron North America and Enron Power Marketing (Enron Subsidiaries), and against Enron, which had guaranteed the Enron Subsidiaries' performance (Enron Corporation Guarantees).

    In March 2006, the U.S. Bankruptcy Court approved agreements between Enron and PPL subsidiaries periodically 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.

    Goodwill

    The 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.

    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).


    At March 31, 2006 and December 31, 2005, the Enron and California ISO reserves accounted for 51% and 60% of PPL's total allowance for doubtful accounts and 76% and 80% of PPL Energy Supply's total allowance for doubtful accounts.

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

    Stock-Based Compensation

    Effective 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.


    See Note 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 Standards

    See Note 16 for information on new accounting standards recently adopted or pending adoption.

  • Segment and Related Information


  • 3.  
    Segment and Related Information

    (PPL and PPL Energy Supply)


    See the "Segment and Related Information" Note in each Registrant's 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).


    Financial data for the segments are as follows:

      

    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,
    2005

      

    December 31,
    2004

      

    March 31,
    2005

      

    December 31,
    2004

     

    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

     
    are:

      
    Three Months Ended March 31,
       
      
    PPL
     
    PPL Energy Supply
             
      
    2006
     
    2005
     
    2006
     
    2005
    Income Statement Data
                    
                     
    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 

      
    PPL
     
    PPL Energy Supply
         
      
    March 31,
    2006
     
    December 31,
    2005
     
    March 31,
    2006
     
    December 31,
    2005
    Balance Sheet Data
                    
                     
    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 

    (a)

     

    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 Share

  • 4.  
    Earnings Per Share

    (PPL)


    In August 2005, PPL completed a 2-for-1 split of its common stock. The record date for the stock split was August 17, 2005, and the distribution date was August 24, 2005. As a result of the stock split, 190 million shares were issued to shareholders, and 31 million shares were issued as treasury shares as of the record date. The par value of the stock remains at $0.01 per share and, accordingly, $2 million was transferred from "Capital in excess of par value" to "Common stock" on the Balance Sheet. The number of shares, the market price, and earnings and dividends per share amounts, as well as PPL's stock-based compensation awards and the conversion rate and market price trigger of PPL Energy Supply's 2.625% Convertible Senior Notes due 2023, in the financial statements for the period ended March 31, 2005, have been adjusted to reflect the stock split.

    Basic EPS is calculated using the weighted-average number of common shares outstanding during the period. Diluted EPS is calculated using weighted-average shares outstanding that are increased for additional shares that would be outstanding if potentially dilutive securities were converted to common stock. Potentially dilutive securities consist of:


    ·

    stock options, restricted stock and restricted stock units granted under the incentive compensation plans;

    ·

    stock units representing common stock granted under the directors compensation programs;

    and

    ·

    common stock purchase contracts that were a component of the PEPS Units and PEPS Units, Series B; and

    convertible senior notes.


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

      

    Three Months
    Ended March 31,

     

      

    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

     

    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:


      
    Three Months
    Ended March 31,
       
      
    2006
     
    2005
    Income (Numerator)
            
             
    Income from continuing operations $280  $170 
             
    Loss from discontinued operations (net of income taxes)      2 
             
    Net Income $280  $168 
             
    Shares (Denominator)
            
             
    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 
             
    Basic EPS
            
             
    Income from continuing operations $0.74  $0.45 
             
    Loss from discontinued operations (net of income taxes)        
             
    Net Income $0.74  $0.45 
             
    Diluted EPS
            
             
    Income from continuing operations $0.73  $0.45 
             
    Loss from discontinued operations (net of income taxes)      0.01 
             
    Net Income $0.73  $0.44 

    If converted, PPL Energy 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.

    stock. Based upon the current conversion rate of 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.


    See Note 7 for discussion of attainment of the market price trigger related to the Convertible Senior Notes did not have a dilutive impact on EPS forin the three months ended March 31, 2004.

    first quarter of 2006.


    The maximum number of shares that could potentially be issued to settle the conversion premium, based upon the current conversion rate, is 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.


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

     

     

     

    Three Months
    Ended March 31,

     

    (Thousands of Shares)

     

    2005

      

    2004

     

    Antidilutive stock options

     

    804

      

    747

     

  • Income Taxes

  •   
    Three Months
    Ended March 31,
     
        
    (Thousands of Shares)
     
    2006
      
    2005
     
           
    Antidilutive stock options 1,335  1,608 

    5.  
    Income Taxes

    (PPL and PPL Energy Supply and PPL Electric)

    Supply)


    Reconciliations of effective income tax rates are as follows:

      

    Three Months
    Ended March 31,

     

    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
     
    2006
     
    2005
         
    Reconciliation of Income Tax Expense
            
             
    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)
             
    Total income tax expense
     $95  $34 
             
    Effective income tax rate
      25.1%   16.4% 
             
    PPL Energy Supply
            
             
    Reconciliation of Income Tax Expense
            
             
    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)
             
    Total income tax expense
     $69  $28 
             
    Effective income tax rate
      22.9%   15.0% 

    In January 2006, WPD, Hyder's liquidator and a former Hyder affiliate signed an agreement to transfer to the affiliate a deferred tax liability from WPD and certain surplus tax losses from Hyder. The U.K. taxing authority subsequently confirmed this agreement. This transfer resulted in a net reduction of income tax expense of $20 million for the three months ended March 31, 2006, and a decrease to goodwill of $12 million from the resolution of a pre-acquisition tax contingency pursuant to EITF Issue 93-7, "Uncertainties Related to Income Taxes in a Purchase Business Combination."

    (PPL Electric)

    Reconciliation of effective income tax rates are:

      
    Three Months
    Ended March 31,
       
      
    2006
     
    2005
         
    Reconciliation of Income Tax Expense
            
             
    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)
             
    Total income tax expense
     $29  $3 
             
    Effective income tax rate
      35.8%   15.8% 

    6.  
    Comprehensive Income

    (PPL and PPL Energy Supply)

    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)


  • The after-tax components of comprehensive income 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
    (Note 8)

          

    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

     


      
    Three Months Ended March 31,
       
      
    PPL
     
    PPL Energy Supply
         
      
    2006
     
    2005
     
    2006
     
    2005
             
    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 

    (PPL Electric)


    PPL Electric's comprehensive income approximates net income.


  • 7.  
    Credit Arrangements and Financing Activities

    Credit Arrangements and Financing Activities

    Credit Arrangements


    (PPL PPL Energy Supply and PPL Electric)

    PPL Energy Supply and


    PPL Electric 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.

    PPL Electric maintains two credit facilities: a $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.


    PPL Electric maintains a commercial paper program for up to $200 million to provide it with an additional financing source to fund its short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by certain credit agreements of PPL Electric. PPL Electric had $100 million of commercial paper outstanding at March 31, 2006, with a weighted-average interest rate of 4.83%.

    At March 31, 2006, $155 million of accounts receivable and $129 million of unbilled revenue were pledged by a PPL Electric subsidiary under the credit agreement related to PPL Electric's and the subsidiary's participation in an 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 4.70%, all of which was being used to cash collateralize letters of credit issued on PPL Electric's behalf. At March 31, 2006, based on the accounts receivable and unbilled revenue pledged, an additional $108 million was available for borrowing. PPL Electric's sale to its subsidiary of the pledged 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.

    (PPL and PPL Energy Supply)

    WPD (South West)


    PPL Energy Supply maintains credit facilities in order to enhance liquidity and provide credit support, and as a backstop to its commercial paper program. At March 31, 2006, PPL Energy Supply had no cash borrowings outstanding under any of its credit facilities.

    PPL Energy Supply maintains three syndicated credit facilities: a £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.

    outstanding under its facilities.


    In March 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.

    In addition, PPL Energy Supply maintains a $300 million five-year letter of credit and revolving credit facility expiring in March 2011. At March 31, 2006, there were no cash borrowings and $288 million of letters of credit outstanding under this agreement.

    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.


    PPL Energy Supply maintains a commercial paper program for up to $500 million to provide it with an additional financing source to fund its short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by certain credit agreements of PPL Energy Supply. PPL Energy Supply had no commercial paper outstanding at March 31, 2006.

    WPD (South West) maintains three committed credit facilities: a £100 million 364-day facility, a £150 million three-year facility and a £150 million five-year facility, which expire in October 2006, October 2008 and October 2009, respectively. At March 31, 2006, WPD (South West) also has uncommitted credit facilities of £65 million. The balance outstanding under the WPD (South West) credit facilities at March 31, 2006, was £20 million (approximately $35 million at current exchange rates) with a weighted-average interest rate of 4.93%.

    (PPL, PPL Energy Supply and PPL Electric)


    The subsidiaries of PPL are separate legal entities. PPL's subsidiaries are not liable for the debts of PPL. Accordingly, creditors of PPL may not satisfy their debts from the assets of the subsidiaries absent a specific contractual undertaking by a subsidiary to pay PPL's creditors or as required by applicable law or regulation. Similarly, absent a specific contractual undertaking or as required by applicable law or regulation, PPL is not liable for the debts of its subsidiaries. Accordingly, creditors of PPL's subsidiaries may not satisfy their debts from the assets of PPL absent a specific contractual undertaking by PPL to pay the creditors of its subsidiaries or as required by applicable law or regulation.


    Similarly, the subsidiaries of PPL Energy Supply and PPL Electric are separate legal entities. These subsidiaries are not liable for the debts of PPL Energy Supply and PPL Electric. Accordingly, creditors of PPL Energy Supply and PPL Electric may not satisfy their debts from the assets of their subsidiaries absent a specific contractual undertaking by a subsidiary to pay the creditors or as required by applicable law or regulation. In addition, absent a specific contractual undertaking or as required by applicable law or regulation, PPL Energy Supply and PPL Electric are not liable for the debts of their subsidiaries. Accordingly, creditors of these subsidiaries may not satisfy their debts from the assets of PPL Energy Supply or PPL Electric absent a specific contractual undertaking by that parent to pay the creditors of its subsidiaries or as required by applicable law or regulation.


    Financing Activities

    (PPL)


    (PPL and PPL Electric)

    In 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.

    upon maturity.


    During the three months ended March 31, 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.

    At


    During the three months ended March 31, 2005,2006, PPL Electric had $100paid common dividends of $38 million of commercial paper outstanding under its commercial paper program that had an averageto PPL.

    In April 2006, PPL Electric sold 10 million depositary shares, each representing a quarter interest 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.


    Holders of the depositary shares are entitled to all proportional rights and preferences of the 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 stock, and they have no voting rights, except as provided by law.

    Dividends on the Preference Shares will be paid when, as and if declared by the Board of Directors 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.

    The Preference Shares do not have a stated maturity, and are not subject to sinking fund requirements. However, PPL Electric may, at its option, redeem the Preference Shares in whole or in part from time to time for $100 per share (equivalent to $25 per depositary share), plus any declared and unpaid dividends, on or after April 6, 2011.

    (PPL and PPL Energy Supply)

    In December 2005, Elfec made a scheduled $3 million principal payment on its $23 million Bolivian Bonds, which was funded primarily with short-term debt. This transaction was recorded in January 2006 due April 2005to the one-month lag in foreign subsidiary reporting.

    The terms of PPL Energy Supply's $400 million 2.625% Convertible Senior Notes due 2023 include a market price trigger that permits holders to convert the notes during any fiscal quarter if the closing sale price of PPL's common stock exceeds $29.83 for at par value.

    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.


    During the three months ended March 31, 2006, PPL Energy Supply distributed $58 million to its parent company and received capital contributions of $15 million.

    Dividends(PPL)


    In February 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.  
    Acquisitions, Development and Divestitures

    From time to time, PPL and Divestitures

    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.


    (PPL and PPL Energy Supply)

    Domestic Generation


    International Energy Projects


    In 2003,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.

    Income.


    Discontinued Operations

    In 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 Projects

    Discontinued Operations

    In December 2003, PPL Global's Board of Managers authorized PPL Global to sell its investment in a Latin American telecommunications company, and approved a plan of sale. It was determined that 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.

    Sale


    Other

    In February 2006, WPD received legal notification citing one of CGE

    In 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 was


    In September 2000, WPD acquired Hyder. WPD continues to operate the Hyder electricity business, sold the majority of Hyder's other activities, and placed the remaining companies in liquidation. In March 2006, WPD received $24 million in proceeds as an initial distribution related to the final liquidation of the remaining companies. These proceeds will be included in the second quarter 2006 financial results due to the write-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 Liabilities

    Energy Purchases and Sales Commitments

    Energy Purchase Commitmentsforeign subsidiary reporting.


  • 9.  
    Stock-Based Compensation

    (PPL, PPL Energy Supply and PPL Electric)


    Effective January 1, 2006, PPL adopted SFAS 123 (revised 2004), "Share-Based Payment," which is known as SFAS 123(R), using the modified prospective application transition method. The adoption of SFAS 123(R) 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, as described by SFAS 123, "Accounting for Stock-Based Compensation," effective January 1, 2003. See Note 18 for further discussion of SFAS 123(R).

    PPL recorded total compensation costs related to stock-based compensation awards of $16 million and $22 million for the three months ended March 31, 2006 and 2005. The income tax benefits related to these costs were $7 million and $9 million for the three months ended March 31, 2006 and 2005. The 2005 period included $5 million after tax, or $0.01 per share, related to periods prior to 2005 to record accelerated recognition of expense for employees at or near retirement age. The prior period amounts were not material to previously issued financial statements.

    PPL Energy Supply recorded total compensation costs related to stock-based compensation awards of $12 million and $15 million for the three months ended March 31, 2006 and 2005. The income tax benefits related to these costs were $5 million and $6 million for the three months ended March 31, 2006 and 2005. The 2005 period included $3 million after tax related to periods prior to 2005 to record accelerated recognition of expense for employees at or near retirement age. The prior period amounts were not material to previously issued financial statements.

    PPL Electric recorded total compensation costs related to stock-based compensation awards of $3 million and $6 million for the three months ended March 31, 2006 and 2005. The income tax benefits related to these costs were $1 million and $2 million for the three months ended March 31, 2006 and 2005. The 2005 period included $2 million after tax related to periods prior to 2005 to record accelerated recognition of expense for employees at or near retirement age. The prior period amounts were not material to previously issued financial statements.

    Restricted Stock and Restricted Stock Units

    Restricted stock and restricted stock unit activity for the three months ended March 31, 2006 was:
      
    Restricted
    Shares
     
    Weighted-Average
    Grant Date Fair Value
    PPL
            
    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 
             
    PPL Energy Supply
            
    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 
             
    PPL Electric
            
    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 

    The weighted-average grant date fair value of restricted stock and restricted stock units granted during the three months ended March 31, 2005, was $27.08 for PPL, $27.27 for PPL Energy Supply and $27.11 for PPL Electric.

    Unrecognized compensation cost related to nonvested awards was:
      
    Unrecognized
    Compensation Cost
     
    Weighted-Average
    Period for Recognition
             
    PPL $16   3.7 years 
             
    PPL Energy Supply  13   3.4 years 
             
    PPL Electric  2   1.8 years 

    The total fair value of shares vesting was:

      
    March 31,
    2006
     
    March 31,
    2005
     
             
    PPL $10  $8 
             
    PPL Energy Supply  4   2 
             
    PPL Electric  1   1 
    Stock Options

    Stock option activity under the plans for the three months ended March 31, 2006 was:

      
    Number of Options
     
    Weighted-Average Exercise Price
     
    Weighted-Average Remaining Contractual Term
     
    Aggregate Intrinsic Value
    PPL
                    
                     
    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             
                     
    PPL Energy Supply
                    
                     
    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             
                     
    PPL Electric
                    
                     
    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             
    The total intrinsic value of stock options exercised was:

      
    March 31,
    2006
      
    March 31,
    2005
             
    PPL $1  $13 
             
    PPL Energy Supply  1   2 
             
    PPL Electric      1 

    Unrecognized compensation cost related to stock options is:

      
    Unrecognized
    Compensation Cost
     
    Weighted-Average
    Period for Recognition
             
    PPL and PPL Energy Supply $3   2.3 years 

    Cash received from stock option exercises for the three months ended March 31, 2006 and 2005, was $2 million and $24 million. The income tax benefits from share-based arrangements for the three months ended March 31, 2006 and 2005, were $2 million and $6 million, with $4 million attributed to stock option exercises for 2005.
    The estimated fair value of each option granted was calculated using a Black-Scholes option-pricing model. The weighted-average assumptions used in the model were:

      
    2006
     
    2005
     
          
    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% 

    Based on the above assumptions, the weighted-average grant date fair value of options granted during the three months ended March 31, 2006 and 2005, was $4.86 and $3.99.

    PPL uses historical volatility to value its stock options using the Black-Scholes option pricing model. Volatility over the expected term of the options is evaluated with consideration given to prior periods that may need to be excluded based on events not likely to recur that had impacted PPL's volatility in those prior periods. Management's expectations for future volatility, considering potential changes to PPL's business model and other economic conditions, are also reviewed in addition to the historical data to determine the final volatility assumption.

    Directors Stock Units(PPL)

    Under the Directors Deferred Compensation Plan, stock units are used to compensate members of PPL's Board of Directors who are not employees of PPL. Such stock units represent shares of PPL's common stock to which board members are entitled after they cease serving as a member of the Board of Directors. Board members are also entitled to defer any or all of their cash compensation into stock units. The stock unit accounts of each board member are increased based on dividends paid or other distributions on PPL's common stock. There were 282,008 stock units outstanding at March 31, 2006. Compensation expense was insignificant for the periods ending March 31, 2006 and 2005.

    Stock Appreciation Rights(PPL and PPL Energy Supply)

    WPD uses stock appreciation rights to compensate senior management employees. Stock appreciation rights are granted with a reference price to PPL's common stock at the date of grant. These awards vest over a three-year period and have a 10-year term, during which time employees are entitled to receive a cash payment of any appreciation in the price of PPL's common stock over the grant date value. At March 31, 2006, there were 402,398 stock appreciation rights outstanding. Compensation expense was insignificant for the periods ending March 31, 2006 and 2005.

    10.  
    Pension and Other Postretirement Benefits

    (PPL and PPL Energy Supply)

    Net periodic pension and other postretirement benefit costs were:

      
    Three Months Ended March 31,
         
      
    Pension Benefits
     
    Other Postretirement
    Benefits
         
      
    Domestic
     
    International
        
               
      
    2006
     
    2005
     
    2006
     
    2005
     
    2006
     
    2005
                       
    PPL
                            
    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 
                             
    PPL Energy Supply
                            
    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.  
    Commitments and Contingent Liabilities

    Energy Purchases, Energy Sales and Other Commitments

    Energy Purchase Commitments

    (PPL, PPL Energy Supply and PPL Electric)


    PPL and PPL Energy Supply enter into long-term purchase contracts to supply the fuel requirements for generation facilities. These include contracts to purchase coal, emission allowances, natural gas, oil and 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.


    PPL and PPL Energy Supply entered into long-term power purchase agreements with two wind project developers to purchase the full output of their facilities when they begin commercial 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.

    through 2026.


    As part of the purchase of generation assets from Montana Power, PPL Montana assumed a power purchase agreement, which was still in effect at March 31, 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 Contracts


    In 1998, PPL Electric recorded a loss accrual for above 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.


    Energy Sales Commitments(PPL and PPL Energy Supply)


    PPL Energy Supply enters into long-term power sales contracts in connection with its load-serving activities or associated with certain of its power plants. These power sales contracts extend for terms through 2017. All long-term contracts were executed at pricing that approximated market rates, including profit margin, at the time of execution.

    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.


    On July 1, 2002, PPL 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.


    In 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.

    In 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.

    may reach 313 MW.


    As a result of New Jersey's Electric Discount and Energy Competition Act, the New Jersey Board of Public Utilities authorized and made available to power suppliers, on a competitive basis, the opportunity to provide Basic Generation Service (BGS) to all non-shopping New Jersey customers. In February 2003, PPL EnergyPlus was awarded a 34-month fixed-price BGS 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.

    2006.


    In 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.

    PPL Montana Hydroelectric License Commitments(PPL and associated electricity. 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. 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 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.

    PPL Montana entered into two Memoranda of 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.

    spend $34 million between 2006 and 2040.


    Legal Matters


    (PPL, PPL Energy Supply and PPL Electric)


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


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


    In August 2001, a purported class-action lawsuit was filed by a group of shareholders of Montana Power against Montana Power, the directors of Montana Power, certain advisors and consultants of Montana Power and PPL Montana. The plaintiffs allege, among other things, that Montana Power was required to, and did not, obtain shareholder approval of the sale of Montana Power's generation assets to PPL Montana in 1999. Although most of the claims in the complaint are against Montana Power, its board of directors,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.

    matter.


    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.


    In November 2004, PPL Montana, Avista Corporation and PacifiCorp commenced an action for declaratory judgment in Montana First Judicial District Court seeking a determination that no lease payments or other compensation for 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.


    Regulatory Issues


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


    Through its subsidiaries, PPL made 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.


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


    In June 2003, the FERC took several actions as a result of a number of related investigations. The FERC terminated proceedings pursuant to which it had been considering whether to order refunds for spot market bilateral sales made in the Pacific Northwest, including sales made by PPL Montana, during the period December 2000 through June 2001. The FERC explained that the totality of the circumstances made refunds 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.

    a subject of these investigations.


    Litigation arising out of the California electricity supply situation has been filed in California courts against sellers of energy to the California ISO. The plaintiffs and intervenors in these legal proceedings allege, among other things, abuse of market power, manipulation of market prices, unfair trade practices and violations of state antitrust laws, and seek other relief, including treble damages and attorneys' fees. While PPL's subsidiaries have not been named by the plaintiffs in these legal proceedings, PPL Montana was named by 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.


    In February 2004, the Montana Public Service Commission initiated a limited investigation of the Montana retail electricity market for the years 2000 and 2001, focusing on how that market was affected by transactions involving the possible manipulation of the electricity grid in the western U.S. The investigation includes all public utilities and licensed electricity suppliers in Montana, including PPL Montana, as well as other entities that may possess relevant information. Through its subsidiaries, PPL is a licensed electricity supplier in Montana and a wholesale supplier in the western U.S. In June 2004, the Montana Attorney General served PPL Montana and more than 20 other companies with subpoenas requesting documents, and PPL Montana 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,

    While PPL and its subsidiaries believe that they have not engaged in any improper trading or marketing practices affecting the 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.

    proceedings.


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


    In December 2002, PPL was served with a complaint against PPL, PPL EnergyPlus and PPL Electric filed in the U.S. District Court for the Eastern District of Pennsylvania by a group of 14 Pennsylvania boroughs that apparently alleges,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.

    boroughs.


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

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


    New England Investigation(PPL and PPL Energy Supply)


    In January 2004, PPL became aware of an investigation by the Connecticut Attorney General and the FERC's Office of Market Oversight and Investigation (OMOI) regarding allegations that natural gas-fired generators located in New England illegally sold natural gas instead of generating electricity during the week of January 12, 2004. Subsequently, PPL and other generators were served 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.


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


    In December 2004, Exelon Corporation, on behalf of its subsidiary, PECO Energy, Inc. (PECO), filed a complaint against PJM and PPL Electric with the FERC alleging that PJM had overcharged PECO from April 1998 through May 2003 as a result of an error by PJM in the State Estimator Model used in connection with billing all PJM customers for certain transmission, spot market energy and ancillary services charges. Specifically, the complaint 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.


    In April 2005, 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


    PPL Electric recognized an after-tax charge of 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."


    In September 2005, PPL Electric and Exelon Corporation filed a proposed settlement agreement regarding this matter with the FERC. In March 2006, the FERC rejected the settlement agreement indicating that the agreement involves material issues of fact that it cannot decide without further information, and ordered the matter to be set for hearing.

    Subsequently, in March 2006, PPL Electric and Exelon filed with the FERC a new proposed settlement agreement under which PPL Electric would pay approximately $41 million over a five-year period to PJM through a new transmission charge that, under applicable law, would be recoverable from PPL Electric's retail customers. PJM would forward amounts collected under this new charge to PECO. The FERC has not yet acted on this new proposed settlement agreement.

    PPL, PPL Electric and PPL Energy Supply cannot be certain of the outcome of this matter or the impact on PPL and its subsidiaries. Some or all of the first quarter 2005 charges for this matter may be reversed in a future period depending on the outcome of this matter, the potential for recovery of any amounts paid as a result of the additional FERC proceedings, the application of the relevant provisions of the energy supply agreements between PPL Electric and PPL EnergyPlus and other factors. Depending on these factors, PPL Energy Supply, the parent company of PPL EnergyPlus, may incur some or all of the costs associated with this matter in a future period.


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


    In December 1998, the FERC issued an order authorizing PPL EnergyPlus to make wholesale sales of electric power and related products at market-based rates. In that order, the FERC directed PPL EnergyPlus to file an updated market analysis within three years of the date of the order, and every three years thereafter. PPL EnergyPlus filed its initial updated market analysis in December 2001. Several parties thereafter filed interventions and protests requesting that PPL EnergyPlus be required to provide additional information demonstrating that it has met the FERC's market power tests necessary for PPL EnergyPlus to continue 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.


    In September 2005, the FERC issued an order conditionally approving the Eastern market-based rate filing, subject to PPL subsidiaries making a compliance filing providing further support that they cannot erect other non-transmission barriers to entry into the generation market. The PPL subsidiaries made this compliance filing in October 2005.
    Also in September 2005, in an order on PPL's western market-based rate filing, the FERC found that PPL Montana did not pass one of the FERC's initial screening tests for market power in NorthWestern's control area, namely the wholesale market share screen. As a result, PPL Montana was required to make a more detailed filing with the FERC demonstrating that it meets the market power tests. Also, the FERC has established a refund effective date of November 8, 2005 (for sales made in NorthWestern's control area pursuant to contracts entered into on and after that date), in the event that PPL Montana does not pass the FERC's market power tests. The FERC's order is not a definitive determination that PPL Montana has market power but rather the FERC's mechanism for analyzing market-based rate authority applications that require further scrutiny. In October 2005, PPL Montana made the more detailed filing with the FERC, which PPL Montana believes demonstrates that it cannot exercise generation market power in NorthWestern's control area and should be granted market-based rate authority in that area. The Montana Public Service Commission is contending in this proceeding that PPL Montana possesses market power in NorthWestern's control area and that the FERC should deny PPL Montana authority to sell power at market-based rates. The Montana Consumer Counsel 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.

    proceeding.

    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)


    In January 2003, PPL negotiated an agreement with ISO - 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.


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


    PPL, through its subsidiaries, has interests in two synthetic fuel production facilities: the Somerset facility located in Pennsylvania and the Tyrone facility located in Kentucky. PPL receives tax credits pursuant to Section 29 of the Internal Revenue Code based on the sale of synthetic fuel from these facilities to 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.


    To qualify for the Section 29 tax credits, the synthetic fuel must meet three primary conditions: (i) there must be a significant chemical change in the coal feedstock, (ii) the product must be sold to an unaffiliated entity, and (iii) the production facility must have been placed in service before July 1, 1998.


    In addition, Section 29 provides for the 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.

    Accounting for inflation, PPL currently estimates 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.

    Since PPL 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.


    In 2005, PPL entered into economic hedge transactions that serve to mitigate some of the earnings and cash flow impact of increases in crude oil prices for 2006 and 2007, with the mark-to-market value of these hedges reflected in "Energy-related businesses" revenues on the Statement of Income. Based on forecasted oil prices and other considerations, in early April 2006, PPL suspended operations at its Somerset facility. In addition, PPL currently expects to suspend operations of the Tyrone facility 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.

    will be permanent.


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

    In June 2003, the IRS 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.


    There currently are legislative proposals pending in the U.S. Congress that could affect the 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.

    In October 2003, 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 operators


    Energy Policy Act of synthetic 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

    2005(PPL, PPL Energy Supply and PPL Electric)


    In August 2005, President Bush signed into law the Energy Policy Act of 2005 (the "2005 Energy Act"). The 2005 Energy Act is comprehensive legislation that will substantially affect the regulation of energy companies. The Act amends federal energy laws and provides the FERC with new oversight responsibilities. Among the important changes to be implemented as a result of this legislation are:

    ·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.

    The implementation of the 2005 Energy Act requires proceedings at the state level and the development of regulations by the FERC, the DOE and other federal agencies, some of which have not been finalized. PPL cannot predict when all of these proceedings and regulations will be finalized.

    PPL cannot predict with certainty the impact of the 2005 Energy Act and any related regulations on PPL and its subsidiaries.

    Environmental Matters - Domestic

    (PPL, PPL Energy Supply and PPL Electric)

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


    Air (PPL and PPL Energy Supply)

    The Clean Air Act deals, in part, with acid rain, attainment of federal ambient ozone standards, 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.


    Citing its authority under the 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.

    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.


    In order to continue meeting existing sulfur dioxide reduction requirements of the Clean Air Act, PPL 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.

    Also citing its authority under the 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.

    Based on preliminary industry estimates, the costs are expected to exceed $150 million.


    Pennsylvania and 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.

    As a result of a petition to initiate state-specific rulemaking for mercury emissions that was filed by a coalition of environmental and other public interest groups with the Montana Board of Environmental Review (BER) in September 2005, the Montana Department of Environmental Quality (DEQ) is developing a rule to recommend to the BER that would be more stringent than the EPA's mercury regulations. The Montana BER has authorized the DEQ to move forward with the development of this mercury rule, and the proposed rule is expected to be released for formal public comment by May 2006. At the same time, the DEQ also will request comments on an alternative rule that would adopt the requirements of the EPA's regulations.

    PPL and other energy companies and industry groups oppose state-specific regulations that are more stringent than the current federal rules 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.


    In addition to the above rules, the Clean Air Visibility Rule was issued by the EPA on June 15, 2005, to address regional haze or regionally-impaired visibility caused by multiple sources over a wide area. The 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.


    In 1999, the EPA initiated enforcement actions against several utilities, asserting that older, coal-fired power plants operated by those utilities have, over the years, been modified in ways that subject them to more stringent "New Source" requirements under the Clean Air Act. The EPA has 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.

    position on New Source Review. In 2003, the EPA issued changes to its "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 October 2005, the EPA proposed changing its rules on how to determine whether a project results in an emissions increase and is therefore subject to review under the "New Source" regulations. The EPA's proposed tests are consistent with the position of energy companies and industry groups and, if adopted, would substantially reduce the uncertainties under the current regulations. PPL cannot predict whether these proposed new tests will be adopted. In addition to proposing these new tests, the EPA also announced in October 2005 that it will not bring new enforcement actions with respect to projects that would satisfy the proposed new tests or the EPA's 2003 clarifications referenced above. Accordingly, PPL believes that it is unlikely that the EPA will follow up on the information requests that had been issued to PPL Montana's Corette and Colstrip plants by EPA Region VIII in 2000 and 2003, respectively, and to PPL Generation's Martins Creek plant by EPA Region III in 2002. However, states and environmental groups also have been bringing enforcement actions alleging violations of "New Source" requirements by coal-fired plants, and PPL is unable to predict whether such state or citizens enforcement actions will be brought with respect to any of its affiliates' plants.

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

    In addition to the opacity concerns raised by the New Jersey DEP, the Pennsylvania DEP also has raised concerns about the opacity of emissions from the Martins Creek 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.


    In December 2003, PPL Montana, as operator of the Colstrip facility, received an Administrative Compliance Order (ACO) from the EPA pursuant to the Clean Air Act. The ACO alleges that Units 3 and 4 of the facility have been in violation of the Clean Air Act permit at Colstrip since 1980. The permit required Colstrip to submit for review and approval by the EPA an analysis and proposal for reducing emissions of nitrogen oxide to address visibility concerns if and 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.

    In addition to the 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.

    Pennsylvania and Montana have not, at this time, established any formal programs to address carbon dioxide and other greenhouse gases. 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 Pennsylvania or Montana develop regulations imposing mandatory reductions of carbon dioxide and other greenhouse gases on generation facilities, the 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.

    of such reductions could be significant.


    Water/Waste (PPL and PPL Energy Supply)


    In August 2005, a leak from a disposal basin containing fly ash and water used in connection with the operation of the two 150-MW coal-fired generating units at the Martins Creek generating facility caused the discharge of 100 million gallons of water containing ash from the basin onto adjacent roadways and fields, and into a nearby creek and the Delaware River. The leak was stopped, and PPL has determined that the problem was caused by a failure in the disposal basin's discharge structure. PPL has conducted extensive clean-up and is continuing to work with the Pennsylvania DEP and other appropriate agencies and consultants to assess the extent of the ash remaining in the river and whether the release caused any environmental damage. PPL shut down the two coal-fired generating units in September 2005 and placed the units back in service in December 2005 after completing the repairs and upgrades to the basin and obtaining the Pennsylvania DEP's approval.

    In September 2005, PPL Martins Creek and the Pennsylvania DEP were served with notice by the Delaware Riverside Conservancy and several citizens of their intention to file a citizens' suit on the basis that the leak from the disposal basin at Martins Creek allegedly violated various state and federal laws. The Pennsylvania DEP subsequently filed a complaint in Commonwealth court against PPL Martins Creek and PPL Generation, alleging violations of various state laws and regulations and seeking penalties and injunctive relief. The Delaware Riverside Conservancy and several citizens have been granted the right, without objection from PPL, to intervene in the Pennsylvania DEP's action. PPL intends to engage in settlement discussions to resolve the Pennsylvania DEP action. In March 2006, the Delaware Riverside Conservancy and several citizens also filed a purported class action lawsuit in the Superior Court of New Jersey, Warren County, alleging that the fly ash spill caused damages to property along a 40-mile stretch of the Delaware River. This lawsuit has not yet been served on PPL.

    At this time, PPL has no reason to believe that the Martins Creek leak has caused any danger to human health or any adverse biological impact on the river aquatic life. However, a group of natural resource trustees, along with the Delaware River Basin Commission, has been conducting an assessment of any natural resource damages that could have been caused by the Martins Creek leak. PPL expects the trustees and the Delaware River Basin Commission to seek to recover their costs as well as any damages they determine were caused by the leak. PPL cannot predict when the assessment will be completed, but does not expect it to be completed before the end of 2006.

    PPL Energy Supply recognized a $33 million pre-tax charge in the third quarter of 2005 and an additional $15 million pre-tax charge in the fourth quarter of 2005 (or a total of $31 million after tax, or $0.08 per share for PPL) in connection with the then-expected on-site and off-site costs relating to the remediation. Based on its ongoing assessment of the expected remediation costs, in the first quarter of 2006 PPL Energy Supply reduced the estimate in connection with the current expected costs of the leak by $3 million, of which $2 million relates to off-site costs and the remainder to on-site costs. This reduction was included in "Other operation and maintenance" on the Statement of Income. At March 31, 2006, $39 million of the $45 million estimate relates to the off-site costs, and the $6 million balance of the total charge relates to the on-site costs. PPL and PPL Energy Supply cannot predict the final cost of assessment and remediation of the leak, the outcome of the action initiated by the Pennsylvania DEP, the outcome of the natural resource damage assessment, and the exact nature of any other regulatory or other legal actions that may be initiated against PPL, PPL Energy Supply or their subsidiaries as a result of the disposal basin leak. PPL and PPL Energy Supply also cannot predict the extent of the fines or damages that may be sought in connection with any such actions or the ultimate financial impact on PPL or PPL Energy Supply.

    Seepages have been detected at 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.


    In 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 on


    PPL has been in discussions with the Pennsylvania DEP concerning the thermal impactdischarges 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.

    approximately $125 million.


    The EPA has significantly tightened the water quality standard for arsenic. The revised standard 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.


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


    Superfund and Other Remediation


    (PPL, PPL Energy Supply and PPL Electric)


    In 1995, PPL Electric and PPL Generation and, in 1996, PPL Gas Utilities entered into consent orders with the Pennsylvania DEP to address a number of sites that were not being addressed under another regulatory program such as Superfund, but for which PPL Electric, PPL Generation or PPL Gas Utilities may be liable for remediation. This may include potential PCB contamination at certain PPL Electric substations and pole sites; potential contamination at a number of coal gas manufacturing facilities formerly owned or operated by PPL Electric; oil or other contamination 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.


    Since the PPL Electric Consent Order expired on January 31, 2005, and since only four sites remained, PPL has negotiated a new consent order and agreement (COA) with the Pennsylvania DEP that combines both PPL Electric's and PPL Gas Utilities' consent orders into one single agreement. As of March 31, 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.


    At March 31, 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.


    The Pennsylvania DEP has raised concerns regarding potential leakage of natural gas from the Tioga gas storage field owned by PPL Gas Utilities. The Pennsylvania DEP believes gas is leaking from the storage field and causing methane impacts to nearby residential wells. While PPL Gas has no evidence to confirm or deny the Pennsylvania DEP's position, PPL Gas Utilities has initiated a plan to identify and address potential sources of gas leakage from the field. PPL Gas Utilities is discussing the matter with the operator of the field and with the Pennsylvania DEP.

    The EPA is evaluating the risks associated with naphthalene, a chemical by-product of coal gas manufacturing operations. As a result of the EPA's evaluation, individual states may establish stricter standards for water quality and soil clean-up. This could require several PPL subsidiaries to take more extensive assessment and remedial actions at former coal gas manufacturing facilities. The costs to PPL of complying with any such requirements are not now determinable, but could be significant.


    (PPL and PPL Energy Supply)


    Under the Pennsylvania Clean Streams Law, subsidiaries of PPL Generation are obligated to remediate acid mine drainage at former mine sites and may be required to take additional measures to prevent potential acid mine drainage at previously capped refuse piles. One PPL Generation subsidiary is pumping and treating mine water at two mine sites. Another PPL Generation subsidiary is installing passive wetlands treatment at a third site, and the Pennsylvania DEP has suggested that it may require that PPL Generation subsidiary to pump and treat the mine water at that third site. At March 31, 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.


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


    (PPL, PPL Energy Supply and PPL Electric)


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


    Asbestos(PPL and PPL Energy Supply)


    There have been increasing litigation claims throughout the U.S. based on exposure to asbestos against companies that manufacture or distribute asbestos products or that have these products on their premises. Certain of PPL'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 Magnetic Fields(PPL, PPL Energy Supply and PPL Electric)


    Concerns have been expressed by some members of the public regarding potential health effects of power frequency 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. Bethel


    Environmental Matters - International (PPL and PPL Energy Supply)

    In 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)


    U.K.


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


    Latin America


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


    Other


    Nuclear Insurance(PPL and PPL Energy Supply)


    PPL Susquehanna is a member of certain insurance programs 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.


    In the event of a nuclear incident at the Susquehanna station, PPL Susquehanna's public liability for claims resulting from such incident would be limited to about $10.8 billion under provisions of The Price Anderson Act Amendments under the Energy Policy Act of 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.


    Guarantees and Other Assurances


    (PPL)


    PPL fully and unconditionally guarantees all of the debt securities of PPL Capital Funding.


    (PPL, PPL Energy Supply and PPL Electric)


    The table below provides an update to those guarantees that are within the scope of FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34," and are specifically disclosed in Note 14 to the Financial Statements contained in each Registrant's 20042005 Form 10-K.

       

    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)

     

       
    Recorded Liability at
     
    Exposure at
      
       
    March 31, 2006
     
    December 31, 2005
     
    March 31, 2006 (a)
     
    Expiration Date
    PPL
                 
                  
    Residual value guarantees of leased equipment       $8  2007(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        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)
                  
    PPL Electric (c)
                 
                  
    Guarantee of a portion of an unconsolidated entity's debt        7 (d) 2008 
                  
    Residual value guarantees of leased equipment        73  2007(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 2006,2007, equipment of similar value is generally leased and guaranteed on an on-going basis.

    (c)

     

    Other than the exceptions noted in (e) below, all guarantees of PPL Energy Supply and PPL Electric also apply to PPL on a consolidated basis.

    (d)

     

    Reflects principal payments only.

    (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)

     

    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 Transactions

  • PPL, PPL Energy Supply and PPL Electric and their subsidiaries provide other miscellaneous guarantees through contracts entered into in the normal course of business. These guarantees are primarily in the form of various indemnifications or warranties related to services or equipment and vary in duration. The obligated amounts of these guarantees often are not explicitly stated, and the overall maximum amount of the obligation under such guarantees cannot be reasonably estimated. Historically, PPL, PPL Energy Supply and PPL Electric and their subsidiaries have not made any significant payments with respect to these types of guarantees. As of March 31, 2006, the aggregate fair value of these indemnifications related to arrangements entered into subsequent to December 31, 2002, was insignificant.

    12.  
    Related Party Transactions

    Affiliate Trust(PPL and PPL Energy Supply)


    At both March 31, 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.


    PLR Contracts(PPL Energy Supply and PPL Electric)


    PPL Electric has power sales agreements with PPL EnergyPlus, effective July 2000 and January 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.


    Under one of the PLR contracts, PPL Electric is required to make performance assurance deposits with PPL EnergyPlus when the market price of electricity is less than the contract price by more than its contract collateral threshold. Conversely, PPL EnergyPlus is required to make performance assurance deposits with PPL Electric when the market price of electricity is greater than the contract price by more than its contract collateral threshold. PPL Electric 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.

    PPL Energy Supply records this as affiliated interest income, which is included in "Other Income - net" on the Statement of Income.


    In 2001, PPL Electric made a $90 million up-front payment to PPL EnergyPlus in connection with the PLR contracts. The up-front payment is being amortized by both parties over the term of the PLR contracts. The unamortized balance of this payment, and other payments under the contract, was $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.


    NUG Purchases(PPL Energy Supply and PPL Electric)


    PPL Electric has a reciprocal contract with PPL EnergyPlus to sell electricity purchased under contracts with NUGs. PPL Electric purchases electricity from the NUGs at contractual rates and then sells the electricity at the same 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.


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


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

     

    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.


     
    Three Months Ended March 31,
     
       
     
    PPL Energy Supply
     
    PPL Electric
     
         
     
    2006
     
    2005
     
    2006
     
    2005
     
             
    Direct expenses$30 $25 $14 $14 
                 
    Overhead costs 27  19  9  12 

    Intercompany Borrowings


    (PPL Energy Supply)


    PPL Energy Supply had no notes receivable from affiliates at March 31, 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.

    2005.


    PPL Energy Supply can borrow up to $650 million under a note payable to an affiliate until May 2010. In May 2004, PPL Energy Supply 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.


    In late December 2005, PPL Energy Supply issued a $30 million demand note payable to an affiliate. There was a balance of $7 million and $8 million at March 31, 2006 and December 31, 2005, which is shown on the Balance Sheet as "Note Payable to Affiliate," a current liability. Interest is payable monthly at a rate equal to LIBOR plus 1.5%. Interest on this note was insignificant for the three months ended March 31, 2006, and is reflected in "Interest Expense with Affiliates" on the Statement of Income.

    (PPL Electric)


    In August 2004, a PPL Electric subsidiary 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."

    Interest earned on 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.


    Intercompany Derivatives (PPL Energy Supply)


    PPL Energy Supply has entered into a combination of average rate forward and average rate option contracts with PPL. These contracts have terms identical to average rate forwards and average rate options entered into by PPL with third parties to protect expected income denominated in British pounds sterling. At March 31, 2006, the total amount of these contracts was £88 million and the market value of these positions, representing the amount PPL Energy Supply would receive from PPL upon their termination, was $2 million and is reflected in "Other Income - net" on the Statement of Income and "Price risk management assets" on the Balance Sheet.
    Trademark Royalties (PPL Energy Supply)

    A PPL subsidiary owns PPL trademarks and bills certain affiliates for their use. PPL Energy Supply was allocated $9 million and $8 million of this license fee for 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 - Net


  • 13.  
    Other Income - Net

    (PPL, PPL Energy Supply and PPL Electric)


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

     

    Three Months Ended
    March 31,

     

    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

     

             
  • Derivative Instruments and Hedging Activities

    was:


  •  
    Three Months Ended
    March 31,
      
    PPL
    2006
     
    2005
            
    Other Income
           
            
    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 
            
    Other Deductions
           
            
    Impairment of investment in U.K. real estate (Note 8) 8     
            
    Charitable contributions 2   2 
            
    Miscellaneous - Domestic 3   2 
            
    Other Income - net
    $9  $7 
            
    PPL Energy Supply
           
            
    Other Income
           
            
    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 
            
    Other Deductions
           
            
    Impairment of investment in U.K. real estate (Note 8) 8     
            
    Miscellaneous - Domestic 3   3 
            
    Other Income - net
    $10  $8 
            
    PPL Electric
           
            
    Other Income
           
            
    Interest income$3  $2 
            
    Affiliated interest income 5   3 
            
    Miscellaneous 1     
            
    Total 9   5 
            
    Other Deductions
         1 
            
    Other Income - net
    $9  $4 

    14.  
    Derivative Instruments and Hedging Activities

    (PPL and PPL Energy Supply)


    PPL and PPL Energy Supply have entered into energy derivative transactions that hedge a specific risk, but do not qualify for hedge accounting under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and interpreted. The unrealized gains and losses on these transactions are classified as non-trading and are reflected on the Statement of Income in either "Wholesale energy marketing" revenues or "Fuel" and "Energy Purchases."

    Fair Value Hedges


    PPL and PPL Energy Supply enter into financial or physical contracts to hedge a portion of the fair value of firm commitments of forward electricity sales.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.

    2013. PPL and PPL Energy Supply 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.

    denominated in foreign currencies. These forward contracts range in maturity through 2008.


    Cash Flow Hedges


    PPL and PPL Energy Supply enter into financial and physical contracts, including forwards, futures and swaps, to hedge the price risk associated with electric, gas and oil commodities. These contracts range in maturity through 2010.2012. 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.

    PPL and PPL Energy Supply also enter into foreign currency forward contracts to hedge the cash flows associated with foreign currency-denominated debt, the exchange rates associated with firm commitments denominated in foreign currencies and the net investment of foreign operations. These forward contracts range in maturity through 2028.

    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 $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.

    2005.


    Due to hedge ineffectiveness, PPL and PPL Energy Supply reclassified 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, PPL and PPL Energy Supply reclassified losses, after tax, of $2 million.


    As of March 31, 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.


    This table shows the after tax change in accumulated unrealized gains or losses on derivatives after tax, in accumulated other comprehensive incomeloss.

      
    Three Months Ended
    March 31,
       
      
    2006
     
    2005
    PPL
            
    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)
             
    PPL Energy Supply
            
    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)

    PPL and PPL Energy Supply have entered into forward contracts to hedge their exposure to changes in market prices of certain metals necessary for the following periods:

      

    Three Months Ended
    March 31,

      

    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."


    Credit Concentration


    (PPL and PPL Energy Supply)

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


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


    At 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.


    At March 31, 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.


    PPL and PPL Energy Supply generally have the right to request collateral from their counterparties in the event that the counterparties' credit ratings fall below investment grade. It is also the policy of PPL and PPL Energy Supply to enter into netting agreements with all of their counterparties to minimizelimit credit exposure.


    (PPL Energy Supply and Electric)

    PPL 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:

      

    Pension Benefits

      

    Other Postretirement
    Benefits

     

      

     
      

    Three Months Ended
    March 31,

      

    Three Months Ended
    March 31,

     

      

     
      

    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

    )

            

  • Restricted Cash


  • 15.  
    Restricted Cash

    (PPL, PPL Energy Supply and PPL Electric)


    The following table details the components of restricted cash by reporting entity and by type:

     

    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

     

    type.

      
    March 31, 2006
           
      
    PPL
     
    PPL Energy Supply
     
    PPL Electric
    Current:
                
                 
    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 
                 
    Noncurrent:
                
                 
    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 

      
    December 31, 2005
           
      
    PPL
     
    PPL Energy Supply
     
    PPL Electric
    Current:
                
                 
    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 
                 
    Noncurrent:
                
                 
    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 

    (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.

    (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 Obligations

  • 16.  
    Goodwill

    (PPL and PPL Energy Supply)


    The changes in the carrying amounts of goodwill by segment were:

      
    PPL Energy Supply
       
    PPL
      
    Supply
     
    International Delivery
     
    Total
     
    Pennsylvania Delivery
     
    Total
                         
    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.  
    Asset Retirement Obligations

    (PPL and PPL Energy Supply)

    The change in the carrying amounts of the AROs was as follows:

    ARO at December 31, 2004

     

    $

    257

     

    Add: Accretion expense

      

    5

     

    ARO at March 31, 2005

     

    $

    262

     

     

    was:


    AROs at December 31, 2005 $298 
         
    Add: Accretion expense  5 
         
    AROs at March 31, 2006 $303 

    Funds in the nuclear decommissioning trust are legally restricted for purposes of settling PPL's and PPL Energy Supply's ARO related to the decommissioning of the Susquehanna station. PPL Electric collects authorized nuclear decommissioning costs through the CTC. These revenues are passed on to PPL EnergyPlus under the power supply agreements between PPL Electric and PPL EnergyPlus. Similarly, these revenues are passed on to PPL Susquehanna under a power supply agreement between PPL EnergyPlus and PPL Susquehanna. These revenues, less applicable taxes, are used to fund the nuclear plant decommissioning trust funds and can only be used for future decommissioning costs. The aggregate fair value of the nuclear plant decommissioning trust 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 Standards

    2005.


  • 18.  
    New Accounting Standards

    (PPL, PPL Energy Supply and PPL Electric)


    FSP No. FIN 46(R)-6

    In April 2006, the FASB issued FSP No. FIN 46(R)-6, "Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)." FSP No. FIN 46(R)-6 provides that the variability to be considered in applying FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities, an Interpretation of ARB 51," (FIN 46(R)) should be based on the design of the entity involved. PPL and its subsidiaries will adopt the provisions of FSP No. FIN 46(R)-6 prospectively no later than July 1, 2006. Retrospective application to the date of the initial application of FIN 46(R) is permitted but not required. PPL and its subsidiaries do not plan to apply retrospective application to any period prior to the date of adoption. The adoption of FSP No. FIN 46(R)-6 is not expected to have a material impact on PPL and its subsidiaries.  However, the impact in periods subsequent to adoption could be material.

    SFAS 123(R)


    In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based Payment," which is known as SFAS 123(R) and replaces SFAS 123, "Accounting for Stock-Based Compensation," as amended by SFAS 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." Among other things, SFAS 123(R) eliminates the alternative to use the intrinsic value method of accounting for stock-based compensation. SFAS 123(R) requires public entities to recognize compensation expense for awards of equity instruments to employees based on the grant-date fair value of the awards.

    PPL and its subsidiaries adopted SFAS 123(R) 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).


    SFAS 155

    In February 2006, the FASB issued SFAS 155, "Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140." Among other items, SFAS 155 addresses certain accounting issues surrounding securitized financial assets and hybrid financial instruments with embedded derivatives that require bifurcation. PPL and its subsidiaries must adopt SFAS 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 47

    In 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.

    2007. PPL and its subsidiaries are currently in the process of 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.



    PPL CORPORATION AND SUBSIDIARIES


    Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations


    Overview


    PPL is an energy and utility holding company with headquarters in Allentown, PA. In PPL's 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.

    more information concerning the material risks and uncertainties that PPL faces in its businesses and with respect to its future earnings.


    The following information should be read in conjunction with PPL's Condensed Consolidated Financial Statements and the accompanying Notes.


    Terms and abbreviations are explained in the glossary. Dollars are in millions, except per share data, unless otherwise noted.


    Results of Operations


    The following discussion begins with a review of PPL's 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.


    Earnings

    Net income and the related EPS were:

      
    Three Months Ended
    March 31,
       
      
    2006
      
    2005
          
    Net income $280   $168 
              
    EPS - basic $0.74   $0.45 
              
    EPS - diluted $0.73   $0.44 

    The changes in 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.

    The period-to-period changes in earnings components, including domestic gross energy margins by region and significant income statement line items, are explained in the "Statement of Income 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%.

    Analysis."


    The Statement of Income reflects the results of past operations and is not intended as any indication of future operating results. Future operating results will necessarily be affected by various and diverse factors and developments. Furthermore, because results for interim periods can be disproportionately influenced by various factors and developments and by seasonal variations, the results of operations for interim periods do not necessarily indicate results or trends for the year.

    Earnings

    Net income and the related EPS were as follows:

      

    Three Months Ended
    March 31,

     

      

    2005

       

    2004

     

    Net income

     

    $

    168

       

    $

    177

     

    EPS - basic

     

    $

    0.89

       

    $

    1.00

     

    EPS - diluted

     

    $

    0.88

       

    $

    0.99

     

    The after-tax change in net income was due to:

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    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

    )

     

    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:

    International Delivery Segment:

    Pennsylvania Delivery Segment:

    All Segments:


    Segment Results


    Net income by segment was as follows:

      

    Three Months
    Ended March 31,

     

      

    2005

      

    2004

     

     

    Supply

     

    $

    86

      

    $

    89

     
     

    International Delivery

      

    62

       

    48

     
     

    Pennsylvania Delivery

      

    20

       

    40

     

     

    Total

     

    $

    168

      

    $

    177

     

    was:


      
    Three Months
    Ended March 31,
       
      
    2006
     
    2005
         
    Supply $143  $86 
             
    International Delivery  81   62 
             
    Pennsylvania Delivery  56   20 
             
    Total $280  $168 

    Supply Segment

    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.


    The Supply segment primarily consists of the activitiesdomestic energy marketing, domestic generation and domestic development operations of PPL Generation and PPL EnergyPlus.

    SegmentEnergy Supply.


    The Supply segment results in 2005 reflect the reclassification of the Sundance plant operating losses from certain income statement line items to "Loss from Discontinued Operations." See Note 8 to the Financial Statements for further discussion.

    Supply segment net income was as follows:

      

    Three Months
    Ended March 31,

     

      

    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 March 31,
       
      
    2006
     
    2005
    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 

    The after-tax change in net income was due to the following factors:

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    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

    )

     


     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
      
    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  

    The following after-tax items, which management considers unusual, had a significant impact on the Supply segment earnings.

      
    Three Months
    Ended March 31,
       
      
    2006
     
    2005
         
    Reduction in Enron reserve (Note 2) $9     
             
    Off-site remediation of ash basin leak
    (Note 11)
      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.

    Outlook

    Based on current forward energy prices, PPL 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.

    See "Regulatory Issues - IRS Synthetic Fuels Tax Credits" in Note 211 to the Financial Statements for additional information.

    PPL had projected an earnings contribution from the combination of synfuel projects and synthetic fuel-related hedges of $39 million (or $0.10 per share) in 2006.  Based upon projected production levels reflecting the suspension of PPL's synthetic fuel operations 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.

    In addition to producing synthetic fuel, PPL also purchases synthetic fuel from unaffiliated third parties, at prices below the market price of coal, for use at its coal-fired power plants. PPL estimates that 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.


    There currently are legislative proposals pending in the U.S. Congress that could affect the potential phase-out of the synthetic fuel tax credits for 2006 and 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 net carrying value of the property, plant and equipment and intangible assets associated with PPL'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 date, did not result in these assets being impaired. However, these estimates can change significantly 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 will continue to assess the Financial Statements for additional information on the accrual.

    status of its synfuel projects as changes in oil prices, legislation and other factors occur.


    International Delivery Segment


    The International Delivery segment 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.

    Segment


    International Delivery segment net income was as follows:

      

    Three Months
    Ended March 31,

     

      

    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 March 31,
       
      
    2006
     
    2005
         
    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 

    The after-tax change in net income was due to the following factors:

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    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

     


     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
    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.

    Outlook

    PPL projects that the International Delivery segment will experience increased operation and maintenance expenses in 2006 compared with 2005, primarily due to increasedresulting from higher pension costs and termination benefit expenses.

    currency exchange rates in 2006.


    Pennsylvania Delivery Segment


    The Pennsylvania Delivery segment includes the regulated electric and gas delivery operations of PPL Electric and PPL Gas Utilities.

    Segment


    Pennsylvania Delivery segment net income was as follows:

      

    Three Months
    Ended March 31,

     

      

    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 March 31,
       
      
    2006
     
    2005
    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 

    The after-tax change in net income was due to the following factors:

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    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
    (Note 9)

      

    (27

    )

      

    $

    (20

    )


     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
      
    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  

    The following after-tax items, which management considers unusual, had a significant impact on the Pennsylvania Delivery segment earnings.

      
    Three Months
    Ended March 31,
       
      
    2006
     
    2005
         
    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.

    Outlook

    PPL projects that the Pennsylvania Delivery segment will have flat revenues 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.

    Statement of 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.

    Income Analysis --


    Domestic Gross Energy Margins


    The following table provides pre-tax changes in the income statement line items that comprise domestic gross energy margins:

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    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

     

     

    margins.

     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
      
    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  

    (a)

     

    Adjusted to exclude the impact of any revenues and costs not associated with domestic gross energy 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.


    Changes in Domestic Gross Energy Margins By Region


    Domestic gross energy margins are generated through PPL's normal hedging (non-trading) activities, as well as trading activities. PPL manages its non-trading energy business on a geographic basis that is aligned with its generation assets.

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    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.


     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
    Non-trading     
          
    Eastern U.S. $45  
          
    Northwestern U.S.  24  
          
    Southwestern U.S.  2  
          
    Net energy trading  (6) 
          
    Domestic gross energy margins $65  

    Eastern U.S.


    Eastern U.S. non-trading margins were higher in the first quarter of 2006 compared with the same period in 2005, primarily because 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.

    Non-trading economic activity contributed $12 million to the quarter due to 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.

    marketing activities.


    Northwestern U.S.


    Northwestern U.S. non-trading margins were 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.

    energy purchase prices.


    Net Energy Trading


    PPL enters into certain energy contracts that meet the criteria of trading derivatives as defined by EITF Issue 02-3, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities." These physical and financial contracts cover trading activity associated with electricity, gas and oil. The $10

    Net energy trading margins decreased by $6 million increase 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.

    The physical volumes for electricity and gas associated with energy trading for the three months ended March 31, 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.

    same period last year.


    Utility Revenues


    The increase in utility revenues was attributable to the following:

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    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:


     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
    Domestic:
         
          
    Retail electric revenue (PPL Electric)     
          
    PLR electric generation supply $34  
          
    Electric delivery  (3) 
          
    Gas revenue (PPL Gas Utilities)  19  
          
    Other  1  
          
    International:
         
          
    Retail electric delivery (PPL Global)     
          
    U.K.  25  
          
    Chile  9  
          
    El Salvador  3  
          
    Bolivia  2  
          
    Foreign currency exchange rates  (9) 
          
      $81  

    The increase in utility revenues, excluding foreign currency exchange rate impacts, was primarily due to:

    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 Businesses

    Energy related


    Energy-related businesses contributed $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:


    See Note 811 to the Financial Statements); and
  • a $2 million increase from mechanical contracting and engineering subsidiaries due to a favorable closeout on a major project; partially offset by
  • a $6 million higher pre-tax operating loss from synfuel projects due to increased production levels which improve after-tax earnings.
  • Statements for an overall assessment of synthetic fuel tax credits.


    Other Operation and Maintenance


    The increasedecrease in other operation and maintenance expenses was due to:

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    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

     

      


     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
      
    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) 

    Depreciation

    The $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:

     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
      
    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  

    Other Income - net pension costs in 2005.

    See Note 13 to the Financial Statements for details of the costs of PPL's pension plans.

    Depreciation

    other income.


    Interest Expense

    The increasedecrease in depreciationinterest expense was due to:

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    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

      

     


     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
      
    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) 

    Income Taxes Other Than Income

    In 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 income taxes other than income.

    Other Income - net

    was due to:


     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
      
    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  

    See Note 115 to the Financial Statements for details of other income.

    Interest Expense

    The increase in interest expense was due to:

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    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

      

     

    (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 Taxes

    Income taxes decreased by $40 million. The decrease was primarily attributable to:

    rates.


    Discontinued Operations


    See "Discontinued Operations" in Note 8 to the Financial Statements for information regarding the 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.

    the Sundance power plant.


    Financial Condition


    Liquidity

    and Capital Resources


    At March 31, 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:


    ·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.

    Convertible Senior Notes

    The terms of PPL Energy Supply's $400 million 2.625% Convertible Senior Notes due 2023 include a market price trigger that permits holders to convert the notes during any fiscal quarter if the closing sale price of PPL's common stock exceeds $29.83 for at 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. 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. PPL and PPL Energy Supply have, and expect to continue to have, sufficient liquidity sources to fund any such conversions.

    Preference Stock

    In April 2006, PPL Electric sold 10 million depositary shares, each representing a quarter interest in a share of PPL Electric's 6.25% Series Preference Stock (Preference Shares), totaling $250 million. In connection with the sale of the 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. PPL Electric used the net proceeds of approximately $245 million from the offering to repurchase $200 million of 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.

    Holders of the depositary shares are entitled to all proportional rights and preferences of the 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 PPL Electric's outstanding preferred stock, and they have no voting rights, except as provided by operating activities;
  • law.

  • Dividends on the 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.

    The Preference Shares do not have a stated maturity, and are not subject to sinking fund requirements. However, PPL Electric may, at its option, redeem the Preference Shares in whole or in part from time to time for $100 per share (equivalent to $25 per depositary share), plus any declared and unpaid dividends, on or after April 6, 2011. It is PPL Electric's intention to redeem or repurchase the Preference Shares only from the proceeds of the sale of certain qualifying securities having equity characteristics similar to or greater than the applicable equity characteristics of the Preference Shares. PPL Electric may decide to affirm this intention in the future by making an enforceable covenant in favor of holders of a specific series of its outstanding long-term debt securities.

    Credit Facilities

    In March 2006, PPL Energy Supply extended the maturity of its 364-day reimbursement agreement, under which it can cause the bank to issue up to $200 million of 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.

    Planned Financing

    In March 2006, PPL, PPL Energy Supply and PPL Electric filed a combined omnibus registration statement registering various debt 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, and
  • an increase in short-term debt of $265 million; offset by
  • the retirement of $396 million of long-term debt;
  • the payment of $78 million of common and preferred dividends; and
  • $169 million of capital expenditures.
  • for general corporate purposes.


    Rating Agency Decisions


    Moody's, S&P 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.

    revisions or ratings affirmations.


    A credit rating reflects an assessment by the rating agency of the credit-worthiness associated with an issuer and particular securities that it issues. PPL's and its subsidiaries' credit ratings are based on information provided by PPL and other sources. The ratings of Moody's, S&P Moody's and Fitch are not a recommendation to buy, sell or hold any securities of PPL or its subsidiaries. Such ratings may be subject to revisions or withdrawal by thethese agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to theirthe securities.

    A downgrade in PPL's or its subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets.


    Moody's

    In 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.

    Moody's noted that PPL's financial performance improved in 2005 and that it expects PPL's financial performance to continue to improve in 2006. More specifically, 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.

    In March 2006, Moody's also reviewed the credit ratings of PPL Energy Supply and concluded that its ratings remain unchanged.

    S&P
    In connection with PPL Electric's issuance of Preference Shares in April 2006, S&P affirmed all of PPL Electric's A-/A-2 corporate credit ratings.
    Fitch

    In February 2006, Fitch's Europe, Middle East and Africa group implemented issuer default ratings (IDRs) based on its new IDR methodology. This implementation led to Fitch's assignment of the following IDRs and 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+.

    Fitch's outlook for WPD and its affiliates remains stable.

    Capital Expenditures

    The schedule below shows PPL's current capital expenditure projections for the years 2006 through 2010.

      
    Projected
     
        
      
    2006
     
    2007
     
    2008
     
    2009
     
    2010
     
    Construction
    expenditures (a)
                    
                      
     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.

    PPL's capital expenditure projections for the years 2006-2010 total $5.9 billion. Capital expenditure plans are revised periodically to 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.

    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 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:

    Fitch 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.

    debt securities.


    For additional information on PPL's liquidity and capital resources, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL's 20042005 Form 10-K.


    Risk Management - Energy Marketing & Trading and Other


    Market Risk


    Commodity Price Risk (Non-trading)


    PPL's non-trading commodity derivative contracts 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:

      

    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.


      
    Three Months Ended March 31,
       
      
    2006
     
    2005
         
    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)

    Beginning in January 2006, PPL instituted a program to hedge its exposures to changes in market prices of certain metals necessary for the scrubbers PPL is installing at the Brunner Island and Montour generating plants. These contracts, which qualify for cash flow hedge treatment, were designated as hedges in March 2006 and their fair values are included in the table above.

    The following chart segregates estimated fair values of PPL's non-trading commodity derivative contracts 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:

      

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

     

      

    Maturity
    Less Than
    1 Year

      

    Maturity
    1-3 Years

      

    Maturity
    3-5 Years

      

    Maturity
    in Excess
    of 5 Years

      

    Total Fair
    Value

     

    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.


      
    Fair Value of Contracts at Period-End
    Gains (Losses)
       
      
    Maturity
    Less Than
    1 Year
     
    Maturity
    1-3 Years
     
    Maturity
    4-5 Years
     
    Maturity
    in Excess
    of 5 Years
     
    Total Fair
    Value
    Source of Fair Value
                        
                         
    Prices actively quoted $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)

    The "Prices actively quoted" category includes the fair value of exchange-traded natural gas futures contracts quoted on the New York Mercantile Exchange (NYMEX).NYMEX. The NYMEX has currently quoted prices through 2010.

    2011.


    The "Prices provided by other external sources" category includes PPL's forward positions and options in natural gas and power and natural gas basis swaps at points for which over-the-counter (OTC) broker quotes are available. The fair value of electricity positions recorded above use the midpoint of the bid/ask spreads obtained through OTC brokers. On average, OTC quotes for forwards and swaps of natural gas and power extend one and two years into the future.


    The "Prices based on models and other valuation methods" category includes the value of transactions for which 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.

    Day 1 gain, which is netted against the above fair values.


    As of March 31, 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.


    In accordance with its marketing strategy, PPL does not completely hedge its generation output or fuel requirements. PPL estimates that for its entire portfolio, including all generation, emissions and physical and financial energy positions, a 10% adverse change in power prices across all geographic zones and time periods would 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.


    The data in the above tables includes the activity for PPL's synthetic fuel tax credit hedges. Additional information regarding these hedges can be found in the "Synthetic Fuel Tax Credit Risk" section below.

    Commodity Price Risk (Trading)

    PPL also executes energy contracts to take advantage of market opportunities. As a result, PPL may at times create a net open position in its portfolio that could result in significant losses if prices do not move in the manner or direction anticipated. The margins from these trading activities are shown in the Statement of Income as "Net energy trading margins."

    Commodity Price Risk (Trading)


    PPL's trading contracts mature at various times through 2008.2009. The following chart sets forth PPL's net fair value of trading contracts:

      

    Three Months Ended
    March 31,

     

      

    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.


      
    Three Months Ended March 31,
       
      
    2006
     
    2005
         
    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 

    PPL will reverse approximately $1$4 million of the $16$12 million unrealized trading gains over the next three months of 20052006 as the transactions are realized.


    The following chart segregates estimated fair values of PPL's trading portfolio at March 31, 2005,2006, based on whether the fair values are determined by quoted market prices or other more subjective means:

      

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

     

      

    Maturity
    Less Than
    1 Year

      

    Maturity
    1-3 Years

      

    Maturity
    3-5 Years

      

    Maturity
    in Excess
    of 5 Years

      

    Total Fair
    Value

     

    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.


      
    Fair Value of Contracts at Period-End
    Gains (Losses)
       
      
    Maturity
    Less Than
    1 Year
     
    Maturity
    1-3 Years
     
    Maturity
    4-5 Years
     
    Maturity
    in Excess
    of 5 Years
     
    Total Fair
    Value
    Source of Fair Value
                        
                         
    Prices actively quoted $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 

    See "Commodity Price Risk (Non-trading)" for information on the various sources of fair value.


    As of March 31, 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.


    Interest Rate Risk


    PPL and its subsidiaries have issued debt to finance their operations. PPL utilizes various financial derivative products to adjust the mix of fixed and floating interest rates in its debt portfolio, adjust the duration of its debt portfolio and lock in U.S. 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.


    At March 31, 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.


    PPL is also exposed to changes in the fair value of its domestic and international debt portfolios. At March 31, 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.


    PPL utilizes various risk management instruments to reduce its 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 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 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.

    $46 million.


    PPL also utilizes various risk management instruments to adjust the mix of fixed and floating interest rates in its debt portfolio. While PPL is exposed to changes in the fair value of these instruments, any change in market value is recorded with an equal and offsetting change in the value of the debt being hedged. 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 interest rates, was approximately $18$12 million.


    Foreign Currency Risk


    PPL is exposed to foreign currency risk, primarily through investments in affiliates in the U.K. and Latin America and Europe.America. In addition, PPL may make purchases of equipment in currencies other than U.S. dollars.


    PPL has adopted a foreign currency risk management program designed to hedge certain foreign currency exposures, including firm commitments, recognized assets or liabilities and net investments. In addition, PPL enters into financial instruments to protect against foreign currency translation risk.


    To protect 2006 expected income in Chilean pesos, PPL entered into an average rate forward for 8 billion Chilean pesos. The settlement date of this forward is November 2006. At March 31, 2006, the market value of this position, representing the amount PPL would receive upon its termination, was insignificant. PPL estimated that its potential exposure to a change in the market value of this instrument, through a 10% adverse movement in foreign exchange rates, was $1 million at March 31, 2006.

    To protect 2006 expected income denominated in British pounds sterling, PPL entered into a combination of average rate forwards and average rate options for £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.

    2006.


    WPDH Limited 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.

    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.


    On the Statement of Income, gains and losses associated with hedges of interest payments denominated in foreign currencies are reflected in "Interest Expense." Gains and losses associated with the purchase of equipment are reflected in "Depreciation." Gains and losses associated with net investment hedges remain in "Accumulated other comprehensive loss" on the Balance Sheet until the investment is disposed.


    Nuclear Decommissioning FundTrust Funds - Securities Price Risk


    In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the Susquehanna station. As of March 31, 2005,2006, 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.


    Synthetic Fuel Tax Credit Risk

    At this time, PPL expects that the current high level and the volatility of crude oil prices will reduce the amount of synthetic fuel tax credits that PPL receives through its synthetic fuel production. The tax credits are reduced if the annual average wellhead price of domestic crude oil falls within a phase-out range. The tax credits are eliminated if this reference price exceeds the phase-out range. See "Regulatory Issues - IRS Synthetic Fuels Tax Credits" in Note 11 to the Financial Statements for more information regarding the phase-out of the tax credits and shutdown of synfuel projects.

    PPL implemented a risk management strategy to hedge a portion of the variability of cash flows associated with its 2006 and 2007 synthetic fuel tax credits by hedging the risk that the 2006 and 2007 annual average wellhead price for domestic crude oil will be within the phase-out range.

    PPL purchased options in 2005 to mitigate some of the reductions in synthetic fuel tax credits if the annual average wellhead price for 2006 and 2007 falls within the applicable phase-out range. These positions did not qualify for hedge accounting treatment. The mark-to-market value of these positions at March 31, 2006, was a gain of $33 million. Of this total, $23 million was recorded during the three months ended March 31, 2006, and is reflected in "Energy-related businesses" revenues on the Statement of Income.

    As of March 31, 2006, PPL estimated that a 10% adverse movement in market prices of crude oil would have decreased the value of the synthetic fuel hedges to a nominal amount. For purposes of this calculation, a decrease in the market price for crude oil is considered an adverse movement.

    Related Party Transactions


    PPL is not aware of any material ownership interests or operating responsibility by senior management of PPL, PPL Energy Supply or PPL Electric in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with PPL.


    For additional information on related party transactions, see Note 1012 to the Financial Statements.


    Acquisitions, Development and Divestitures


    From time to time, PPL and its subsidiaries are involved in negotiations with third parties regarding acquisitions and dispositions of businesses and assets, joint ventures and 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.

    transactions.


    PPL is currently planning incremental capacity increases of 255270 MW at several existing domestic generating facilities.


    PPL is continuously reexamining development projects based on market conditions and other factors to determine whether to proceed with these projects, sell them, cancel them, expand them, execute tolling agreements or pursue other opportunities.


    Environmental Matters


    See Note 911 to the Financial Statements for a discussion of environmental matters.


    New Accounting Standards


    See Note 1618 to the Financial Statements for information ona discussion of new accounting standards recently adopted or pending adoption.


    Application of Critical Accounting Policies


    PPL's financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to the financial condition or results of operations of PPL, and require estimates or other judgments of matters inherently uncertain: price risk management, pension and other postretirement benefits, asset impairment, leasing, loss contingenciesaccruals and asset retirement obligations.


    See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL's 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.


    PPL ENERGY SUPPLY, LLC AND SUBSIDIARIES


    Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations


    Overview


    PPL Energy Supply is an energy company with headquarters in Allentown, PA. In PPL Energy Supply's 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.

    more information concerning the material risks and uncertainties that PPL Energy Supply faces in its businesses and with respect to its future earnings.


    The following information should be read in conjunction with PPL Energy Supply's Condensed Consolidated Financial Statements and the accompanying Notes.


    Terms and abbreviations are explained in the glossary. Dollars are in millions unless otherwise noted.


    Results of Operations


    The following discussion begins with a review of PPL Energy Supply's 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.


    Earnings

    Net income was $230 million for the three months ended March 31, 2005, as2006, compared with $155 million for the same period in 2004,three months ended March 31, 2005.

    The changes in 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.

    The period-to-period changes in earnings components, including domestic gross energy margins by region and expensesignificant income statement line items, by about 5%.

    are explained in the "Statement of Income Analysis."


    The Statement of Income reflects the results of past operations and is not intended as any indication of future operating results. Future operating results will necessarily be affected by various and diverse factors and developments. Furthermore, because results for interim periods can be disproportionately influenced by various factors and developments and by seasonal variations, the results of operations for interim periods do not necessarily indicate results or trends for the year.

    Earnings

    Net income was $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:

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    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

     

     

    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:

    International Delivery Segment:

    All Segments:


    Segment Results


    Net income by segment was as follows:

      

    Three Months
    Ended March 31,

     

      

    2005

      

    2004

     

    Supply

     

    $

    93

      

    $

    98

     

    International Delivery

      

    62

       

    48

     

     

    Total

     

    $

    155

      

    $

    146

     

    was:


      
    Three Months
    Ended March 31,
       
      
    2006
     
    2005
           
    Supply $149  $93 
             
    International Delivery  81   62 
             
    Total $230  $155 

    Supply Segment

    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.


    The Supply segment primarily consists of the activitiesdomestic energy marketing, domestic generation and domestic development operations of PPL Generation and PPL EnergyPlus.

    SegmentEnergy Supply.


    The Supply segment results in 2005 reflect the reclassification of the Sundance plant operating losses from certain income statement line items to "Loss from Discontinued Operations." See Note 8 to the Financial Statements for further discussion.

    Supply segment net income was as follows:

      

    Three Months
    Ended March 31,

     

      

    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 March 31,
       
      
    2006
     
    2005
           
    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 

    The after-tax change in net income was due to the following factors:

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    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

    )

     


     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
          
    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  

    The following after-tax items, which management considers unusual, had a significant impact on the Supply segment earnings.

      
    Three Months
    Ended March 31,
       
      
    2006
     
    2005
           
    Reduction in Enron reserve (Note 2) $9     
             
    Off-site remediation of ash basin leak
    (Note 11)
      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.

    Outlook

    Based on current forward energy prices, PPL Energy 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.

    See "Regulatory Issues - IRS Synthetic Fuels Tax Credits" in Note 211 to the Financial Statements for additional information.
    PPL Energy Supply had projected an earnings contribution from the combination of synfuel projects and synthetic fuel-related hedges of $39 million in 2006.  Based upon projected production levels reflecting the suspension of PPL Energy Supply's synthetic fuel operations 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.

    In addition to producing synthetic fuel, PPL Energy Supply also purchases synthetic fuel from unaffiliated third parties, at prices below the market price of coal, for use at its coal-fired power plants. PPL Energy Supply estimates that 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.

    There currently are legislative proposals pending in the U.S. Congress that could affect the potential phase-out of the synthetic fuel tax credits for 2006 and 2007. At this time, PPL Energy Supply 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 net carrying value of the property, plant and equipment and intangible assets associated with 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.

    status of its synfuel projects as changes in oil prices, legislation and other factors occur.


    International Delivery Segment


    The International Delivery segment 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.

    Segment


    International Delivery segment net income was as follows:

      

    Three Months
    Ended March 31,

     

      

    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 March 31,
         
      
    2006
     
    2005
           
    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 

    The after-tax change in net income was due to the following factors:

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    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

     


     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
    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.

    Outlook

    PPL Energy Supply projects that the International Delivery segment will experience increased operation and maintenance expenses in 2006 compared with 2005, primarily due to increasedresulting from higher pension costs and termination benefit expenses.

    Statement of foreign tax credits.
    • Lower interest expense was due to lower affiliate debt.

    Income Analysis --


    Domestic Gross Energy Margins


    The following table provides pre-tax changes in the income statement line items that comprise domestic gross energy margins:

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    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

     

     

    margins.

     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
      
    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  

    (a)

     

    Adjusted to exclude the impact of any revenues and costs not associated with domestic gross energy 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.


    Changes in Domestic Gross Energy Margins By Region


    Domestic gross energy margins are generated through PPL Energy Supply's normal hedging (non-trading) activities, as well as trading activities. PPL Energy Supply manages its non-trading energy business on a geographic basis that is aligned with its generation assets.

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    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.


     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
    Non-trading     
          
    Eastern U.S. $45  
          
    Northwestern U.S.  24  
          
    Southwestern U.S.  2  
          
    Net energy trading  (6) 
          
    Domestic gross energy margins $65  

    Eastern U.S.


    Eastern U.S. non-trading margins were higher in the first quarter of 2006 compared with the same period in 2005, primarily because 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.

    Non-trading economic activity contributed $12 million to the quarter due to 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.

    marketing activities.


    Northwestern U.S.


    Northwestern U.S. non-trading margins were 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.

    energy purchase prices.


    Net Energy Trading


    PPL Energy Supply enters into certain energy contracts that meet the criteria of trading derivatives as defined by EITF Issue 02-3, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities." These physical and financial contracts cover trading activity associated with electricity, gas and oil. The $10

    Net energy trading margins decreased by $6 million increase 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.

    The physical volumes for electricity and gas associated with energy trading for the three months ended March 31, 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.

    same period last year.


    Utility Revenues


    The increase in utility revenues was attributable to the following:

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    International:

         

    Retail electric delivery (PPL Global)

         
     

    Chile

     

    $

    7

      
     

    U.K.

      

    4

      
     

    El Salvador

      

    3

      

      

    $

    14

      

     

    to:


     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
    International:
         
          
    Retail electric delivery (PPL Global)     
           
     U.K. $25  
           
     Chile  9  
           
     El Salvador  3  
           
     Bolivia  2  
          
    Foreign currency exchange rates  (9) 
          
      $30  

    The increase in utility revenues, was primarily due to:

    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 Businesses

    Energy related


    Energy-related businesses contributed $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:


    See Note 811 to the Financial Statements); and
  • a $2 million increase from mechanical contracting and engineering subsidiaries due to a favorable closeout on a major project; partially offset by
  • a $6 million higher pre-tax operating loss from synfuel projects due to increased production levels which improve after-tax earnings.
  • Statements for an overall assessment of synthetic fuel tax credits.


    Other Operation and Maintenance


    The increasedecrease in other operation and maintenance expenses was due to:

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    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

      

     


     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
          
    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) 

    Depreciation

    The $13 million increase in net pension costsdepreciation expense was due to:

     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
          
    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  

    Taxes, Other Than Income

    Taxes, other than income, decreased by $3 million. This is primarily 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.

    Other Income - net pension costs in 2005.

    See Note 13 to the Financial Statements for details of the costs of PPL Energy Supply's pension plans.

    Depreciation

    other income.


    Interest Expense

    The decrease in interest expense, which includes "Interest Expense with Affiliates," was due to:

     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
      
    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) 

    Income Taxes

    The increase in depreciation expenseincome taxes was due to:

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    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

      

     

    Other Income - net


     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
      
    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  

    See Note 115 to the Financial Statements for details of other income.

    Interest Expense

    The increase in interest expense was due to:

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    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

      

     

    (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 Taxes

    The $26 million decrease in income taxes was primarily attributable to:

    rates.


    Discontinued Operations


    See "Discontinued Operations" in Note 8 to the Financial Statements for information regarding the 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.

    the Sundance power plant.


    Financial Condition


    Liquidity

    and Capital Resources


    At March 31, 2006, PPL Energy Supply had $132 million of cash and cash equivalents and $44 million of short-term debt (including a note payable to an affiliate). At December 31, 2005, PPL Energy Supply had $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:


    ·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.

    Convertible Senior Notes

    The terms of PPL Energy Supply's $400 million 2.625% Convertible Senior Notes due 2023 include a market price trigger that permits holders to convert the notes during any fiscal quarter if the closing sale price of PPL's common stock exceeds $29.83 for at 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. 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. PPL and PPL Energy Supply have, and expect to continue to have, sufficient liquidity sources to fund any such conversions.

    Credit Facilities

    In March 2006, PPL Energy Supply extended the maturity of its 364-day reimbursement agreement, under which it can cause the bank to issue up to $200 million of 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.

    Planned Financing

    In March 2006, PPL, PPL Energy Supply and
  • PPL Electric filed a $165 million increase in short-term debt; offset by
  • distributionscombined 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.
  • for general corporate purposes.


    Rating Agency Decisions


    Moody's, S&P 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.

    revisions or ratings affirmations.


    A credit rating reflects an assessment by the rating agency of the credit-worthiness associated with an issuer and particular securities that it issues. PPL Energy Supply's and its subsidiaries' credit ratings are based on information provided by PPL Energy Supply and other sources. The ratings of Moody's, S&P Moody's and Fitch are not a recommendation to buy, sell or hold any securities of PPL Energy Supply or its subsidiaries. Such ratings may be subject to revisions or withdrawal by thethese agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to theirthe securities.

    A downgrade in PPL Energy Supply's or its subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets.


    In January 2005, S&P revisedMarch 2006, Moody's reviewed the credit ratings of PPL Energy Supply and concluded that its outlooksratings remain unchanged.

    In February 2006, Fitch's Europe, Middle East and Africa group implemented issuer default ratings (IDRs) based on its new IDR methodology. This implementation led to Fitch's assignment of the following IDRs and Fitch's revision of its ratings on the following securities currently outstanding at WPD 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+.

    Fitch's outlook for WPD and its affiliates remains stable.

    Capital Expenditures

    The schedule below shows PPL Energy Supply's current capital expenditure projections for the years 2006 through 2010.

      
    Projected
     
        
      
    2006
     
    2007
     
    2008
     
    2009
     
    2010
     
    Construction
    expenditures (a)
                    
                      
     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.

    PPL Energy Supply's capital expenditure projections for the years 2006-2010 total $4.5 billion. Capital expenditure plans are revised periodically to 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:


    PPL Energy Supply plans to BBB- from BBB
  • WPD LLP to BBB from BBB+
  • WPD (South West) and WPD (South Wales) to BBB+/F2 from A-/F1
  • Fitch 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.

    debt securities.


    For additional information on PPL Energy Supply's liquidity and capital resources, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL Energy Supply's 20042005 Form 10-K.


    Risk Management - Energy Marketing & Trading and Other


    Market Risk


    Commodity Price Risk (Non-Trading)


    PPL Energy Supply's non-trading commodity derivative contracts 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:

      

    Three Months Ended
    March 31,

     

      

    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.


      
    Three Months Ended March 31,
       
      
    2006
     
    2005
         
    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)

    Beginning in January 2006, PPL Energy Supply instituted a program to hedge its exposures to changes in market prices of certain metals necessary for the scrubbers PPL Energy Supply is installing at the Brunner Island and Montour generating plants. These contracts, which qualify for cash flow hedge treatment, were designated as hedges in March 2006 and their fair values are included in the table above.

    The following chart segregates estimated fair values of PPL Energy Supply's non-trading commodity derivative contracts 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:

      

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

     

      

    Maturity
    Less Than
    1 Year

      

    Maturity
    1-3 Years

      

    Maturity
    3-5 Years

      

    Maturity
    in Excess
    of 5 Years

      

    Total Fair
    Value

     

    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.


      
    Fair Value of Contracts at Period-End
    Gains (Losses)
       
      
    Maturity
    Less Than
    1 Year
     
    Maturity
    1-3 Years
     
    Maturity
    4-5 Years
     
    Maturity
    in Excess
    of 5 Years
     
    Total Fair
    Value
    Source of Fair Value
                        
                         
    Prices actively quoted $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)

    The "Prices actively quoted" category includes the fair value of exchange-traded natural gas futures contracts quoted on the New York Mercantile Exchange (NYMEX).NYMEX. The NYMEX has currently quoted prices through 2010.

    2011.


    The "Prices provided by other external sources" category includes PPL Energy Supply's forward positions and options in natural gas and power and natural gas basis swaps at points for which over-the-counter (OTC) broker quotes are available. The fair value of electricity positions recorded above use the midpoint of the bid/ask spreads obtained through OTC brokers. On average, OTC quotes for forwards and swaps of natural gas and power extend one and two years into the future.


    The "Prices based on models and other valuation methods" category includes the value of transactions for which 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.

    Day 1 gain, which is netted against the above fair values.


    As of March 31, 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.


    In accordance with its marketing strategy, PPL Energy Supply does not completely hedge its generation output or fuel requirements. PPL Energy Supply estimates that for its entire portfolio, including all generation, emissions and physical and financial energy positions, a 10% adverse change in power prices across all geographic zones and time periods would 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.


    The data in the above tables includes the activity for PPL Energy Supply's synthetic fuel tax credit hedges. Additional information regarding these hedges can be found in the "Synthetic Fuel Tax Credit Risk" section below.

    Commodity Price Risk (Trading)

    PPL Energy Supply also executes energy contracts to take advantage of market opportunities. As a result, PPL Energy Supply may at times create a net open position in its portfolio that could result in significant losses if prices do not move in the manner or direction anticipated. The margins from these trading activities are shown in the Statement of Income as "Net energy trading margins."

    Commodity Price Risk (Trading)


    PPL Energy Supply's trading contracts mature at various times through 2008.2009. The following chart sets forth PPL Energy Supply's net fair value of trading contracts:

      

    Three Months Ended
    March 31,

     

      

    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.


      
    Three Months Ended March 31,
       
      
    2006
     
    2005
           
    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 

    PPL Energy Supply will reverse approximately $1$4 million of the $16$12 million unrealized trading gains over the next three months of 20052006 as the transactions are realized.


    The following chart segregates estimated fair values of PPL Energy Supply's trading portfolio at March 31, 2005,2006, based on whether the fair values are determined by quoted market prices or other more subjective means:

      

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

     

      

    Maturity
    Less Than
    1 year

      

    Maturity
    1-3 years

      

    Maturity
    3-5 years

      

    Maturity
    in Excess
    of 5 Years

      

    Total Fair
    Value

     

    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.


      
    Fair Value of Contracts at Period-End
    Gains (Losses)
       
      
    Maturity
    Less Than
    1 year
     
    Maturity
    1-3 years
     
    Maturity
    4-5 years
     
    Maturity
    in Excess
    of 5 Years
     
    Total Fair
    Value
    Source of Fair Value
                        
                         
    Prices actively quoted $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 

    See "Commodity Price Risk (Non-trading)" for information on the various sources of fair value.


    As of March 31, 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.


    Interest Rate Risk


    PPL Energy Supply and its subsidiaries have issued debt to finance their operations. Both PPL 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.


    At March 31, 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.


    PPL Energy Supply is also exposed to changes in the fair value of its domestic and international debt portfolios. At March 31, 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.


    PPL 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.

    $28 million.


    PPL and PPL Energy Supply also utilize various risk management instruments to adjust the mix of fixed and floating interest rates in PPL Energy Supply's debt portfolio. While PPL Energy Supply is exposed to changes in the fair value of these instruments, any change in market value is recorded with an equal and offsetting change in the value of the debt being hedged. 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 interest rates, was approximately $1$2 million.


    Foreign Currency Risk


    PPL Energy Supply is exposed to foreign currency risk, primarily through investments in affiliates in the U.K. and Latin America and Europe.America. In addition, PPL Energy Supply may make purchases of equipment in currencies other than U.S. dollars.


    PPL 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.


    To protect 2006 expected income in Chilean pesos, PPL Energy Supply entered into an average rate forward for 8 billion Chilean pesos. The settlement date of this forward is November 2006. At March 31, 2006, the market value of this position, representing the amount PPL Energy Supply would receive upon its termination, was insignificant. PPL Energy Supply estimated that its potential exposure to a change in the market value of this instrument, through a 10% adverse movement in foreign exchange rates, was $1 million at March 31, 2006.

    To protect 2006 expected income denominated in British pounds sterling, PPL entered into a combination of average rate forwards and average rate options for £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.

    2006.


    WPDH Limited 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.

    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.


    On the Statement of Income, gains and losses associated with hedges of interest payments denominated in foreign currencies are reflected in "Interest Expense." Gains and losses associated with the purchase of equipment are reflected in "Depreciation." Gains and losses associated with net investment hedges remain in accumulated other comprehensive loss, a component of "Member's Equity" on the Balance Sheet, until the investment is disposed.


    Nuclear Decommissioning FundTrust Funds - Securities Price Risk


    In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the Susquehanna station. As of March 31, 2005,2006, 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.


    Synthetic Fuel Tax Credit Risk
    At this time, PPL Energy Supply expects that the current high level and the volatility of crude oil prices will reduce the amount of synthetic fuel tax credits that PPL Energy Supply receives through its synthetic fuel production. The tax credits are reduced if the annual average wellhead price of domestic crude oil falls within a phase-out range. The tax credits are eliminated if this reference price exceeds the phase-out range. See "Regulatory Issues - IRS Synthetic Fuels Tax Credits" in Note 11 to the Financial Statements for more information regarding the phase-out of the tax credits and shutdown of synfuel projects.

    PPL Energy Supply implemented a risk management strategy to hedge a portion of the variability of cash flows associated with its 2006 and 2007 synthetic fuel tax credits by hedging the risk that the 2006 and 2007 annual average wellhead price for domestic crude oil will be within the phase-out range.

    PPL Energy Supply purchased options in 2005 to mitigate some of the reductions in synthetic fuel tax credits if the annual average wellhead price for 2006 and 2007 falls within the applicable phase-out range. These positions did not qualify for hedge accounting treatment. The mark-to-market value of these positions at March 31, 2006, was a gain of $33 million. Of this total, $23 million was recorded during the three months ended March 31, 2006, and is reflected in "Energy-related businesses" revenues on the Statement of Income.

    As of March 31, 2006, PPL Energy Supply estimated that a 10% adverse movement in market prices of crude oil would have decreased the value of the synthetic fuel hedges to a nominal amount. For purposes of this calculation, a decrease in the market price for crude oil is considered an adverse movement.

    Related Party Transactions


    PPL Energy Supply is not aware of any material ownership interests or operating responsibility by senior management of PPL Energy Supply in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with PPL Energy Supply.


    For additional information on related party transactions, see Note 1012 to the Financial Statements.


    Acquisitions, Development and Divestitures


    From time to time, PPL Energy Supply and its subsidiaries are involved in negotiations with third parties regarding acquisitions and dispositions of businesses and assets, joint ventures and 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.

    transactions.


    PPL Energy Supply is currently planning incremental capacity increases of 255270 MW at several existing domestic generating facilities.


    PPL Energy Supply is continuously reexamining development projects based on market conditions and other factors to determine whether to proceed with these projects, sell them, cancel them, expand them, execute tolling agreements or pursue other opportunities.


    Environmental Matters


    See Note 911 to the Financial Statements for a discussion of environmental matters.


    New Accounting Standards


    See Note 1618 to the Financial Statements for information ona discussion of new accounting standards recently adopted or pending adoption.


    Application of Critical Accounting Policies


    PPL Energy Supply's financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to the financial condition or results of operations of PPL Energy Supply, and require estimates or other judgments of matters inherently uncertain: price risk management, pension and other postretirement benefits, asset impairment, leasing, loss contingenciesaccruals and asset retirement obligations.


    See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL Energy Supply's 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.




    PPL ELECTRIC UTILITIES CORPORATION AND SUBSIDIARIES


    Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations


    Overview


    PPL Electric provides electricity delivery service in eastern and central Pennsylvania. Its headquarters are in Allentown, PA. In PPL Electric's 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."

    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.


    The following information should be read in conjunction with PPL Electric's Condensed Consolidated Financial Statements and the accompanying Notes.


    Terms and abbreviations are explained in the glossary. Dollars are in millions unless otherwise noted.


    Results of Operations


    The following discussion, which explains significant changes in principal items on thePPL Electric's Statement of Income, compares the three months ended March 31, 2005,2006, with the comparable period in 2004.

    2005.


    The Statement of Income reflects the results of past operations and is not intended as any indication of future operating results. Future operating results will necessarily be affected by various and diverse factors and developments. Furthermore, because results for interim periods can be disproportionately influenced by various factors and developments and by seasonal variations, the results of operations for interim periods do not necessarily indicate results or trends for the year.


    Earnings


    Income available to PPL was $15$51 million for the three months ended March 31, 2005, and $332006, compared with $15 million for the same period in 2004. 2005.

    The after-tax changechanges in income available to PPL waswere due to:

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    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
    (Note 9)

      

    (27

    )

      

    $

    (18

    )

     


     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
      
    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  

    The following after-tax items, which management considers unusual, had a significant impact on earnings.

      
    Three Months Ended March 31,
       
      
    2006
     
    2005
         
    PJM billing dispute (Note 11)     $(27)
             
    Acceleration of stock-based compensation expense for periods prior to 2005
     (Note 9)
          (2)
             
    Total     $(29)

    The period-to-period changes in significant earnings components are discussed followingexplained in the future earnings factors.

    "Statement of Income Analysis."


    PPL Electric's futureperiod-to-period earnings could be, or will be, impactedwere affected by a number of factors, including the following:


    ·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.

    Outlook

    PPL Electric projects flat revenues in 2006 compared with 2005 due to favorable weather impacts in 2005 and 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.

    Statement of $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.

    Income Analysis --


    Operating Revenues


    The increase in revenues from retail electric operations was attributable to:

     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
      
    PLR electric generation supply $34  
          
    Electric delivery  (3) 
          
    Other  1  
          
      $32  

    Higher PLR revenues resulted from an increase of 8.4% in prices, offset by a 2.5% decrease in volume, due in part to milder weather in the following:

     

    Three Months Ended
    March 31, 2005 vs. March 31, 2004

    Electric delivery

     

    $

    32

     

    PLR electric generation supply

      

    16

     

      

    $

    48

     

     

    first quarter of 2006 compared to 2005.


    The 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.

    2005.


    Energy Purchases


    Energy purchases 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.

    accrual.


    Energy Purchases from Affiliate


    The increase in energy purchases from affiliate of $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.


    Other Operation and Maintenance

    Other


    The decrease in other operation and maintenance expense 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 Income

    In 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.

    to:


     
    Three Months Ended
    March 31, 2006 vs. March 31, 2005
      
    Costs associated with severe ice storms in January 2005 $(16) 
          
    PUC reportable storm costs in 2006  4  
          
    Other  (2) 
          
      $(14) 

    Other Income - net


    See Note 1113 to the Financial Statements for details of other income.


    Interest Expense


    Interest expense, 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.

    PJM billing dispute.


    Income Taxes

    Income


    The $26 million increase in income taxes decreased by $17 million,was primarily as athe result of lowerhigher pre-tax book income.

    income in 2006 relative to 2005.


    See Note 5 to the Financial Statements for details on effective income tax rates.

    Financial Condition


    Liquidity

    and Capital Resources


    At March 31, 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.

    Preference Stock

    In April 2006, PPL Electric sold 10 million depositary shares, each representing a quarter interest in a share of PPL Electric's 6.25% Series Preference Stock (Preference Shares), totaling $250 million. In connection with the 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;
  • PPL Electric's common stock held by PPL, and for other general corporate purposes.

  • Holders of the 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;
  • law.

  • Dividends on the 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.

    The Preference Shares do not have a stated maturity, and are not subject to sinking fund requirements. However, PPL Electric may, at its option, redeem the Preference Shares in whole or in part from time to time for $100 per share (equivalent to $25 per depositary share), plus any declared and unpaid dividends, on or after April 6, 2011. It is PPL Electric's intention to redeem or repurchase the Preference Shares only from the proceeds of the sale of certain qualifying securities having equity characteristics similar to or greater than the applicable equity characteristics of the Preference Shares. PPL Electric may decide to affirm this intention in the future by making an enforceable covenant in favor of holders of a specific series of its outstanding long-term debt securities.

    Credit Facilities

    PPL Electric is currently pursuing extending the maturity of its $200 million of tax-exempt long-term debt; and
  • an increase of $100 millionsyndicated credit facility that expires in short-term debt.
  • June 2010 by one year. PPL expects the extension to be effective in June 2006.


    Rating Agency Decisions


    Moody's, S&P 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.

    revisions or ratings affirmations.


    A credit rating reflects an assessment by the rating agency of the credit-worthiness associated with an issuer and particular securities that it issues. PPL Electric's and PPL Transition Bond Company's credit ratings are based on information provided by PPL Electric and other sources. The ratings of Moody's, S&P 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.

    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.


    In 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.
    In connection with PPL Electric's issuance of Preference Shares in April 2006, S&P affirmed all of PPL Electric's 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.

    For additional information on PPL Electric's liquidity and capital resources, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL Electric's 20042005 Form 10-K.


    Risk Management


    Market Risk


    Commodity Price Risk - PLR Contracts


    PPL Electric and PPL EnergyPlus have power supply agreements under which PPL EnergyPlus sells to PPL Electric (under a predetermined pricing arrangement) energy and capacity to fulfill PPL Electric's PLR obligation through 2009. As a result, PPL Electric has shifted any electric price risk relating to its PLR obligation to PPL EnergyPlus through 2009. See Note 1012 to the Financial Statements for information on the PLR contracts.


    Interest Rate Risk


    PPL Electric has issued debt to finance its operations, which increases its interest rate risk. At March 31, 2005,2006, PPL Electric's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was insignificant.

    $1 million.


    PPL Electric is also exposed to changes in the fair value of its debt portfolio. At March 31, 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.


    Related Party Transactions


    PPL Electric is not aware of any material ownership interests or operating responsibility by senior management of PPL Electric in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with PPL Electric.


    For additional information on related party transactions, see Note 1012 to the Financial Statements.


    Environmental Matters


    See Note 911 to the Financial Statements for a discussion of environmental matters.


    New Accounting Standards


    See Note 1618 to the Financial Statements for information ona discussion of new accounting standards recently adopted or pending adoption.


    Application of Critical Accounting Policies


    PPL Electric's financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to the financial condition or results of operations of PPL Electric, and require estimates or other judgments of matters inherently uncertain: pension and other postretirement benefits and loss contingencies.

    accruals.


    See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL Electric's 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.



    PPL CORPORATION
    PPL ENERGY SUPPLY, LLC
    PPL ELECTRIC UTILITIES CORPORATION

    Item 3. Quantitative and Qualitative Disclosures About Market Risk


    Reference is made to "Risk Management - Energy Marketing & Trading and Other" for PPL and PPL Energy Supply and "Risk Management" for PPL Electric in Management's Discussion and Analysis of Financial Condition and Results of Operations.


    Item 4. Controls and Procedures

    Item 4. Controls and Procedures

    (a)

    Evaluation of disclosure controls and procedures.

    The registrants' principal executive officers and principal financial officers, based on their evaluation of the registrants' disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) have concluded that, as of March 31, 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.

    The aforementioned principal officers have concluded that the disclosure controls and procedures are also effective to ensure that information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive and principal financial officers, to allow for timely decisions regarding required disclosure.

    (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 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.



    PART II. OTHER INFORMATION


    Item 1. Legal Proceedings

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

     

    ·"Item 3. Legal Proceedings" in PPL's, PPL Energy Supply's and PPL Electric's 20042005 Form 10-K; and

    ·

    Note 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.


    Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


    Issuer Purchases of Equity Securities:

     

    (a)

    (b)

    (c)

    (d)

    Period

    Total Number of
    Shares (or Units)
    Purchased (1)

    Average Price Paid
    per Share
    (or Unit)

    Total Number of
    Shares (or Units)
    Purchased as Part of
    Publicly Announced
    Plans or Programs (2)

    Maximum Number (or
    Approximate Dollar Value) of
    Shares (or Units) that May Yet Be
    Purchased Under the Plans
    or Programs (2)

    January 1 to January 31, 2005

        

    February 1 to February 28, 2005

    9,050          

    $52.75

      

    March 1 to March 31, 2005

    1,618          

    $54.69

      

    Total

    10,668          

       

     
    (a)
    (b)
    (c)
    (d)
    Period
    Total Number of
    Shares (or Units)
    Purchased (1)
    Average Price Paid
    per Share
    (or Unit)
    Total Number of
    Shares (or Units)
    Purchased as Part of
    Publicly Announced
    Plans or Programs (2)
    Maximum Number (or
    Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (2)
    January 1 to January 31, 2006    
    February 1 to February 28, 200625,817$30.92  
    March 1 to March 31, 2006    
    Total25,817   

    (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.



       
    3(a)-Amended and Restated Articles of Incorporation of PPL Electric Utilities Corporation

    10(a) -

    *3(b)

    -

    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)

    *[_]10(b)

    -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
    Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended
    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

       

    Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended
    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




    SIGNATURES


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

     

    PPL Corporation

     

    (Registrant)

     
       
     

    PPL Energy Supply, LLC

     

    (Registrant)

     
       
     

    PPL Electric Utilities Corporation

     

    (Registrant)

     
       
       
       
       

    Date:  May 4, 2005

    2006

    /s/  John R. BiggarMatt Simmons                                         

     

    John R. Biggar

    Matt Simmons
     
     

    Executive Vice President and

    Controller
     
     

    Chief Financial Officer

    (PPL Corporation)

    (principal financial officer)

    /s/  James E. Abel                                            

    James E. Abel

    Vice President and Treasurer

    (PPL Energy Supply, LLC)

    (principal financial officer)

    /s/  Paul A. Farr                                              

    Paul A. Farr

    Vice President and Controller

    (PPL Electric Utilities Corporation)

    (principal accounting officer)