PPL

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2006, for PPL Corporation (PPL), PPL Energy Supply, LLC, and PPL Electric Utilities Corporation. PPL is an energy and utility holding company engaged in the generation and marketing of electricity in the northeastern and western U.S., and the delivery of electricity in Pennsylvania, the U.K., and Latin America. The filing includes unaudited condensed consolidated financial statements for the three and six months ended June 30, 2006, compared to the same periods in 2005.

Key Financial Metrics (Six Months Ended June 30, 2006)

Material Changes vs. Prior Period

• Revenue Growth: PPL's total operating revenues increased 12% to $3,423 million, driven by an 8.4% increase in Provider of Last Resort (PLR) sale prices, higher wholesale electricity sales, and increased hydroelectric generation in the western U.S.
• Profitability: Net income for PPL rose 56% to $461 million compared to $296 million in the prior year. This increase was significantly aided by the absence of a $47 million loss on the sale of the Sundance plant (recorded in 2005) and a reduction in the Enron reserve.
• Discontinued Operations: The current period includes a $20 million loss from discontinued operations related to the sale of PPL's 50% interest in the Griffith plant. The prior year included a $53 million loss related to the Sundance plant sale.
• Segment Performance:
  • Supply Segment: Net income increased to $217 million (from $126 million), driven by higher non-trading margins in the Eastern and Northwestern U.S.
  • International Delivery: Net income rose to $160 million (from $116 million), boosted by higher U.K. delivery margins and a $24 million distribution from the liquidation of Hyder's non-electricity businesses.
  • Pennsylvania Delivery: Net income increased to $84 million (from $54 million), primarily due to the absence of a $27 million charge for the PJM billing dispute recorded in the first quarter of 2005.

Guidance, Outlook, and Risks

• Outlook: Management projects higher energy margins for the Supply segment in 2006 compared to 2005, driven by PLR price increases and higher hydro output, though partially offset by higher fuel costs and reduced earnings from synthetic fuel projects. The International Delivery segment is expected to have slightly higher earnings. The Pennsylvania Delivery segment is projected to have lower earnings due to favorable weather impacts in 2005.
• Synthetic Fuel Tax Credits: High crude oil prices are causing a phase-out of synthetic fuel tax credits. PPL recorded a $10 million impairment charge on synthetic fuel assets in Q2 2006. The company estimates a 69% phase-out for 2006.
• Environmental Compliance: PPL is proceeding with the installation of sulfur dioxide scrubbers at Montour and Brunner Island plants at an estimated cost of $1.6 billion through 2010 to comply with the Clean Air Interstate Rule (CAIR). Additional costs for mercury compliance (CAMR) are expected to exceed $150 million.
• Legal and Regulatory:
  • PJM Billing Dispute: A proposed settlement involving a $41 million payment over five years is pending FERC approval. The outcome remains uncertain.
  • Martins Creek Ash Leak: PPL reduced its remediation cost estimate by $8 million in Q2 2006 due to an insurance settlement. Litigation regarding the leak is ongoing.
  • California ISO: PPL has fully reserved for $17 million in unpaid sales to the California ISO from 2000-2001.
• Convertible Notes: The market price trigger for PPL Energy Supply's 2.625% Convertible Senior Notes was met in Q1 and Q2 2006, allowing holders to convert notes. Approximately $370 million of notes remain eligible for conversion in Q3 2006.

Key Facts for Investor Verification

• Discontinued Operations Impact: Verify the net impact of the Griffith plant sale ($24 million loss) versus the prior year's Sundance plant sale ($47 million loss) on year-over-year earnings comparisons.
• Synthetic Fuel Viability: Monitor the phase-out of tax credits due to crude oil prices and the potential for further impairments or operational suspensions at the Somerset and Tyrone facilities.
• Environmental Capital Expenditures: Confirm the timeline and cost estimates for the $1.6 billion scrubber installation and potential additional costs for mercury compliance in Pennsylvania and Montana.
• PJM Billing Dispute Resolution: Track the status of the FERC review of the proposed $41 million settlement agreement.
• Convertible Note Conversions: Assess the potential cash outflow or equity dilution from the conversion of the remaining $370 million of convertible senior notes in Q3 2006.
• Regulatory Rate Cases: Monitor PPL Electric's ability to recover storm costs and the potential need for rate increases in 2010 following the expiration of current supply contracts.