PPL

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2005, for PPL Corporation (PPL), PPL Energy Supply, LLC, and PPL Electric Utilities Corporation. PPL is an energy and utility holding company engaged in electricity generation, marketing, and delivery in the U.S. (primarily Pennsylvania, the Northeast, and the West) and internationally (U.K. and Latin America). The filing reflects a 2-for-1 common stock split completed in August 2005.

Key Financial Metrics (Nine Months Ended Sept 30, 2005)

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 9% to $4,721 million (from $4,331 million in 2004), driven by higher utility delivery revenues due to rate increases effective Jan 1, 2005, and increased sales volumes.
• Net Income Decline: Consolidated net income decreased 5% to $493 million (from $521 million in 2004). This decline was primarily due to unusual items, including a $47 million after-tax loss on the sale of the Sundance power plant and a $27 million after-tax charge related to a PJM billing dispute.
• Segment Performance:
  • Supply Segment: Net income fell to $238 million (from $314 million) due to lower non-trading margins in the Eastern U.S. and the Sundance plant sale loss.
  • International Delivery: Net income remained flat at $152 million, with U.K. delivery margin gains offset by higher pension costs.
  • Pennsylvania Delivery: Net income surged to $103 million (from $55 million) due to rate increases and volume growth, partially offset by the PJM billing charge.
• Divestitures: PPL sold the Sundance power plant in May 2005 for $190 million, resulting in a significant loss on sale recorded in discontinued operations.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items Impact:
  • Martins Creek Ash Basin Leak: A $33 million pre-tax charge ($22 million after-tax) was recorded in Q3 2005 for remediation costs following a fly ash basin leak in August 2005.
  • PJM Billing Dispute: A $47 million pre-tax accrual ($27 million after-tax) was recognized in Q1 2005 regarding a billing error by PJM Interconnection. A settlement agreement was filed in September 2005, subject to FERC approval.
  • NorthWestern Litigation: A $9 million settlement was reached in Q3 2005 regarding transmission system claims, with a $6 million after-tax charge recognized in Q1 2005.
• Convertible Notes Trigger: The market price trigger for PPL Energy Supply's $400 million Convertible Senior Notes was met in Q3 2005. Holders may convert notes in Q4 2005. PPL expects sufficient liquidity to fund cash settlements.
• Environmental Risks: Significant future capital expenditures are anticipated for environmental compliance, including sulfur dioxide scrubbers (estimated $1.5 billion through 2010) and mercury regulations. The final cost of the Martins Creek leak remediation remains uncertain.
• Regulatory Outlook: PPL Electric received approval for a $194 million annual rate increase effective Jan 1, 2005. The company is seeking recovery of $12 million in deferred storm costs from January 2005 ice storms in its next rate case.

Key Facts for Investor Verification

• Settlement Approvals: Verify the status of the FERC approval for the PJM billing dispute settlement and the potential for cost recovery of the Martins Creek leak remediation.
• Convertible Note Conversion: Monitor the volume of conversions for the $400 million Convertible Senior Notes in Q4 2005 and the resulting cash outflow.
• Environmental Capital Expenditures: Track actual spending against the projected $1.5 billion for pollution control equipment and the final costs associated with the Martins Creek incident.
• Rate Case Outcomes: Confirm the recovery of deferred storm costs and the timing of future rate adjustments for PPL Electric.
• Goodwill Impairment: Assess the risk of future goodwill impairments for international investments, particularly given pension cost pressures in the U.K.