PPL

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2004, for PPL Corporation (PPL), its subsidiary PPL Energy Supply, LLC (PPL Energy Supply), and PPL Electric Utilities Corporation (PPL Electric). 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.

Key Financial Metrics (Six Months Ended June 30, 2004)

Note: PPL Electric's Net Income is reported as "Income Available to PPL Corporation" as it is a wholly-owned subsidiary.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated operating revenues increased 2% to $2,882 million for the six months ended June 30, 2004, compared to $2,827 million in 2003. Utility revenues rose due to higher Provider of Last Resort (PLR) rates and volumes, and favorable foreign exchange impacts on U.K. operations.
• Net Income: Consolidated net income was $325 million, down from $355 million in the prior year. This decrease was primarily driven by a $63 million cumulative effect of a change in accounting principle (SFAS 143) recorded in 2003 which is not present in 2004, partially offset by higher earnings from international operations and the sale of CEMAR.
• Domestic Margins: Eastern U.S. margins improved due to increased retail and wholesale volumes. Conversely, Northwestern U.S. margins declined due to a retroactive coal price increase and lower hydro generation from drought conditions.
• Divestitures: PPL Global sold its interest in CEMAR (Brazil) for a $23 million gain and its minority interest in CGE (Chile) for $123 million, resulting in a $15 million pre-tax charge due to currency devaluation.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items: The 2003 results included a $63 million one-time gain from the adoption of SFAS 143 (Asset Retirement Obligations). 2004 results include a $23 million gain from the CEMAR sale and a $10 million impairment charge on a technology supplier investment.
• Asset Sales: PPL agreed to sell the 450 MW Sundance power plant in Arizona for approximately $190 million, subject to regulatory approval. Management estimates a potential impairment charge of $47 million (after-tax) if the sale proceeds.
• Regulatory Risks: PPL Electric has filed a proposal to increase distribution rates by approximately $164 million and pass through $57 million in transmission charges, potentially resulting in an 8.1% rate increase effective January 1, 2005. The outcome is pending PUC approval.
• Environmental & Legal: Significant exposure exists regarding synthetic fuel tax credits (Section 29) under IRS review. PPL faces ongoing litigation regarding the Montana Power acquisition and potential liabilities related to the California electricity market and NorthWestern's bankruptcy.
• Accounting Changes: PPL adopted EITF Issue 03-11, reducing wholesale energy marketing revenues and energy purchases by $142 million for the six months ended June 30, 2004, to net non-trading bilateral sales.

Investor Verification Checklist

• Sundance Sale Status: Verify the progress of regulatory approvals for the $190 million Sundance power plant sale and the likelihood of the estimated $47 million impairment charge.
• Rate Case Outcome: Monitor the Pennsylvania Public Utility Commission's decision on PPL Electric's proposed 8.1% rate increase.
• Synthetic Fuel Tax Credits: Assess the status of the IRS investigation into synthetic fuel production procedures and the potential impact on future tax credits.
• NorthWestern Bankruptcy: Confirm the status of payments and contract assumptions by NorthWestern Energy following its Chapter 11 filing.
• WPD Pension Deficit: Review the final actuarial valuation for WPD's pension plans, which preliminarily showed a deficit of approximately £250 million ($454 million).