PPL

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2010, for PPL Corporation (PPL), PPL Energy Supply, LLC, and PPL Electric Utilities Corporation. PPL is an energy and utility holding company operating in the northeastern and western U.S. and the U.K. The reporting period is dominated by the pending acquisition of E.ON U.S., a regulated utility in Kentucky, Virginia, and Tennessee, for an aggregate consideration of approximately $7.6 billion. To fund this acquisition, PPL raised approximately $3.5 billion in June 2010 through the issuance of common stock and Equity Units.

Key Financial Metrics (Six Months Ended June 30, 2010)

Material Changes vs. Prior Period

• Revenue Growth: PPL's total operating revenues increased 13% to $4,536 million compared to $4,015 million in the prior year period. This was driven by higher wholesale energy marketing revenues and unregulated retail sales, partially offset by lower utility revenues due to the expiration of generation rate caps in Pennsylvania.
• Profitability Surge: Net income attributable to PPL Corporation increased significantly to $335 million from $234 million in the prior year. This improvement was largely due to higher domestic gross energy margins resulting from the expiration of capped rates in Pennsylvania, allowing PPL to sell generation at prevailing market rates.
• Liquidity Expansion: Cash and cash equivalents increased by $3.7 billion to $4.505 billion, primarily due to net proceeds of $2.4 billion from common stock issuance and $1.7 billion from long-term debt and Equity Units issued to fund the E.ON U.S. acquisition.
• Discontinued Operations: The period included a loss from discontinued operations of $29 million, primarily related to the sale of the Long Island generation business and the majority of the Maine hydroelectric generation business.

Guidance, Outlook, and Risks

• Acquisition Outlook: PPL projects that upon closing the E.ON U.S. acquisition, the mix of earnings will shift from 25% regulated/75% unregulated in 2010 to 55-60% regulated in 2011. The transaction is expected to close by the end of 2010, subject to regulatory approvals.
• Segment Outlook:
  • Supply: Excluding special items, PPL projects higher earnings in 2010 due to strong growth in energy margins, offset by higher depreciation and financing costs.
  • International Delivery: Lower earnings are projected for 2010 due to higher income taxes, operation and maintenance expenses, and financing costs, partially offset by higher utility revenues.
  • Pennsylvania Delivery: Lower earnings are projected for 2010, driven by higher operation and maintenance expenses, partially offset by lower financing costs.
• Key Risks:
  • Regulatory Approval: The E.ON U.S. acquisition is subject to approvals from state regulators and the FERC. Failure to close could result in a $450 million termination fee.
  • Environmental Compliance: Significant costs may be incurred related to the EPA's proposed regulations on coal combustion residuals (CCR) and potential new rules on greenhouse gas emissions.
  • Legal Proceedings: PPL Montana faces ongoing litigation regarding hydroelectric streambed lease payments, with a pre-tax charge of $56 million recorded in Q1 2010. The company plans to petition the U.S. Supreme Court for review.
  • Financial Reform: The Dodd-Frank Act may impose new collateral and margin requirements on over-the-counter derivative transactions, potentially impacting liquidity.

Investor Verification Checklist

• Acquisition Financing: Verify the status of the $6.5 billion Bridge Facility and the monetization of full-requirement sales contracts intended to fund the E.ON U.S. acquisition.
• Regulatory Approvals: Monitor the progress of regulatory approvals required for the E.ON U.S. transaction, specifically in Kentucky, Virginia, Tennessee, and from the FERC.
• Environmental Liabilities: Assess the potential financial impact of the EPA's proposed CCR regulations and the outcome of the Montana hydroelectric litigation.
• Derivative Exposure: Review the fair value of non-trading commodity derivative contracts, which stood at a net liability of $233 million at June 30, 2010, and the impact of potential margin requirements under Dodd-Frank.
• Dividend Sustainability: Confirm the ability to maintain the quarterly dividend of $0.35 per share given the increased interest expense from the acquisition financing.