PPL

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2003, for PPL Corporation and its subsidiaries: PPL Energy Supply, LLC; PPL Electric Utilities Corporation; and PPL Montana, LLC. PPL operates in three primary segments: Supply (domestic energy marketing and generation), Delivery (regulated electric and gas delivery), and International (primarily U.K. and Latin American distribution). The filing includes unaudited condensed consolidated financial statements and management discussion and analysis.

Key Financial Metrics (PPL Corporation Consolidated)

Material Changes vs. Prior Period

• Accounting Changes: The significant increase in Net Income ($239M vs. $(3)M) is largely driven by a $63 million cumulative effect gain from the adoption of SFAS 143 (Asset Retirement Obligations) effective January 1, 2003. Conversely, Q1 2002 included a $150 million goodwill impairment charge related to the International segment (Latin America).
• Revenue Growth: Total revenues increased by $133 million (9.8%). Utility revenues rose $69 million, driven by a 9.8% increase in electricity deliveries due to colder winter weather in 2003. Wholesale energy marketing revenues increased $105 million due to higher volumes.
• Margin Compression: Despite revenue growth, domestic gross energy margins decreased by $50 million. This was primarily due to a $21 million decline in net energy trading margins and a $46 million decline in regulated retail margins caused by higher supply costs from extreme weather.
• International Operations: Earnings from U.K. operations increased by $29 million due to full consolidation of WPD (Western Power Distribution) following the acquisition of the remaining 49% interest in September 2002. Earnings from Latin America improved due to the deconsolidation of CEMAR (Brazil), which had been under administrative intervention.
• Interest Expense: Decreased by $22 million, primarily due to debt retirements and the deconsolidation of CEMAR.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items:
  • ARO Transition: $63 million gain (Q1 2003) from SFAS 143 adoption.
  • Goodwill Impairment: $150 million charge (Q1 2002) in the Latin American reporting unit.
  • CEMAR Impairment: $6 million charge (Q1 2002) for write-down of international energy projects.
• Outlook and Risks:
  • Wholesale Prices: Management expects low wholesale energy prices to adversely impact margins in 2003 and beyond. There is a risk that investments in new gas-fired generation facilities may not be recoverable.
  • Regulatory/Litigation: Significant exposure exists regarding California ISO payments ($17 million unpaid, fully reserved) and potential FERC refund liabilities for sales in California and the Pacific Northwest. PPL Montana is involved in litigation with NorthWestern Corporation regarding the Colstrip Transmission System.
  • Environmental: Potential significant costs related to Clean Air Act amendments (NOx, SO2, mercury), water quality standards, and Superfund remediation. Specific concerns include the Lower Mt. Bethel facility noise and air quality appeals.
  • Accounting Impact: Future earnings will be impacted by the consolidation of Variable Interest Entities (VIEs) under FIN 46, expected to add approximately $1.1 billion in assets and liabilities and an $11 million cumulative effect charge in Q3 2003.
• Planned Financing: PPL plans to issue up to $270 million of common stock and PPL Energy Supply plans to issue up to $350 million of debt or convertible debt in May 2003 to repurchase commercial paper.

Investor Verification Checklist

• Core Earnings Quality: Verify the sustainability of the $176 million "Income from Core Operations" excluding the one-time $63 million accounting gain.
• Merchant Risk: Assess the impact of low wholesale energy prices on the Supply segment's ability to cover costs for new gas-fired generation.
• California Exposure: Confirm the status of the $17 million receivable from California ISO and the potential magnitude of FERC refund liabilities.
• FIN 46 Consolidation: Monitor the Q3 2003 financial statements for the impact of consolidating VIEs (Sundance, University Park, Lower Mt. Bethel), which will increase debt and assets significantly.
• CEMAR Resolution: Track the status of the Brazilian Federal Appellate Court rulings regarding the sale of CEMAR and the potential for recovery of the negative investment balance.
• Credit Ratings: Note the negative outlooks assigned by S&P and Fitch, and the downgrades by Moody's, citing weak debt protection and merchant generation risk.