ML051890357
| ML051890357 | |
| Person / Time | |
|---|---|
| Site: | Susquehanna  |
| Issue date: | 12/31/2004 |
| From: | PPL Corp |
| To: | Office of Nuclear Reactor Regulation |
| References | |
| Download: ML051890357 (106) | |
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William F. Hecht CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER x D~ear Shar:eowners, - Challenges, opportunities and accomplishments praising our customer service as the best marked 2004 as another successful year in in England, Scotland and Wales. the growth of PPL Corporation:
- PPL Generation, our domestic unregulated
- Our regulated Pennsylvania subsidiary, PPL generation subsidiary, completed a complex Electric Utilities, was awarded a $194 million maintenance and modification project at increase in annual revenue by the Pennsylvania the Susquehanna Unit 1 nuclear plant, Public Utility Commission. increasing the unit's generating capacity by
- In the United Kingdom, the electricity reg- 50 megawatts.
ulator awarded the company's subsidiaries -
- PPL Generation also brought into service Western Power Distribution-Southwest and our newest power plant, a 600-megawatt Western Power Distribution-South Wales a gas-fired facility located in Lower Mount a slight increase in distribution prices, while Bethel, Pennsylvania.
PPL CORPORATION 2004 ANNUAL REPORT 13
- PPL Corporation met the stringent require- "Today, 12,000 PPL people ments of Section 404 of the Sarbanes-Oxley on three continents are Act, a major undertaking that provided dedicated to delivering on confidence to our shareowners that PPL has the promises that we make effective financial reporting controls in place to you, our shareowners, throughout the corporation, including and to our customers corporate governance controls. This effort, around the world."
involving hundreds of professionals on three continents, allowed PPL Corporation to be We embarked on this strategy to grow among the first major corporations to be shareowner value. We did so understanding that certified under that act. such a strategy is not an end in itself. On the Even as we achieved these milestones, contrary, this strategy, which is built for long-term we continued to enhance our execution of the sustainable growth, requires superb operating fundamentals. For the third straight year, our performance. So, it is our confidence in the ability generation company set a record for electricity and dedication of PPL people that enables us to produced, and our regulated distribution continue to build on the solid base we established subsidiaries won recognition for exemplary through our first 75 years as a Pennsylvania-customer service. based electricity company. In 2004, we again demonstrated the Today, 12,000 PPL people on three conti-validity of our strategy, developed a number of nents are dedicated to delivering on the promises years ago. That strategy has resulted in the expan- that we make to you, our shareowners, and to sion of both our electricity delivery operations our customers around the world. Every day, and our generation operations. This has led to these employees leave their homes and travel to our purchase of electricity distribution companies customers, power plants, service depots and in England, Wales, Chile, El Salvador and Bolivia. office buildings, bringing with them knowledge We also have acquired or built power plants and experience that are among the best in the in Montana, Maine, Connecticut, New York, energy business. Our corporate strategy depends Arizona, Illinois and Pennsylvania. on our employees performing at levels that 14 PPL CORPORATION 2004 ANNUAL REPORT
are significantly above average today - and sustainable growth. We will continue to be on finding ways to do even better tomorrow. a major supplier of electricity in key markets, The results speak for themselves. Your searching for expansion opportunities that company continues to be one of the most provide you with clear benefits. We also will successful in the industry, with its stock price continue to provide the best in electricity increasing by 133 percent over the past five delivery services to nearly 5 million customers years, a rate that is more than seven times faster on three continents.' than the Dow Jones Utilities Average" over Your company has an excellent strategy that period. in place. We have the right people -to carry out Also over the past five years, PPL's common that strategy. PPL also has another valuable - stock price has grown at a greater rate than all advantage: We know that success is not guar-but three of the FORTUNE 500 utility compa- anteed. Rather, it is earned day-by-day by nies. In 2004, we also significantly outperformed paying attention'to the basics and executing. the Standard & Poor's' 500, with our stock on new opportunities. - price growing at 21.8 percent, compared with a On behalf of all 12,000 people of PPL, 9 percent increase in that index. I pledge our continued dedication to living up In addition, for the fourth year in a row, to the confidence that you have placed in us. we have increased our dividend. At $1.84 per share on an annualized basis, the dividend has increased by more than 70 percent over the past four years. We also announced recently -' WILLIAM F. HECHT that it is our policy to continue to grow our Chairman, President dividend at a rate exceeding our projected rate and Chief Executive Officer ; of growth in earnings per share'from ongoing March 18, 2005 operations, until we reach a payout ratio-in the 50 percent range. As we look to the future, your company will continue to find ways to provide long-term, PPL CORPORATION 2004 ANNUAL REPORT 15
William F. Hecht John R. Biggar James H. Miller CHIAIRMAN, PRESII)ENT ANI) EXECUTIVE VICE PRESIDENT ANI) EXECUTIVE VICE PRESIDENT AND CIIIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER CHIEF OPERATING OFFICER PPL Executive Discuission PPL Corporation's success in the were prepared to act. When we acted, Center, which we established by changing global electricity business is we did so thoughtfully and diligently, hiring some of the brightest people the result of strategic innovation as expanding the company at a time of in the wholesale energy commodity well as the on-the-ground innovation extraordinary opportunity. Most business and by providing additional of PPL's employees around the world. significant, we executed this expan- professional development to people Chairman Bill Hecht, Chief Financial sion by keeping our feet firmly planted we already had on board. Officer John Biggar and Chief Operat- on the ground, by being honest with Miller: As we were expanding, how-ing Officer Jim Miller talk about the ourselves about our limitations, about ever, we also had another significant company's strategic direction and what we did not know and about challenge: to retain our traditional operational performance. what we could not do. focus on operational excellence even Biggar: We also ensured that the com- while we were changing our corporate PPL has a long history of steady pany's financial strength was protected landscape. PPL's strategy for success growth. Over the past five years, as we expanded. While some companies always has been vitally linked to a con-however, the company has grown at a in our sector overreached with their viction that our employees must - and dramatic pace, taking a place among growth plans, we maintained the disci- can - successfully compete in global the leaders in the industry. What has pline to finance all of our acquisitions markets. We expect our employees driven this extraordinary growth? in a balanced manner, never jeopardiz- to take ownership of their operations, Hecht: We are very pleased that we ing our investment-grade ratings. and the result has been continual, have been able to capitalize on emerg- Hecht: That's right. While some of dramatic improvement. ing opportunities in our industry to our acquisitions, like the purchase significantly improve the company's of 13 power plants in Montana, may PPL has outperformed nearly all the value for our shareowners. In the have appeared aggressive, they were electric companies in the S&P 5soo early 1990s, we recognized that made with a meticulous understand- over the past five years. Why is this so? changes were coming to the electricity ing of the financial and operational Hecht: Part of the reason for our business, and we developed a strategy implications. We also made a realistic success has been our depth of under-both to influence that change and to assessment of what company skills standing of the electricity business and take advantage of emerging opportu- were transferable to the new company our self-confidence to take actions that nities. As deregulation in the United we were creating and what skills we did not always follow the conventional States brought assets to the market would have to develop. This sort of wisdom. In devising our strategy and and as privatization of overseas distri- assessment led to, among other things, initiatives, we listened to the best bution companies moved forward, we the creation of our Energy Marketing 16 PPL CORPORATION 2004 ANNUAL REPORT
opinions and advice of those in our from our experiences and have avoided States, with the country seemingly industry, including our colleagues at the major problems that have seriously- split over the question of deregulation. other electricity companies.-In the end, damaged some of the largest players in And, in Pennsylvania, we are working however, we made some decisions that our business. On the whole, however, with the state to develop electricity took us in a different direction than the growth in shareowner value from supply regulations as the'deregulation many others. We decided that there our successes has far outweighed the transition period comes to an end. was value in owning and operating impact of our relatively few missteps. Each of these items, and many others, both electricity'distribution and provides us with both opportunity electricity generation companies. How will PPL continue to grow the and challenge. We are managing these We concluded that we would not be company? issues with the same rigor and disci-speculative traders but would base Miller: As has been the case for the last pline that have allowed us to prosper our energy marketing operations on decade, we are continuing our search over the past decade. assets that we controlled, and that we for the right expansion opportunities. Miller: We always are faced with one would employ advanced statistical risk That type of expansion, however, will ongoing challenge: the imperative to management techniques to guide our not be the only source of our growth continually improve our operations. initiatives. And, we determined that over the next several years. PPL employ- This is an area in which we can there were significant growth prospects ees are also growing earnings from never rest. in certain overseas markets. We also the operations that we already have. recommitted ourselves to a long- We are improving the capacity and Some companies have dramatically standing PPL principle that we would availability of our power plants. We increased their dividends over ensure long-term value for our share- are developing new ways to provide the past year or so. What is PPL's owners by doing business only in extraordinary customer service in our dividend policy? markets where we also could expect electricity delivery business in the to bring value to customers and Biggar: Given the company's sound United States, Latin America and the counterparties. financial performance,,our dividend United Kingdom. We are taking full policy is to grow our common stock Miller: Certainly, we didn't avoid all advantage of our strong generation dividend, at a rate exceeding the the bumps in the road. For example, fleet in our wholesale and retail mar- projected rate of growth in earnings we simply failed in Brazil due to an keting operations. per share from ongoing operations, unprecedented drought affecting Biggar: Over the next several years, we until the dividend payout ratio reaches hydroelectric generation and to inef- are projecting a 3 percent to 5 percent the 50 percent level. In pursuit of this fective regulatory actions in an ailing compound annual growth rate in earn- objective, we announced at the end of sector. And, we trimmed back some ings, derived primarily from enhance- February that we are increasing the of our generation expansion plans as ments to and improvements in the quarterly dividend by 12 percent to an a result of the significant downturn operation of our existing assets. We annualized level of $1.84 per share. in wholesale market prices following should note that our projected growth-the crisis in California. But we also rate excludes any asset additions or Why should someone consider PPL were decisive in those situations, possible increases in wholesale energy when making an investment decision? acting quickly to minimize losses to prices. Our stronger balance sheet and shareowners. We didn't bury our Hecht: Our record and our people. improved cash flow position us for We have proven that we have what heads in the sand and pretend the pursuit of growth opportunities. problems would go away. it takes to succeed in this business - a clear strategy and the ability to Biggar: On the contrary, we leveled What are the key issues for the carry out that strategy. PPL people with each other and with our share- company over the next several years? are among the best in the business, owners, telling them that it was Hecht: We recently'announced that we and they are constantly learning - necessary to end our investments in will be undertaking major construction and inventing - new ways to-succeed. these projects, take the appropriate projects to install the most advanced. The formula for success in today's charges and move on. I believe this pollution control equipment available electricity business is deceptively sim-direct, no-nonsense approach to our at our Montour and Brunner Island ple on paper yet extremely challenging business has created additional value power plants in Pennsylvania. Mean- in execution: a solid strategy and the for our shareowners. While there have while, debate continues regarding the people to carry it out. We continue been some setbacks, we have learned future of energy markets in the United to prove that PPL has both. PPL CORPORATION 2004 ANNUAL REPORT 17
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Selected Financial and Operating Data PPL Corporation(') 20014 2003 2002 2001 2000 Income Items - millions Operating revenues(b) $ 5,812 $ 5.596 $ 5,491 $ 5,147 $ 4,541 Operating income 1,387 1,340 1,246 850 1,194 Income from continuing operations 700 719 360 169 487 Net income 698 734 208 179 498 Balance Sheet Items - millions(¢) Property, plant and equipment-netlb) 11,209 10,593 9,733 5,947 5,948 Recoverable transition costs 1,431 1,687 1,946 2,172 2,425 Total assets 17,761 17,123 15,552 12,562 12,360 Long-term debt 7,658 7,859 6,267 5,579 4,784 Long-term debt with affiliate trusts(d) 89 681 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures(>) 661 825 250 Preferred stock With sinking fund requirements 31 31 46 Without sinking fund requirements 51 51 51 51 51 Common equity 4,239 3.259 2,224 1,857 2,012 Short-term debt 42 56 943 118 1,037 Total capital provided by investors 12,079 11,906 10,177 8,461 8,180 Capital lease obligations 11 12 Financial Ratios Return on average common equity- % 18.14 26.55 10.27 8.41 27.49 Embedded cost rates(c) Long-term debt - % 6.67 6.56 7.04 6.84 6.98 Preferred stock - % 5.14 5.14 5.81 5.81 5.87 Preferred securities - %(d) 8.02 8.13 8.44 Times interest earned before income taxes 2.72 2.93 1.97 2.19 3.05 Ratio of earnings to fixed charges - total enterprise basis l6 2.6 2.5 1.9 1.7 2.5 Common Stock Data Number of shares outstanding - thousands Year-end 189,072 177,362 165,736 146,580 145,041 Average 184,228 172,795 152,492 145,974 144,350 Number of shareowners of recordc 81,175 83,783 85,002 87,796 91,777 Income from continuing operations- Basic EPS $ 3.80 $ 4.16 $ 2.36 $ 1.16 $ 3.38 Income from continuing operations- Diluted EPS S 3.78 $ 4.15 $ 2.36 $ 1.15 $ 3.37 Net income - Basic EPS $ 3.79 $ 4.25 $ 1.37 $ 1.23 $ 3.45 Net income - Diluted EPS S 3.77 $ 4.24 $ 1.36 $ 122 $ 3.44 Dividends declared per share $ 1.64 $ 1.54 $ 1.44 $ 1.06 $ 1.06 Book value per share(c) $ 22.42 $ 18.38 $ 13.42 $ 12.67 $ 13.87 Market price per share c) S 53.28 $ 43.75 $ 34.68 $ 34.85 $ 45.188 Dividend payout rate - %zf 44 36 106 87 31 Dividend yield - %() 3.08 3.52 4.15 3.04 2.35 Price earnings ratio(t'(o) 14.13 10.32 25.50 28.57 13.14 Sales Data - millions of kWh Domestic - Electric energy supplied - retail 37,664 36,774 36,746 37,395 37,758 Domestic - Electric energy supplied - wholesale 37,394 37,841 36,849 27,683 40,925 Domestic - Electric energy delivered 35,897 36,083 35,712 35,534 34,731 International - Electric energy deliveredih 32,846 31,952 33,313 5,919 3,735 (') The earnings each year were affected by unusual Items, which affected net income. See 'Earnings' in Management's Discussion and Analysis for adescription of unusual items in2004, 2003 and 2002. (b) Data for certain years are reclassified to conform to the current presentation. (c)Al year-end. (d) On July 1,2003. PPL adopted the provisions of SFAS 150, 'Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.' The company-obligated mandatorily redeemable preferred securities are mandatorily redeemable financial instruments, as they require the issuer to redeem the securities for cash on a specified date. Thus. they should be classified as liabilities, as a component of long-term debt, instead of 'mezzanine equity on the Balance Sheet. However, as of December 31, 2004 and 2003, no amounts were included In 'Long-term Debt for these securities because PPL Capital Funding Trust I and SIUK Capital Trust I were deconsolidated effective December 31, 2003, inconnection with the adoption of FIN 46, 'Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,for certain entities. Instead, the subordinated debt securities that support the company-obligated mandatorily redeemable preferred securities of the trust are reflected in 'Long-term Debt with Affiliate Trusts' as of December 31, 2004 and 2003, to the extent they were outstanding. See Notes 8 and 22 to the Financial Statements for additional Information. (") Computed using earnings and fixed charges of PPL and its subsidiaries. Fixed charges consist of interest on short- and long-term debt, other interest charges, Interest on capital lease obligations, the estimated interest component of other rentals and preferred dividends. (f) Based on diluted EPS. (a)Based on year-end market prices. (IN Deliveries for 2002 include the electricity deliveries of WPD for the full year and of CEMAR prior to deconsolidation. PPL CORPORATION 2004 ANNUAL REPORT 21
Management's Discussion and Analysis Terms andabbreviations areexplained IntIheglossary. Dollars areInmillions. except pershare data, unless otherwise noted. Forward-looking Information New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time to time, and it is Statements contained inthis report concerning expectations, beliefs, plans, not possible for PPL to predict all of such factors, or the extent to which any objectives, goals, strategies, future events or performance and underlying such factor or combination of factors may cause actual results to differ from assumptions and other statements which are other than statements of histori- those contained inany forward-looking statement. Any forward-looking state-cal facts are 'forward-looking statements' within the meaning of the federal ment speaks only as of the date on which such statement is made, and PPL securities laws. Although PPL believes that the expectations and assumptions undertakes no obligations .to update the information contained insuch state-reflected inthese statements are reasonable, there can be no assurance that ment to reflect subsequent developments or information. these expectations will prove to be correct. These forward-looking statements involve a number of risks and uncertainties, and actual results may differ mate-rially from the results discussed in the forward-looking statements. Inaddition Overview to the specific factors discussed inthe Management's Discussion and Analysis PPL is an energy and utility holding company with headquarters in Allentown, section herein, the following are among the important factors that could cause PA. Through its subsidiaries, PPL isprimarily engaged inthe generation and actual results to differ materially from the forward-looking statements: marketing of electricity in two key markets - the northeastern and western U.S.
- market demand and prices for energy, capacity and fuel; - and in the delivery of electricity inPennsylvania, the U.K. and Latin America.
- weather conditions affecting customer energy usage and operating costs; PPL's strategy for its electricity generation and marketing business is to match
- competition inretail and wholesale power markets; energy supply with load, or customer demand, under long-term and intermedi-
- the effect of any business or industry restructuring; ate-term contracts with creditworthy counterparties. PPLs strategy for its
- the profitability and liquidity of PPL and its subsidiaries; electricity delivery businesses is to own and operate these businesses at the
- new accounting requirements or new Interpretations or applications of highest level of quality and reliability and at the most efficient cost.
existing requirements; PPL faces several risks in its generation business. The principal risks are
- operation and availability of existing generation facilities and operating costs; electricity wholesale price risk, fuel supply and price risk, power plant perfor-
- transmission and distribution system conditions and operating costs; mance and counterparty credit risk. PPL attempts to manage these risks through
- environmental conditions and requirements; various means. For instance, PPL operates aportfolio of generation assets that
- development of new projects, markets and technologies; is diversified as to geography, fuel source, cost structure and operating char-
- performance of new ventures; acteristics. PPL is focused on the operating efficiency of these power plants
- asset acquisitions and dispositions; and maintaining their availability. Inaddition, PPL has in place and continues
- political, regulatory or economic conditions instates, regions or countries to pursue long-term and intermediate-term contracts for energy sales and fuel where PPL or its subsidiaries conduct business; supply, and other means, to mitigate the risks associated with adverse changes
- receipt of necessary governmental permits, approvals and rate relief; inthe difference, or margin, between the cost to produce electricity and the
- impact of state, federal or foreign investigations applicable to PPL and its price at which PPL sells it. PPLs contractual commitments for energy sales subsidiaries and the energy industry; are primarily satisfied through its own generation assets - i.e., PPL primarily
- the outcome of litigation against PPL and its subsidiaries; markets and trades around its physical portfolio of generating assets through
- capital market conditions and decisions regarding capital structure; integrated generation, marketing and trading functions. PPL has in place risk
- stock price performance; management programs that, among other things, are designed to monitor and
- the market prices of equity securities and the impact on pension income manage its exposure to volatility of earnings and cash flows related to changes in and resultant cash funding requirements for defined benefit pension plans; energy and fuel prices, interest rates, foreign currency exchange rates, counter-
- securities and credit ratings; party credit quality and the operational performance of its generating units.
- state, federal and foreign regulatory developments; PPLs electricity delivery businesses are rate-regulated. Accordingly, these
- foreign exchange rates; businesses are subject to regulatory risk interms of the costs that they may
- new state, federal or foreign legislation, including new tax legislation; recover and the investment returns that they may collect incustomer rates.
- national or regional economic conditions, including any potential effects The principal challenge that PPL faces inits electricity delivery businesses arising from terrorist attacks inthe U.S., the situation in Iraq and any is to maintain high standards of customer service and reliability inacost-consequential hostilities or other hostilities; and effective manner. PPL faces certain financial risks by conducting international
- the commitments and liabilities of PPL and its subsidiaries. operations, such as fluctuations incurrency exchange rates. PPL attempts to manage these financial risks through its risk management program.
Any such forward-looking statements should be considered infight of A key challenge for PPL~s business as awhole is to maintain astrong credit such important factors and inconjunction with PPL's Form 10-K and other profile. Inthe past few years, investors, analysts and rating agencies that follow reports on file with the SEC. companies in the energy industry have been particularly focused on the credit quality and liquidity position of energy companies. PPL is focused on strength-ening its balance sheet and improving its liquidity position, thereby improving its credit profile. 22 PPL CORPORATION 2004 ANNUAL REPORT
The purpose of 'Management's Discussion and Analysis' is to provide The comparability of certain items on the 2003 and 2002 Statements of information concerning PPLs past and expected future performance inimple- Income has also been impacted by PPL Global's investment in CEMAR. The menting the strategies and managing the risks and challenges outlined above. consolidated results of CEMAR are included from January to August 2002, Specifically: when PPL had a controlling interest. See Note 9 to the Financial Statements
- 'Results of Operations' provides an overview of PPL's operating results for more information, including the sale of this investment in 2004.
in2004, 2003 and 2002, starting with a review of earnings. The earnings Earnings review includes a listing of certain unusual items that had significant Net income and the related EPS were as follows: impacts inthese years, and it also includes adescription of key factors that 2004 2003 2002 management expects may impact future earnings. 'Results of Operations' also includes an explanation of changes during this three-year period in Net income $ 698 $ 734 $208 EPS-basic $3.79 $4.25 $1.37 significant income statement components, such as energy margins, utility EPS-diluted $3.77 $4.24 $1.36 revenues, operation and maintenance expenses, financing costs, income taxes and cumulative effects of accounting changes. The after-tax changes in net income were primarily due to:
- Financial Condition - Liquidity' provides an analysis of PPLs liquidity 2004 vs. 2003 2003 vs. 2002 position and credit profile, including its sources of cash (including bank Domestic:
credit facilities and sources of operating cash flow) and uses of cash Eastern U.S. non-trading margins $ 35 $ (2) (including contractual commitments and capital expenditure requirements) Northwestern U.S. non-trading margins (1) 16 and the key risks and uncertainties that impact PPLs past and future liquidity Southwestern U.S. non-trading margins (5) 5 Net energy trading margins 7 (6) position and financial condition. This subsection also includes an explana-Delivery revenues (net of CTC/ITC tion of recent rating agency decisions affecting PPL, as well as a listing of amortization, interest expense on transition PPL's current credit ratings. bonds and ancillary charges) 5 11 Operation and maintenance expenses (17) (41)
* 'Financial Condition - Risk Management - Energy Marketing & Trading Realized earnings on nuclear decommissioning and Other" includes an explanation of PPL's risk management program relat- trust (Note 16) (16) 12 ing to market risk (i.e., commodity price, interest rate and foreign currency Contribution of property (10) 12 exchange risk) and credit risk (i.e., counterparty credit risk). Taxes, other than income (excluding gross receipts tax) 10 (14) * 'Application of Critical Accounting Policies" provides an overview of the Synfuel earnings 11 2 accounting policies that are particularly important to the results of opera- Depreciation (22) tions and financial condition of PPL and that require PPLs management to Energy related businesses (5) (4) make significant estimates, assumptions and other judgments. Although Interest income on IRS tax settlement 14 PPL's management believes that these estimates, assumptions and other Reduction intax reserves associated with stranded costs securilization 22 judgments are appropriate, they relate to matters that are inherently uncer- Interest expense and distributions on tain. Accordingly, changes inthe estimates, assumptions and other judg- preferred securities (14) 51 ments applied to these accounting policies could have a significant impact Other 6 (6) on PPLs results of operations and financial condition, as reflected in Total Domestic 20 36 PPL's Financial Statements. International:
U.K operations: The information provided in'Management's Discussion and Analysis" Benefit of complete ownership of WPD (Note 9) 29 should be read inconjunction with PPLs Financial Statements and the Impact of changes inforeign currency exchange rates 22 14 accompanying Notes. Distribution margins 5 Operation and maintenance expenses 11 Results of Operations Other (6) 1 Latin America 3 18 The following discussion, which explains significant annual changes In Other (7) 3 principal items on the Statement of Income, compares 2004 to 2003 and Total International 28 65 compares 2003 to 2002. Unusual items (84) 425 WPD's results, as consolidated in PPL's Statement of Income, are impacted
$(36) $526 by changes inforeign currency exchange rates. Changes in foreign exchange rates increased WPD's portion of revenue and expense line items by about 12%
in2004 compared with 2003 and by about 9%in2003 compared with 2002. PPL CORPORATION 2004 ANNUAL REPORT 23
Management's Discussion and Analysis The changes innet income from year to yeair were, inpart, attributable to
- Due to current electricity and natural gas price levels, there is arisk that several unusual items with significant earnings impacts, including accounting PPL may be unable to recover its investment incertain gas-fired generation changes, discontinued operations and infreque nIly occurring items. The alter- facilities. Under GAAP PPL does not believe that there is an impairment tax impacts of these unusual items are: charge to be recorded for these facilities at this time. PPL is unable to 2004 2003 2002 predict the earnings impact of this issue, based upon future energy and fuel Accounting changes: price levels, applicable accounting rules and other factors, but such impact ARO (Note 21) $ 63 may be material.
Consolidation of variable interest
- In June 2004, asubsidiary of PPL Generation agreed to sell the 450 MW entities (Note 22) (27) Sundance power plant to Arizona Public Service Company (APS). Each Gwodwill impairment (Note 19)
Sale of CGE (Note 9) $(7) party has waived the remaining contractual conditions for approval of the Sale of CEMAR (Note 9) 23 transaction by the Arizona Corporation Commission. The sale still requires Discontinued operations (Note 9) (2) (20) approvals of the FERC under the Federal Power Act. PPL cannot predict CEMAR-related net tax benefit (Note 5) 81 whether or when these approvals will be obtained. PPL estimates that aloss Impairment of investment in technology supplier (Note 9) (6) on sale or an impairment charge of about $47 million alter tax, or $0.25 per Wortdorce reduction (Note 20) (5) (44) share, could be recorded in 2005 depending on the timing and likelihood Write-down of generation assets (Note 9) (26) of obtaining the FERO approvals. CEMAR operating losses (Note 9) (23)
- PPLs ability to manage operational risk with respect to its generation plants CEMAR impairment (Note 9) (98 iscritical to its financial performance. Specifically, depending on the timing Taxbenefit - Teesside (Note 9) 8 and duration of both planned and unplanned outages (inparticular, if such Total S 8 $ 92 $(333) outages are during peak periods or periods of severe weather), PPUs revenue The year-to-year changes in earnings coml 3onents, including domestic from energy sales could be adversely affected and its need to purchase gross energy margins by region and income sta tement line items, are discussed power to satisfy its energy commitments could be significantly increased.
in the balance of 'Results of Operations. PPL has been successful inthe past several years inincreasing fleet-wide PPLs future earnings could be, or will be, impacted by anumber of key equivalent availability (i.e., the percentage of time inayear that agenerating factors, including the following: unit is capable of producing power) frorn the low 80% range to over 90%.
- PPLs future energy margins and, consequen tly, its future earnings, may However, since many of its generating units are reaching mid-lile, PPL is be impacted by fluctuations in market prices for electricity, as well as faced with the potential for outages of longer duration to accommodate fluctuations in fuel prices, fuel transportatioi i costs and emission allowance significant investments inmajor component replacements.
expenses. For instance, although PPL expec Ismarket prices for electricity in
- PPL has interests intwo synthetic fuel facilities and receives tax credits 2005 to be higher than in 2004, PPL is not expecting an increase in its 2005 pursuant to Section 29 of the Internal Revenue Code based on its sale of energy margins due to expected increases in the cost of fuel, fuel transpor- synthetic fuel to unaffiliated third-party purchasers. PPL has estimated tation and emissions allowances. that these facilities will contribute approximately $0.21 to annual EPS
- A key part of PPLs overall strategy is to ente r into long-term and intermedi- through 2007. See Note 14 to the Financial Statements for adiscussion ate-term energy supply agreements in order to mitigate market price and of the requirements to receive the Section 29 tax credits, the IRS review supply risk. PPLs ability to continue to enter into such agreements, and of synthetic fuel production procedures and the impact of higher oil to renew existing energy supply agreements, may affect its future earnings. prices on the Section 29 tax credits.
See Note 14 to the Financial Statements for imnore information regarding
- InMarch 2004, PPL Electric filed arequest with the PUC for an overall PPLs wholesale energy commitments and Niote 15 for more information annual net increase indistribution rates of approximately $164 million (sub-regarding the PLR contracts. sequently amended to $160 million), based on areturn on equity of 11.5%,
- PPL Electric has agreed to provide electricityf supply to its PLR customers at and notified the PUG that it planned to pass through to customers approxi-predetermined rates through 2009, and it has entered into PUC-approved, mately $57 million in increased transmission charges imposed on PPL full requirements energy supply agreements with PPL EnergyPlus to fulfill Electric by PJM. InDecember 2004, the PUC approved an increase in PPL its PLR obligation. The predetermined chargees for generation supply which Electric's distribution rates of approximately $137 million (based on areturn PPL Electric collects from its PLR customers and pays to PPL EnergyPlus on equity of 10.7%), and approved PPL Electric's proposed mechanism for under the energy supply agreements provide for annual increases in each collecting the additional $57 million in transmission-related charges, for a year commencing in 2006 and continuing through 2009. PPL Electric's PLR total increase of approximately $194 million, effective January 1,2005.
obligation after 2009 will be determined by Ihe PUC pursuant to rules that have not yet been promulgated. 24 PPL CORPORATION 2004 ANNUAL REPORT
- InJanuary 2005, severe ice storms hit PPL Electric's service territory. Domestic Gross Energy Margins PPL Electric had to restore service to about 238,000 customers. Although The following table provides changes inthe income statement line items that the actual cost of these storms and the specific allocation of such cost comprise domestic gross energy margins:
between operation and maintenance expense and capital costs is not yet 2004 vs. 2003 2003 vs. 2002 finalized, PPL Electric currently estimates atotal cost of $22 million, with Utility revenues $183 $ 31 approximately 85% being expensed. On February 11,2005, PPL Electric Unregulated retail electric and gas revenues (34) (30) filed apetition with the PUC for authority to defer and amortize for regulatory Wholesale energy marketing revenues 25 183 accounting and reporting purposes its actual cost of these storms, excluding Net energy trading margins 12 (10) Other revenue adjustments(') (112) 4 capitalized costs of approximately $3million and regular payroll expenses of approximately $2million (pursuant to PUC precedent on this issue). Ifthe Total revenues 74 178 PUC grants this petition, PPL Electric's management at that time will assess Fuel 125 44 Energy purchases (87) 100 the recoverability of these costs inPPL Electric's next general rate increase Other cost adjustmentsM() (25) 12 proceeding. Based on the PUC's action on the petition and management's Total cost of sales 13 156 assessment, PPL Electric would either record these storm expenses, excluding regular payroll, as a regulatory asset inaccordance with SFAS 71, Domestic gross energy margins S 61 S 22
'Accounting for the Effects of Certain Types of Regulation,' or record these (a Adjusted to exclude the Impact of any revenues and costs not associated with domestic gross energy margins, inparticular, revenues and energy costs related to the international storm expenses on its income statement. Ifthe PUG grants the petition before operations of PPL Global and the domestic delivery operations of PPL Electric and PPL Gas PPL Electric files its Form 10-0 for the first quarter of 2005, the result of Utilities. Also adjusted to include gains or losses on sales of emission allowances, which are included in'Other operation and maintenance' expenses on the Statement of Income, this assessment will be reflected inPPL Electric's financial statements for and the reduction of the reserve for Enron receivables, as described inNote 17 to the the first quarter of 2005. Ifthe PUG has not acted on or has denied the Financial Statements.
petition by such date, PPL Electric would record these storm expenses on its income statement. At this time, PPL Electric cannot predict the outcome Changes in Domestic Gross Energy Margins By Region of this matter. Domestic gross energy margins are generated through PPLs normal and hedge
- Earnings in2005 and beyond are expected to continue to be adversely activities (non-trading), as well as trading activities. Non-trading margins are affected by increased pension costs. Specifically, WPD will experience now discussed on ageographic basis rather than on an activity basis, as reported increased pension costs due to arecent actuarial valuation of WPD's plans prior to 2004. Aregional perspective more closely matches the internal view of that reflects higher pension obligations. The increase inpension costs how PPLs energy business is managed.
in2005 is forecasted to be approximately $22 million after tax, and the 2004 vs. 2003 2003vs.2002 increase in pension costs is expected to continue to be significant in2006. Eastem U.S. non-trading $59 S (4) See 'Other Operation and Maintenance' for the impact on earnings in2004. Northwestern U.S. non-trading 12) 27
- PPL is unable to predict whether future impairments of goodwill may be Southwestern U.S. non-trading (8) 9 Net energy trading 12 (10) required for its domestic and international investments. While no goodwill Domestic gross energy margins $61 $22 impairments were required based on the annual review performed inthe fourth quarter of 2004, future impairments may occur due to determinations Eastern US.
of carrying value exceeding the fair value of these investments. Eastern U.S. non-trading margins were higher in2004 compared to 2003,
- See Note 14 to the Financial Statements for potential commitments and primarily due to 3%higher generation, as well as higher prices and slightly contingent liabilities that may impact future earnings.
- See 'Application of Critical Accounting Policies' for an overview of account- higher sales volumes. In PJM, where the majority of PPLs Eastern wholesale activity occurs, average spot prices rose 15% in 2004 over 2003. PPL also ing policies that are particularly important to the results of operations and financial condition of PPL and that require PPLs management to make benefited from favorable transmission congestion positions. Inaddition, retail energy prices increased by approximately 1%in 2004 inaccordance with the significant estimates, assumptions and other judgments. Although PPus schedule established by the PUC Final Order. The higher volumes reflect the management believes that these estimates, assumptions and other judg-return of customers who had previously shopped for electricity, as well as ments are appropriate, they relate to matters that are inherently uncertain.
- See Note 23 to the Financial Statements for new accounting standards that new load obligations inConnecticut and New Jersey, partially offset by lower have been issued but not yet adopted by PPL that may impact future earnings. wholesale sales. Partially offsetting these improvements were increased supply costs driven by increased fossil fuel and purchased power prices.
PPL CORPORATION 2004 ANNUAL REPORT 25
Management's Discussion and Analysis Eastern U.S. non-trading margins were essentially flat in2003 compared inelectricity positions and a$6million increase in gas and oil positions. The to 2002 due to lower supply costs in2002 caused by the buyout of aNUG con- $10 million decrease in2003 compared to 2002 was primarily due to realized tract inFebruary 2002, which reduced 2002's power purchases by $25 million. electric swap losses in 2003. The physical volumes associated with energy Excluding the NUG buyout, margins in 2003 were higher compared to 2002, trading were 5,700 GWh and 11.7 Bcf in2004; 5,200 GWh and 12.6 Bcf in 2003; primarily due to higher wholesale volumes, which increased by 47%. The and 9,600 GWh and 12.4 Bcf in2002. The amount of energy trading margins higher volumes were primarily driven by market opportunities to optimize the from unrealized mark-to-market transactions was $13 million in2004 and not value of generating assets and by higher spot prices that allowed PPL Energy significant in 2003 and 2002. Supply to increase the utilization of its higher-cost generating units. Utility Revenues Northwestem US. The increases inutility revenues were attributable to the following: Northwestern U.S. non-trading margins were slightly lower in2004 com- 2004 vs. 2003 2003 vs. 2002 pared to 2003, due in part to a retroactive coal price adjustment caused by Domestic: an unfavorable arbitration ruling. Incremental expense of $6million was Retail electric revenue (PPL Electric) recorded in 2004 as a result of the ruling, most of which related to years PLR electric generation supply S 94 $ 22 2001 to 2003. Contributing to the decrease in margins in2004 compared to Electric delivery (7) 48 Wholesale electric revenue (PPL Electric) (23) 1 2003 was a$6million positive impact to 2003 margins related to apartial Gas revenue (PPL Gas Utilities) 22 6 reversal of areserve against Enron receivables (discussed in Note 17 to the Other (1) (1) Financial Statements) and a 2003 favorable litigation settlement of $3mil- International: lion with Energy West Resources. These decreases were offset by improved Retail electric delivery (PPL Global) generation and higher prices. UL. 70 36 Chile 27 18 Northwestern U.S. non-trading margins were higher in2003 compared to Bolivia 1 1 2002, due to higher wholesale prices. Average wholesale prices for 2003 were Brazil (113)
$6/MWh higher than prices in2002. A$6million partial reversal of a reserve ElSalvador 13 against Enron receivables (discussed inNote 17 to the Financial Statements) $183 S 31 and afavorable settlement of $3million with Energy West Resources also positively impacted margins in2003. The increase in utility revenues for 2004 compared with 2003 was attributable to:
Southwestern U.S.
- higher PLR revenues due to higher energy and capacity rates, and a 3.6%
Southwestern U.S. non-trading margins were lower in2004 compared to 2003, increase in volume, in part due to the return of customers previously served primarily due to wholesale sales volumes decreasing 17%. Also contributing to by alternate suppliers; the decrease inmargins in2004 compared to 2003 was a$3million positive
- higher gas revenues primarily due to ott-system sales of storage gas in impact to 2003 margins related to a partial reversal of a reserve against Enron the fourth quarter of 2004, and the increase in natural gas prices, which are receivables (discussed in Note 17 to the Financial Statements). a pass-through to customer rates, partially offset by a decrease in volume; Southwestern U.S. non-trading margins were higher in2003 compared
- higher WPD revenues, primarily due to the change in foreign currency to 2002, due to the inception of new tolling agreements inArizona and an exchange rates; increase of average wholesale prices by $16/MWh in 2003 compared to 2002.
- higher revenues in Chile, due to higher energy prices, which are a pass-Inaddition, margins were positively impacted by $3million in2003 related through to customer rates, the change in foreign currency exchange rates, to apartial reversal of areserve against Enron receivables. and a 7% increase in sales volume; partially offset by Net Energy Trading
- lower electric delivery revenues due to a decrease in ITC and CTC revenue PPL enters into certain energy contracts that meet the criteria of trading as a result of lower ITC rates, and several rate groups reaching their rate derivatives as defined by EITF Issue 02-3, 'Issues Involved inAccounting cap; and for Derivative Contracts Held for Trading Purposes and Contracts Involved in
- lower wholesale electric revenues, due to the expiration of all PPL Electric Energy Trading and Risk Management Activities. These physical and financial municipal purchase power agreements at the end of January 2004.
contracts cover trading activity associated with electricity, gas and oil. The
$12 million increase in2004 compared to 2003 was due to a$6million increase 26 PPL CORPORATION 2004 ANNUAL REPORT
The increase in utility revenues for 2003 compared with 2002 was Other Operation and Maintenance attributable to: The increases inother operation and maintenance expenses were primarily
- higher electric delivery revenues resulting from a1.1% increase in delivery due to:
sales, inpart due to colder winter weather in the first quarter of 2003; 2004 vs. 2003 2003 vs. 2002
- higher PLR revenues, due to higher energy and capacity rates; Property damage and environmental insurance
- higher gas revenues, primarily due to higher sales volume of propane and settlements which were recorded in2003 $27 s(27) natural gas; Increase indomestic and international pension costs 18 47
- higher WPD revenues, primarily due to the change in foreign currency Increased operating expenses in domestic business exchange rates: lines and other 54
- higher revenues inEl Salvador, primarily due to higher volume and higher Additional expenses of new generating facilities 5 28 Increase inWPD expenses due to regulatory accounting pass-through energy costs, partially offset by a6%tariff reduction effective adjustments, and resolution of purchase accounting January 1,2003; and contingencies in2002 related to the Hyder acquisition 18
- higher revenues inChile, primarily due to higher volume and the consolida- Increase inforeign currency exchange rates 15 10 tion of TransEmel (see Note 9to the Financial Statements); partially offset by Increase inWPD tree trimming costs a Decrease inthe Clean Air Act contingency relating to
- lower revenues in Brazil attributable to the deconsolidation of CEMAR generating facilities recorded in2003 8 (8) inAugust 2002 (see Note 9). Outage costs associated with planned maintenance at the Montour and Conemaugh plants 7 Energy Related Businesses Consulting and independent auditor costs to meet the Energy related businesses contributed $45 million less to operating income requirements of Sarbanes-Oxley 404 6 Write-oft of Hurricane Isabel costs not approved for in2004 compared with 2003. The decrease was primarily attributable to recovery by the PUC 4 the following: Accretion expense as a result of applying
- a $15 million pre-lax loss on the sale of CGE in 2004 (see Note 9to the SFAS 143 (Note 21) 1 18 Timing and extent of outage costs associated with the Financial Statements); planned refueling and Inspection at the Susquehanna
- a $5million pre-tax decrease from mechanical contracting and engineering station and of other nuclear-related expenses 2 7 subsidiaries due to the continued decline In capital spending incommercial Change to account for CEMAR on the cost method in 2002 (38)
Estimated reduction insalaries and benefits as aresult of and industrial markets, lower margins experienced In those markets, and the workforce reduction initiated in2002 (Note 20) (28) cost overruns at two major projects; Decrease inlease expense due to consolidation of the
- a $3million pre-tax decrease from Latin American subsidiaries due Sundance and University Park generation facilities (24)
Vacation liability adjustment in 2002 in conjunction primarily to lower dividends received and lower construction sales; and with the workforce reduction (15)
- a $17 million higher pre-tax operating loss from synfuel projects. WPD capitalization (13)
Increase (decrease) inother postretirement benefit expense (12) 16 Energy related businesses contributed $17 million less to operating Decrease inBrunner Island expenses due to outage work income in2003 compared with 2002. The decrease resulted primarily from: In 2003. No major outage work performed in2004 (6)
- $7million of credits recorded on development projects in2002, due largely Gains on sales of emission allowances (1) (17) to afavorable settlement on the cancellation of ageneration project in Other (3) 5 Washington state; $42 $ 70
- a $5million operating loss on some Hyder properties inthe first quarter of The $18 million increase innet pension costs was attributable to reductions 2003, which were subsequently sold inApril 2003; in the discount rate assumption for PPUs domestic and international pension
- an $8million decrease inLatin America revenues from lower material and plans at December 31, 2003. Although financial markets have improved and construction project sales (In2002, a Bolivian subsidiary participated in PPLs domestic and international pension plans have experienced significant the construction of a 1,500 kilometer transmission line inrural areas.); and asset gains in2003 and 2004, domestic interest rates on fixed-income obliga-
- a$3million decrease in margins from telecommunications, due to the tions have continued to fall, requiring afurther reduction inthe discount rate acquisition of afiber optic network and start-up activities for new products; assumption for PPL's domestic plans as of December 31, 2004. The reduction partially offset by inthe discount rate assumption has asignificant impact on the measurement
- a$3million improvement incontributions from mechanical contracting of plan obligations and net pension cost. Inaddition, there was an increase subsidiaries, due to enhanced project controls that were implemented to inthe obligations of the WPD pension plan as determined by its most recent minimize project overruns, offset by acontinuing decline Inconstruction markets in 2003.
PPL CORPORATION 2004 ANNUAL REPORT 27
.Management's Discussion and Analysis actuarial valuation as of March 31, 2004. PPL's net pension costs are expected Other charges of $232 million in2002 consisted of the write-down of PPL to increase by approximately $40 million in2005. Approximately $31 million of Global's investment in CEMAR and several smaller impairment charges on other the increased costs isattributable to the WPD pension plans. See Note 12 to the international investments (see Note 9), the write-down of generation assets Financial Statements for details of the funded status of PP~s pension plans. (see Note 9)and acharge for aworktorce reduction program (see Note 20).
Depreciation Other Income - net Increases indepreciation expense were primarily due to: See Note 16 to the Financial Statements for details of other income and 2004 vs. 2003 2003 vs. 2002 deductions. Additions to PP&E $ 13 $29 Financing Costs Sundance and University Park generation facilities- FIN 46"'( 15 The increase (decrease) in financing costs, which include 'Interest Expense' Depreciation on Lower Mt. Bethel generation facility, and 'Distributions on Preferred Securities, were primarily due to: which began commercial operation inMay 2004 10 2004 vs. 2003 2003 vs. 2002 Foreign currency exchange rates 16 10 Lower depreciation due to deconsolidation of Increase ininterest expense due to consolidation CEMAR in2002 (7) of the lessors of the Sundance, University Park and Lower Mt. Bethel generation facilities, in 2003 purchase accounting adjustments to accordance with FIN 46 WPD assets (Note 9) (22) 3 $34 Financing costs associated with the repayment of No decommissioning expense in2003 due to the consolidated trusts debt for the Sundance and application of SFAS 143, 'Accounting for Asset University Park generation facilities Retirement Obligationsebl (22) 9 Increase inforeign currency exchange rates 15 $ 10
$32 $13 Decrease ininterest expense due to hedging activities "' The lessor of these facilities was consolidated under FIN 46, 'Consolidation of Variable accounted for under SFAS 133, 'Accounting for Derivative Instruments and Hedging Activities (10) (20)
Interest Entities, anInterpretation of ARB No. 51, effective December 31, 2003. InJune 2004, subsidiaries of PPL Energy Supply purchased the Sundance and University Park Decrease inamortization expense (5) (13) generation assets from the lessor that was consolidated by PPL Energy Supply under FIN 46. Decrease inshort-term debt interest expense (10) (20) See Note 22 to the Financial Statements for additional information. Decrease inlong-term debt interest expense (1) (31) (b) There was acorresponding recording of accretion expense for PPL Susquehanna in2003, Decrease inlong-term debt interest from the which isincluded in Other operation and maintenance expense on the Statement of deconsolidation of CEMAR inAugust 2002 (34) Income. See Note 21lo the Financial Statements for additional information. Charge in2002 related to the inetfectiveness and subsequent dedesignation of hedges on antici-Taxes, Other Than Income pated debt issuances that did not occur (15) Charge in2002 to cancel aremarketing agreement (24) Taxes, other than income, decreased by $6million in2004 compared with Decrease in capitalized interest 1 14 2003. The decrease was primarily due to a$14 million reversal of a prior year Write-ott of unamortized swap costs on WPD debt accrual and a$5million decrease indomestic capital stock expense, partially restructuring in2003 (11) 11 offset by a$9million increase inWPD property taxes. Inthe first quarter Other 1 (3) of 2004, PPL Electric reversed a $14 million accrued liability for 1998 and $23 S(125) 1999 PURTA taxes that had been accrued based on potential exposure inthe proceedings regarding the Susquehanna nuclear station tax assessment. The Income Taxes rights of the third-party intervenors to further appeal expired in2004. WPD's Income tax expense increased by $25 million in2004 compared with 2003. property taxes increased by $9million, primarily from the impact of changes This increase was primarily attributable to: inforeign currency exchange rates, adjustments recorded in2003 and an
- an $84 million tax benefit recognized in2003 related to foreign investment increase in property tax rates. losses not recurring in 2004; and Taxes, other than income, increased by $25 million in2003 compared
- a$9million tax benefit recognized in2003 related to acharitable contribu-with 2002 due to the settlement of prior years' capital stock tax refund claims tion of property not recurring in2004; offset by of $8million in2002, higher taxes related to an increase inthe basis on which
- a$22 million tax benefit recognized in2004 related to areduction intax capital stock tax iscalculated in2003 and higher real estate taxes. reserves associated with stranded costs securitization predicated upon management's reassessment of its best estimate of probable tax exposure, Other Charges relative to 2003; Other charges of $9million in2003 consisted of a charge for aworkforce
- a$25 million decrease intax expense on foreign earnings in2004; and reduction program (see Note 20 to the Financial Statements).
- a$22 million tax benefit recognized in2004 related to additional noncon-ventional fuel tax credits in excess of credits recognized in 2003.
28 PPL CORPORATION 2004 ANNUAL REPORT
Income tax expense decreased by $40 million in 2003 compared with atransition impairment analysis in the first quarter of 2002 and recorded atran-2002. This decrease was due to: sition goodwill impairment charge of $150 million. See Note 19 to the Financial
- a$31 million reduction related to deferred income tax valuation allowances Statements for additional information.
recorded on impairment charges on PPLs investment in Brazil recorded during 2002; Financial Condition
- an $84 million reduction in income taxes related to the tax benefit recog-Liquidity nized in2003 on foreign investment losses included inthe 2002 federal PPL is focused on maintaining a strong liquidity position and strengthening income tax return; its balance sheet, thereby improving its credit profile. PPL believes that its
- a $9million decrease related to a contribution of property; and cash on hand, operating cash flows, access to debt and equity capital markets
- a $2million decrease related to additional nonconventional fuel tax credits and borrowing capacity, taken as awhole, provide sufficient resources to fund recognized; offset by its ongoing operating requirements, future security maturities and estimated
- higher pre-tax domestic book income, resulting inan $84 million increase future capital expenditures. PPL currently expects cash on hand at the end of inincome taxes.
2005 to be about $300 million, with about $2.3 billion inavailable credit facili-Annual tax provisions include amounts considered sufficient to pay ties. However, PPL's cash flows from operations and its access to cost effective assessments that may result from examination of prior year tax returns by bank and capital markets are subject to risks and uncertainties, including but taxing authorities. However, the amount ultimately paid upon resolution of not limited to, the following: any issues raised by such authorities may differ materially from the amount
- changes inmarket prices for electricity; accrued. Inevaluating the exposure associated with various filing positions.
- changes incommodity prices that may increase the cost of producing power PPL accounts for changes inprobable exposures based on management's or decrease the amount PPL receives from selling power; best estimate of the amount that should be recognized. An allowance ismain-
- price and credit risks associated with selling and marketing products inthe tained for the tax contingencies, the balance of which management believes wholesale power markets; to be adequate. During 2004, PPL reached partial settlement with the IRS
- ineffectiveness of trading, marketing and risk management policies and pro-with respect to the tax years 1991 through 1995 and received acash refund grams used to mitigate PPLs risk exposure to adverse energy and fuel prices, inthe amount of $52 million. As a result of this settlement, the net tax impact interest rates, foreign currency exchange rates and counterparty credit; recorded in2004 was not significant.
- unusual or extreme weather that may damage PPLs transmission and See Note 5to the Financial Statements for details on effective income tax distribution facilities or affect energy sales to customers; rates and for information on the American Jobs Creation Act of 2004.
- reliance on transmission and distribution facilities that PPL does not own or control to deliver its electricity and natural gas; Discontinued Operations
- unavailability of generating units (due to unscheduled or longer-than-In2003, PPL reported a loss of $20 million inconnection with the approval anticipated generation outages) and the resulting loss of revenues and of aplan of sale of PPL Global's investment ina Latin American telecom-additional costs of replacement electricity; munications company. An additional $2million loss was recorded in2004,
- ability to recover and the timeliness and adequacy of recovery of costs representing operating losses through the date of the sale. See 'Discontinued associated with regulated utility businesses; and Operations' inNote 9to the Financial Statements for additional information
- adowngrade inPPLs or PPLs subsidiaries' credit ratings that could related to the sale.
negatively affect their ability to access capital and increase the cost of Cumulative Effects of Changes In Accounting Principles maintaining credit facilities and any new debt. In2003, PPL recorded a charge of $27 million, after-tax, as acumulative At December 31, 2004, PPL had $616 million incash and cash equivalents effect of a change inaccounting principle inconnection with the adoption of and $42 million of short-term debt compared to $466 million incash and cash FIN 46, 'Consolidation of Variable Interest Entities, an Interpretation of ARB equivalents and $56 million of short-term debt at December 31, 2003. and No.51," for certain entities. See Note 22 to the Financial Statements for
$245 million incash and cash equivalents and $943 million of short-term debt additional information.
at December 31, 2002. The changes incash and cash equivalents resulted PPL adopted SFAS 143, 'Accounting for Asset Retirement Obligations, from the following: effective January 1,2003. SFAS 143 addresses the accounting for obligations associated with the retirement of tangible long-lived assets. It requires legal 2004 2003 2002 obligations associated with the retirement of long-lived assets to be recognized Net Cash Provided by Operating Activities $1,437 $1,340 $ 774 as a liability in the financial statements. Application of the new rules resulted Net Cash Used inInvesting Activities (718) (39) (1.057) Net Cash Used inFinancing Activities (578) (387) (363) ina cumulative effect of adoption that increased net income by $63 million in Effect of Exchange Rates on Cash &Cash 2003. See Note 21 to the Financial Statements for additional information. Equivalents 9 7 2 PPL adopted SFAS 142, 'Goodwill and Other Intangible Assets, on Increase (Decrease) InCash &Cash Equivalents $ 150 $ 221 $ (644) January 1,2002. SFAS 142 requires an annual impairment test of goodwill and other intangible assets that are not subject to amortization. PPL performed PPL CORPORATION 2004 ANNUAL REPORT 29
Management's Discussion and Analysis Net Cash Provided by Operating Activities Net Cash Used in Financing Activities Net cash from operating activities increased by 7%, or $97 million, in 2004 Net cash used infinancing activities was $578 million in2004, compared versus 2003, reflecting higher energy margins and other improvements in to $387 million in2003. The increase primarily reflects higher retirement of cash-adjusted net income. long-term debt and increased dividends to shareholders. In2004, cash used in Important elements supporting the stability of PPLs cash provided by financing activities primarily consisted of net debt retirements of $863 million operating activities are the long-term and intermediate-term commitments from and common and preferred dividends paid of $299 million, partially offset by wholesale and retail customers and long-term fuel supply contracts PPL has common stock sale proceeds of $596 million, of which $575 million related in place. PPL estimates that, on average, approximately 83% of its expected to the settlement of the common stock purchase contracts that were acompo-annual generation output for the period 2005 through 2009 is committed under nent of the PEPS Units and the PEPS Units, Series B.In 2003, cash used in long-term and intermediate-term energy supply contracts. PPL EnergyPlus also financing activities primarily consisted of net debt retirements of $460 million, enters into contracts under which it agrees to sell and purchase electricity, natu- preferred stock retirements of $31 million and common and preferred divi-ral gas, oil and coal. These contracts often require cash collateral or other credit dends paid of $287 million, partially offset by common stock sale proceeds of enhancement, or reductions or terminations of aportion of the entire contract approximately $426 million. PPL currently has no plans to issue any significant through cash settlement inthe event of adowngrade of PPL or the respective amounts of additional common stock. See Note 8to the Financial Statements subsidiary's credit ratings or adverse changes in market prices. For example, in for additional information on common stock sales in2004. addition to limiting its trading ability, if PPL or its respective subsidiary's rat- PPLs debt financing activity in2004 was as follows: ings were lowered to below 'Investment grade and energy prices increased by Issuances Retirements 10%, PPL estimates that, based on its December 31,2004, positions, it would PPL Energy Supply Senior Unsecured Notes $300 have had to post additional collateral of approximately $280 million, compared PPL Capital Funding Medium-Term Notes $ (104) to $190 million at December 31, 2003. PPL has in place risk management pro- PPL Transition Bond Company Transition Bonds (264) grams that, among other things, are designed to monitor and manage its expo- PPL Electric First Mortgage Bonds (71) PPL Electric Senior Secured Bonds (59) sure to volatility of cash flows related to changes in energy prices, interest rates, PPL Energy Supply lease financing (656) foreign currency exchange rates, counterparty credit quality and the operational WPD shor-term debt (net change) (56) performance of its generating units. PPL Electric Asset-backed Commercial Paper (net change) 42 Net cash from operating activities increased by $566 million in2003 North Penn Gas. Inc. Notes (2) versus 2002 reflecting higher net income adjusted for non-cash items, working Latin American companies long-term debt 22 (15) capital improvements and lower cash income taxes. In addition, 2002 included Total $364 $(1.227) cash outlays of $152 million for the cancellation of generation projects and Net reduction S (863)
$50 million for the termination of a NUG contract. The higher net income in 2003 was principally driven by complete ownership of WPD, higher wholesale Debt issued during 2004 had stated interest rates ranging from 1.1% to energy margins, lower interest expense and savings from a workforce reduction 9.0% and maturities from 2004 through 2014. See Note 8to the Financial program inthe U.S. that commenced in2002. The working capital improve- Statements for more detailed information regarding PPLs financing activities.
In March 2004, PPL Electric reactivated its commercial paper program to ments resulted from a decrease inaccounts receivable and prepayments. These positive changes were partially offset by rising transmission and distribution provide it with an additional financing source to fund its short-term liquidity needs, if and when necessary. At December 31, 2004, PPL Electric had no operating costs at PPL Electric and other factors. commercial paper outstanding. Net Cash Used inInvesting Activities InAugust 2004, PPL Electric began participating inan asset-backed com-Net cash used in investing activities decreased by 3%, or $21 million, in mercial paper program through which PPL Electric obtains financing by selling 2004 versus 2003 primarily as the result of the $123 million proceeds from the and contributing its eligible accounts receivable and unbilled revenue to a sale of PPLs minority interest inCGE. The primary use of cash for investing special purpose, wholly owned subsidiary on an ongoing basis. The subsidiary activities is capital and investment expenditures. See 'Capital Expenditure pledges these assets to secure loans of up to an aggregate of $150 million from Requirements' for capital and investment expenditures in 2004 and expected acommercial paper conduit sponsored by a financial institution. PPL Electric expenditures in2005 through 2009. In2005, PPL expects to be able to fund expects to use the proceeds from the program for general corporate purposes all of its capital expenditures with cash from operations and cash on hand. and to cash collateralize letters of credit. At December 31, 2004, the loan The $318 million reduction innet cash used in investing activities in balance outstanding was $42 million, all of which was being used to cash 2003, compared with 2002, was primarily due to reduced investment ingener- collateralize letters of credit. ation assets and electric energy projects and the acquisition of the controlling InDecember 2004, PPL Energy Supply reactivated its commercial paper interest inWPD inSeptember 2002. program to provide it with an additional financing source to fund its short-term liquidity needs, if and when necessary. At December 31, 2004, PPL Energy Supply had no commercial paper outstanding and currently has no plans to access the commercial paper market in the short-term. 30 PPL CORPORATION 2004 ANNUAL REPORT
At December 31, 2004, PPL's total committed borrowing capacity under credit facilities and the use of this borrowing capacity were as follows: Committed Letters of Available Capacity Borrowed Credit Issuedld) Capacity PPL Electric Credit Facilities(a) $ 300 S 300 PPL Energy Supply Credit Facilities Ib) 1,100 $250 850 WPD (South West) Bank Facilities ') 769 2 767 Total $2.169 $252 S1.917 "' PPL Electric's credit facilities allow for borrowings atLIBOR-based rates plus aspread, depending upon the companys public debt rating. PPL Electric also has the capability to cause the lenders to Issue up to S300 million of letters of credit under these facilities, which Issuances reduce available borrowing capacity. The credit facilities contain afinancial covenant requiring debt to total capitalization to not exceed 70%. At December 31, 2004 and 2003, PPL Electric's consolidated debt to total capitalization per-centages, as calculated inaccordance with its credit facilities, were 54% and 57%. The credit facilities also contain certain representations and warranties that must bemade for PPL Electric to borrow under them, Including, but not limited to, amaterial adverse change clause that relates to PPL Electric's ability to perform its obligations under the credit agreements and related loan documents. (b) PPL Energy Supply's credit facilities allow for borrowings at LIBOR-based rates plus aspread, depending upon the company's public debt rating. PPL Energy Supply also has the capability to cause the lenders to issue up to $950 million of letters of credit under these facilities, which issuances reduce available borrowing capacity. These credit facilities contain financial covenants requiring debt to total capitalization to not exceed 65% and requiring that PPL Energy Supply maintain an interest coverage ratio to not be less than 2.0 times consolidated earnings before Income taxes, depreciation and amortization. At December 31, 2004 and 2003, PPL Energy Supplys consolidated debt to total capitalization percent-ages, as calculated inaccordance with one of its credit facilities, were 35% and 36%. Under asecond credit facility entered into InJune 2004, the consolidated debt to capitalization percentage was 34% atDecember 31, 2004. At December 31, 2004 and 2003. PPL Energy Supplys interest coverage ratios, as calculated inaccordance with its credit facilities, were 6.2 and 6.3. The credit facilities also contain certain representations and warranties that must bemade for PPL Energy Supply to borrow under them, Including, but not limited to, amaterial adverse change clause that relates to PPL Energy Supply's ability to perform its obligations under the credit agreements and related loan documents.
"' WPD (South West)s credit facilities allow for borrowings atLIBOR-based rates plus aspread, depending upon the companys public debt rating.
These credit facilities contain financial covenants that require WPD (South West) to maintain an Interest coverage ratio of not less than 3.0 times consolidated earnings before income taxes, depre-ciation and amortization and aregulatory asset base (RAB) at £150 million greater than total gross debt, Ineach case as calculated Inaccordance with the credit facilities. Al December31, 2004 and 2003. WPD (South Wesl)s interest coverage ratio, as calculated inaccordance with its credit lines, were 6.8 and 6.7. At December 31, 2004 and 2003. WPD (South West)'s RAB, as calculated Inaccordance with the credit facilities, exceeded its total gross debt by £531 million and £482 million.
'd)The Borrower under each of these facilities has areimbursement obligation to the extent any letters of credit are drawn. The letters of credit issued as of December 31, 2004, expire in2005.
These credit agreements contain various other covenants. Failure to meet Operating Leases those covenants beyond applicable grace periods could result inacceleration PPL and its subsidiaries also have available funding sources that are provided of due dates of borrowings and/or termination of the agreements. PPL monitors through operating leases. PPIs subsidiaries lease vehicles, office space, land, the covenants on aregular basis. At December 31,2004, PPL was in material buildings, personal computers and other equipment. These leasing structures compliance with those covenants. PPL Energy Supply and WPD (South West) provide PPL with additional operating and financing flexibility. The operating intend to renew and extend all of their syndicated credit facilities in2005. leases contain covenants that are typical for these agreements, such as main-The increase of $24 million innet cash used infinancing activities in2003 taining insurance, maintaining corporate existence and timely payment of rent compared to 2002 primarily reflected the repayment of short-term debt, retire- and other tees. Failure to meet these covenants could limit or restrict access to ment of long-term debt and increased dividends to shareholders. In2003, the these funds or require early payment of obligations. At this time, PPL believes
$387 million of net cash used infinancing activities primarily consisted of net that these covenants will not limit access to these funding sources or cause debt retirements of $460 million, preferred stock retirements of $31 million acceleration or termination of the leases.
and common and preferred dividends paid of $287 million, partially offset PPL, through its subsidiary PPL Montana, leases a50% interest in by common stock sale proceeds of approximately $426 million. In2002, the Colstrip Units 1and 2 and a30% interest in Unit 3,under four 36-year non-
$363 million of net cash used infinancing activities primarily consisted of net cancelable operating leases. These operating leases are not recorded on PPLs debt retirements of $412 million, company-obligated mandatorily redeemable Balance Sheet, which is inaccordance with applicable accounting guidance.
preferred security retirements of $250 million and common and preferred The leases place certain restrictions on PPL Montana's ability to incur addi-dividends paid of $261 million, partially offset by common stock sale proceeds tional debt, sell assets and declare dividends. At this time, PPL believes that of approximately $587 million. these restrictions will not limit access to these funding sources or cause accel-eration or termination of the leases. See Note 8 to the Financial Statements for a discussion of other dividend restrictions related to PPL subsidiaries. See Note 10 to the Financial Statements for further discussion of the operating leases. PPL CORPORATION 2004 ANNUAL REPORT 31
Management's Discussion and Analysis ContractualObligations At December 31, 2004, the estimated contractual cash obligations of PPL were as follows: Contractual Cash Obligations Total Less Than 1Year 1-3 Years 3-5 Years Alter 5Years Long-term Debt() $ 7,755 $ 866 $2,266 $1,310 $3,313 Capital Lease Obligations 18 1 2 2 13 Operating Leases 784 77 133 117 457 Purchase Obligations(b) 3,273 684 1.280 580 729 Other Long-term Liabilities Reflected on the Balance Sheet under GAAPI' 174 38 116 20 Total Contractual Cash Obligations $12,004 $1,666 $3.797 $2,029 $4.512 (a)Reflects principal maturities only, including maturities of consolidated leasedebt. Ib) The payments reflected herein are subject to change, as certain purchase obligations included are estimates based on projected obligated quantities and/or projected pricing under tle contracts. I') The amounts reflected represent estimated pension funding requirements. Credit Ratings ___ Moody's S&P Fitch Standard &Poor's Ratings Services (S&P), Moody's Investors Service, Inc. WPDH Limited (Moody's) and Fitch Ratings (Fitch) periodically review the credit ratings on Issuer Rating Baa3 BBB-the debt and preferred securities of PPL and its subsidiaries. Based on their Senior Unsecured Debt Baa3 BBB- BBB Shor-term Debt A-3 respective reviews, the rating agencies may make certain ratings revisions. Outlook NEGATIVE NEGATIVE STABLE The ratings of S&P, Moody's and Fitch are not arecommendation to buy, WPD LLP sell or hold any securities of PPL or its subsidiaries. Such ratings may be Issuer Rating BBB-subject to revisions or withdrawal by the agencies at any time and should Senior Unsecured Debt Baa2 BBB- BBB+ be evaluated independently of each other and any other rating that may be Shor-term Debt A-3 Preferred Stock Baa3 BB BBB assigned to their securities. Outlook NEGATIVE NEGATIVE STABLE The following table summarizes the credit ratings of PPL and its key WPD (South Wales) financing subsidiaries at December 31, 2004: Issuer Rating BBB+ Moody's S&P Filch Senior Unsecured Debt Baal BBB+ A-Short-term Debt A-2 FI PPL Outlook STABLENEGATIVE STABLE Issuer Rating BBB WPD (South West) Senior Unsecured Debt Baa3 BBB- EBB Issuer Rating Baal BBB+ Outlook STABLE STABLE STABLE Senior Unsecured Debt Baa1 BBB* A-PPL Energy Supply Short-term Debt P-2 A-2 Fl Issuer Rating BBB Outlook STABLENEGATIVE STABLE Senior Unsecured Notes Baa2 BBB BBB. Commercial Paper P-2 A-2 F2 (a) Insured as to payment of principal and interest. Outlook STABLE STABLE STABLE PPL Capital Funding Rating Agency Actions in 2004 Senior Unsecured Debt Baa3 BBB- BBB S&P Subordinated Debt Bal BBB- In May 2004, S&P affirmed its BBB ratings on both PPL and PPL Energy Medium-Term Notes Baa3 BBB- BBB Supply and revised its outlook on both entities from negative to stable. S&P Outlook STABLE STABLE STABLE PPL Electric also affirmed ifs BBB- rating on PPL Montana's Pass-Through Certificates Senior Unsecured/Issuer Rating Baa2 A- due 2020 and revised its outlook from negative to stable. At the same time, First Mortgage Bonds Baal A- A- S&P affirmed its A-/A-2 rating and negative outlook on PPL Electric. Also, Pollution Control Bonds(a) Aaa AAA S&P indicated that the following ratings would remain unchanged following Senior Secured Bonds Baal A- A-the aforementioned revision to PPL's outlook: Commercial Paper P-2 A-2 F2 Preferred Stock Bal BBS BBB+
- WPDH Limited of BBB-/Negative/A-3; Outlook STABLE NEGATIVE STABLE
- WPD (South West) of BBB+/Negative/A-2; and PPL Transition Bond Company
- WPD (South Wales) of BBB+/Negative/A-2.
Transition Bonds Aaa AAA AAA PPL Montana In December 2004, S&P confirmed its A-2 rating on PPL Energy Supply's Pass-Through Certificates Baa3 BBB- EBB reactivated commercial paper program. Outlook STABLE STABLE 32 PPL CORPORATION 2004 ANNUAL REPORT
Moodys years. S&P indicated that the stable outlook reflects its expectations that PPL InMarch 2004, Moody's confirmed its P-2 rating on PPL Electric's reactivated Electric will rapidly improve and Ihen maintain financial metrics more consis-commercial paper program. tent with its ratings! S&P indicated that it expects PPL Electric's operations InDecember 2004, Moody's confirmed its P-2 rating on PPL Energy to remain stable through the expiration of the PLR agreement. Supply's reactivated commercial paper program. Additionally, inJanuary 2005, S&P revised its outlooks on the WPD com-Also in December 2004, Moody's downgraded the senior unsecured long- panies to stable from negative. S&P attributes this positive change to financial term debt ratings of WPDH Limited from Baa2 to Baa3 with a negative outlook. profile improvements resulting from the final regulatory outcome published by At the same time, Moody's changed the outlook on the senior unsecured long- Olgem inNovember 2004. At the same time, S&P affirmed the WPD companies' term debt rating of WPD LLP from stable to negative and affirmed its Baal long-term and short-term credit ratings. senior unsecured long-term ratings of WPD (South West) and WPD (South Also inJanuary 2005, Fitch announced that it downgraded the WPD Wales). The outlook on WPD (South West) and WPD (South Wales) is stable. companies' senior unsecured credit ratings by one notch as follows: Moody's indicated that its ratings actions with respect to WPD reflect its
- WPDH Limited to BBB- from BBB; concern that WPDH Limited has an adjusted net debt/Regulatory Asset Base
- WPD LLP to BBB from BBB+; and (RAB) ratio inexcess of 95% after pension deficits that are not recoverable
- WPD (South West) and WPD (South Wales) to BBB+/F2 from A-/Fl.
through the U.K. regulatory process are taken into account. Moody's also Fitch has astable outlook on all of the WPD companies. indicated that the ratings reflect its expectation that adjusted net debt/RAB Fitch stated that its downgrade was prompted by the high level of pension will fall to less than 90% during the course of 2005. adjusted leverage at WPD. Fitch acknowledged that WPD's funding plan should Fitch reduce its pension deficit over time and it expects WPD to proceed with its In March 2004, Fitch confirmed its F2 rating on PPL Electric's reactivated de-leveraging program. However, Fitch indicated that it is not certain enough, commercial paper program. due to the unpredictability in future pension valuations, that pension adjusted In December 2004, Fitch confirmed its F2 rating on PPL Energy Supply's leverage will support aBBB rating at WPDH Limited. Fitch indicated that WPD reactivated commercial paper program. (South West) and WPD (South Wales) have been downgraded to maintain atwo-notch differential with WPDH Limited because Fitch does not believe that WPD's Ratings Tiggers financial ring-fencing is restrictive enough to support athree-notch differential. PPL Energy Supply's 2.625% Convertible Senior Notes due 2023 are convert-ible upon the occurrence of certain events, including if the long-term credit Dividend Policy ratings assigned to the notes by S&P and Moody's are lower than BB and Ba2, In December 2004, PPL's Board of Directors adopted a dividend policy that or either S&P or Moody's no longer rates the notes. The terms of the notes provides for growing the common stock dividend in the future at a rate that were modified inNovember 2004 to. among other things, require cash settle- exceeds the projected rate of growth inearnings per share from ongoing opera-ment of the principal amount upon conversion of the notes. These modifica- tions. Earnings from ongoing operations exclude unusual items. PPL plans tions were made in response to the FASB's ratification of EITF Issue 04-8, The to pursue this policy until the dividend payout ratio reaches the 50% level, Effect of Contingently Convertible Instruments on Diluted Earnings per Share. subject to the Board of Directors' quarterly dividend declarations based on the See Note 4 to the Financial Statements for more information concerning these company's financial position and other relevant considerations at the time. modifications, Note 8 for a discussion of the consent solicitation that effected Off-Balance Sheet Arrangements these modifications and Note 23 for adiscussion of EITF Issue 04-8. PPL provides guarantees for certain affiliate financing arrangements that PPL and its respective subsidiaries do not have additional material liquidity enable certain transactions. Some of the guarantees contain financial and exposures caused by aratings downgrade below 'investment grade that would other covenants that, it not met, would limit or restrict the affiliates' access accelerate the due dates of borrowings. However, if PPL and PPL Energy Supply's to funds under these financing arrangements, require early maturity of such debt ratings were below investment grade at December 31, 2004, PPL and PPL arrangements or limit the affiliates' ability to enter into certain transactions. Energy Supply would have had to post an additional $118 million of collateral to At this time, PPL believes that these covenants will not limit access to the counterparties. relevant funding sources. Subsequent Ratings Events PPL has entered into certain guarantee agreements that are within the In January 2005, S&P affirmed PPL Electric's A-/A-2 corporate credit ratings scope of FIN 45, Guarantor's Accounting and Disclosure Requirements for and has favorably revised its outlook on the company to stable from nega- Guarantees, Including Indirect Guarantees of Indebtedness of Others, an tive following the authorization of a$194 million rate increase by the PUC. Interpretation of FASB Statements No.5, 57, and 107 and Rescission of FASB S&P indicated that the outlook revision reflects its expectations that the rate Interpretation No. 34. See Note 14 to the Financial Statements for a discus-increase, effective January 1,2005 will allow for material improvement in sion on guarantees. PPL Electric's financial profile, which had lagged S&P's expectations inrecent PPL CORPORATION 2004 ANNUAL REPORT 33
Management's Discussion and Analysis Risk Management - Energy Marketing & Trading and Other To record derivatives at their fair value, PPL discounts the forward values Market Risk using LIBOR. Additionally, PPL reduces derivative assets' carrying values to Background recognize differences in counterparty credit quality and potential illiquidity in Market risk is the potential loss PPL may incur as a result of price changes the market: associated with aparticular financial or commodity instrument. PPL is exposed
- The credit adjustment takes into account the probability of default, as to market risk from: calculated by an independent service, for each counterparty that has an
- commodity price risk for energy and energy-related products associated out-of-the money position with PPL.
with the sale of electricity, the purchase of fuel for the generating assets and
- The liquidity adjustment takes into account the fact that it may not be appro-energy trading activities; priate to value contracts at the midpoint of the bid/ask spread. PPL might
- interest rate risk associated with variable-rate debt and the fair value of have to accept the 'bid' price if PPL wanted to close an open sales position fixed-rate debt used to finance operations, as well as the fair value of debt or PPL might have to accept the 'ask' price if PPL wanted to close an open securities invested inby PPUs nuclear decommissioning fund; purchase position.
- foreign currency exchange rate risk associated with investments in affiliates Accounting and Reporting inLatin America and Europe, as well as purchases of equipment incurrencies To account for and report on contracts entered into to manage market risk, other than U.S. dollars; and PPL follows the provisions of SFAS 133, Accounting for Derivative
- equity securities price risk associated with the fair value of equity securities Instruments and Hedging Activities,' as amended by SFAS 138, Accounting invested in by PPLs nuclear decommissioning fund.
for Certain Derivative Instruments and Certain Hedging Activities, and PPL has a risk management policy approved by its Board of Directors SFAS 149, 'Amendment of Statement 133 on Derivative Instruments and to manage market risk and counterparty credit risk. (Credit risk is discussed Hedging Activities," and interpreted by DIG issues (together, 'SFAS 133-), below.) The RMC, comprised of senior management and chaired by the Vice EITF 02-3, 'Issues Involved inAccounting for Derivative Contracts Held President-Risk Management, oversees the risk management function. Key for Trading Purposes and Contracts Involved inEnergy Trading and Risk risk control activities designed to monitor compliance with risk policies and Management Activities,' and EITF 03-11, 'Reporting Realized Gains and detailed programs include, but are not limited to, credit review and approval, Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 validation of transactions and market prices, verification of risk and transaction and Not Held for Trading Purposes' as Defined in Issue No. 02-3.- SFAS 133 limits, sensitivity analyses, and daily portfolio reporting, including open posi- requires that all derivative instruments be recorded at fair value on the balance tions, mark-to-market valuations and other risk measurement metrics. sheet as an asset or liability (unless they meet SFAS 133's criteria for exclu-The forward-looking information presented below provides estimates of sion) and that changes inthe derivative's fair value be recognized currently in what may occur in the future, assuming certain adverse market conditions, due earnings unless specific hedge accounting criteria are met. to reliance on model assumptions. Actual future results may differ materially In April 2003, the FASB issued SFAS 149, which amends and clarifies from those presented. These disclosures are not precise indicators of expected SFAS 133 to improve financial accounting and reporting for derivative instru-future losses, but only indicators of reasonably possible losses. ments and hedging activities. To ensure that contracts with comparable char-acteristics are accounted for similarly, SFAS 149 clarified the circumstances Contract Valuation under which acontract with an initial net investment meets the characteristics PPL utilizes forward contracts, futures contracts, options, swaps and tolling of a derivative, clarified when aderivative contains afinancing component, agreements as part of its risk management strategy to minimize unanticipated amended the definition of an 'underlying and amended certain other existing fluctuations inearnings caused by commodity price, interest rate and foreign pronouncements. Additionally, SFAS 149 placed additional limitations on the currency volatility. When available, quoted market prices are used to deter-use of the normal purchase or normal sale exception. SFAS 149 was effective mine the fair value of a commodity or financial instrument. This may include for contracts entered into or modified and for hedging relationships designated exchange prices, the average mid-point bid/ask spreads obtained from brokers, after June 30, 2003, except certain provisions.relating to forward purchases or or an independent valuation by an external source, such as a bank. However, sales of when-issued securities or other securities that did not yet exist. PPL market prices for energy or energy-related contracts may not be readily deter-adopted SFAS 149 as of July 1,2003. The adoption of SFAS 149 did not have minable because of market illiquidity. If no active trading market exists, con-asignificant impact on PPL. tracts are valued using internally developed models, which are then reviewed by an independent, internal group. Although PPL believes that its valuation methods are reasonable, changes inthe underlying assumptions could result insignificantly different values and realization infuture periods. 34 PPL CORPORATION 2004 ANNUAL REPORT
PPL adopted the final provisions of EITF 02-3 during the fourth quarter seasonal changes indemand, weather conditions, available generating assets of 2002. As such, PPL now reflects its net realized and unrealized gains and within regions, transportation availability and reliability within and between losses associated with all derivatives that are held for trading purposes inthe regions, market liquidity, and the nature and extent of current and potential
'Net energy trading margins' line on the Statement of Income. Non-derivative federal and state regulations. To hedge the impact of market price fluctuations contracts that met the definition of energy trading activities as defined by EITF on PPL's energy-related assets, liabilities and other contractual arrangements, 98-10, 'Accounting for Energy Trading and Risk Management Activities' are PPL EnergyPlus sells and purchases physical energy at the wholesale level reflected inthe financial statements using the accrual method of accounting. under FERC market-based tariffs throughout the U.S. and enters into financial Under the accrual method of accounting, unrealized gains and losses are not exchange-traded and over-the-counter contracts. Because PPL owns or con-reflected inthe financial statements. Prior periods were reclassified. No cumu- trols generating assets, the majority of PPLs energy transactions qualify for lative effect adjustment was required upon adoption. accrual or hedge accounting.
PPL adopted the final provisions of EITF 03-11 prospectively as of October 1, Within PPLs hedge portfolio, the decision to enter into energy contracts 2003. As a result of this adoption, non-trading bilateral sales of electricity at hinges on the expected value of PPLs generation. To address this risk, PPL major market delivery points are netted with purchases that offset the sales at takes aconservative approach in determining the number of MWhs that are those same delivery points. Amajor market delivery point is any delivery point available to be sold forward. In this regard, PPL reduces the maximum poten-with liquid pricing available. See Note 17 to the Financial Statements for the tial output that aplant may produce by three factors - planned maintenance, impact of the adoption of EITF 03-11. unplanned outages and economic conditions. The potential output of aplant PPL's short-term derivative contracts are recorded as 'Price risk manage- is first reduced by the amount of unavailable generation due to planned main-ment assets' and 'Price risk management liabilities' on the Balance Sheet. Long- tenance on aparticular unit. Another reduction, representing the unplanned term derivative contracts are included in'Regulatory and Other Noncurrent outage rate, is the amount of MWhs that historically is not produced by a Assets - Other" and "Deferred Credits and Other Noncurrent Liabilities - Other. plant due to such factors as equipment breakage. Finally, the potential output of certain plants (like peaking units) are reduced because their higher cost of Accounting Designation production will not allow them to economically run during all hours. Energy contracts that do not qualify as derivatives receive accrual accounting. PPL's non-trading portfolio also includes full requirements energy contracts. For energy contracts that meet the definition of a derivative, the circumstances The net obligation to serve these contracts changes minute by minute. PPL and intent existing at the time that energy transactions are entered into deter-analyzes historical on-peak and off-peak usage patterns, as well as spot prices mine their accounting designation. In addition to energy-related transactions, and weather patterns, to determine a monthly level of ablock of electricity PPL enters into financial interest rate and foreign currency swap contracts that best fits the usage patterns inorder to minimize earnings volatility. On a to hedge interest expense associated with both existing and anticipated debt forward basis, PPL reserves ablock amount of generation for full requirements issuances. PPL also enters into foreign currency swap contracts to hedge energy contracts that is expected to be the best match with their anticipated the fair value of firm commitments denominated inforeign currency and net usage patterns and energy peaks. Anticipated usage patterns and peaks are investments inforeign operations. As with energy transactions, the circum-affected by expected load growth, regional economic drivers and seasonality. stances and intent existing at the time of the transaction determine a contract's PPLs commodity derivative contracts that qualify for hedge accounting accounting designation. These designations are verified by aseparate internal treatment mature at various times through 2010. The following chart sets forth group on adaily basis. See Note 17 to the Financial Statements for asummary PPUs net fair market value of these contracts as of December 31: of the guidelines that have been provided to the traders who are responsible for contract designation for derivative energy contracts due to the adoption Gains (Losses) 2004 2003 of SFAS 149. Fair value of contracts outstanding atthe beginning Commodity Price Risk (Non-trading) of the period $ 86 $63 Commodity price risk is one of PPL's most significant risks due to the level of Contracts realized or otherwise settled during the period (66) (94) Fair value of new contracts at inception investment that PPL maintains in its generation assets, coupled with the vola-Other changes infair values (31) 117 tility of prices for energy and energy-related products. Several factors influ-Fair value of contracts outstanding at the end of the period - S1) $ 86 ence price levels and volatilities. These factors include, but are not limited to, PPL CORPORATION 2004 ANNUAL REPORT 35
Mlanagement's Discussion and Analysis The following chart segregates estimated fair values of PPUs commodity derivative contracts that qualify for hedge accounting treatment at December 31, 2004, based on whether the fair values are determined by quoted market prices or other more subjective means. Maturity Less Maturity in Fair Value of Contracts at Period-End Gatns (Losses) Than 1Year Maturity 1-3 Years Maturity 3-5 Years Excess of 5Years Total Fair Value Source of Fair Value Prices actively quoted $4 $ 3 $7 Prices provided by other external sources 14 (21) 5(10) 5(1) (18) Prices based on models and other valuation methods Fair value of contracts outstanding atthe end of the period $18 5(18) 3(10) 3(1) $(11) The 'Prices actively quoted category includes the fair value of exchange- portfolio would have been substantially offset by an increase inthe value of the traded natural gas futures contracts quoted on the New York Mercantile underlying commodity, the electricity generated, because these contracts serve Exchange (NYMEX). The NYMEX has currently quoted prices through 2010. to reduce the market risk inherent inthe generation of electricity. Additionally, The 'Prices provided by other external sources' category includes PPLs the value of PPUs unsold generation would be improved. Because PPUs elec-forward positions and options in natural gas and power and natural gas basis tricity portfolio is generally ina net sales position, the adverse movement in swaps at points for which Qver-the-counter (OTC) broker quotes are available. prices is usually an increase inprices. Conversely, because PPUs commodity The fair value of electricity positions recorded above use the midpoint of the fuels portfolio is generally in anet purchase position, the adverse movement in bid/ask spreads obtained through OTC brokers. On average, OTC quotes for prices is usually adecrease inprices. If both of these scenarios happened, the forwards and swaps of natural gas and power extend one and two years into implied margins for the unsold generation would increase. the future. In accordance with its marketing strategy, PPL does not completely hedge The "Prices based on models and other valuation methods' category its generation output or fuel requirements. PPL estimates that for its entire includes the value of transactions for which an internally developed price portfolio, including all generation and physical and financial energy positions, curve was constructed as aresult of the long-dated nature of the transaction a10% adverse change inpower prices across all geographic zones and time or the illiquidity of the market point, or the value of options not quoted by an periods will decrease expected 2005 gross margins by about $2million. Similarly, exchange or OTC broker. Additionally, this category includes strip transac- a10% adverse movement inall fossil fuel prices will decrease 2005 gross tions whose prices are obtained from external sources and then modeled to margins by $5million. monthly prices as appropriate. PPL also executes energy contracts to take advantage of market opportu-Because of PPUs efforts to hedge the value of the energy from its genera- nities. As aresult, PPL may at times create anet open position in its portfolio tion assets, PPL sells electricity and buys fuel on aforward basis, resulting that could result insignificant losses it prices do not move inthe manner or inopen contractual positions. If PPL were unable to deliver firm capacity and direction anticipated. The margins from these trading activities are shown in energy or to accept delivery of fuel under its agreements, under certain circum- the Statement of Income as 'Net energy trading margins.' stances it could be required to pay damages. These damages would be based Commodity Price Risk (Trading) on the difference between the market price and the contract price of the com-PPUs trading contracts mature at various times through 2006. The following chart modity. Depending on price volatility inthe wholesale energy markets, such sets forth PPUs net fair market value of trading contracts as of December 31: damages could be significant. Extreme weather conditions, unplanned power plant outages, transmission disruptions, non-performance by counterparties Gains (Losses) 2004 2003 (or their counterparties) with which it has energy contracts and other factors could affect PPLs ability to meet its obligations, or cause significant increases Fair value of contracts outstanding atthe beginning of the period $ 3 $(6) inthe market price of replacement-energy. Although PPL attempts to mitigate Contracts realized or otherwise settled during the period (12) 16 these risks, there can be no assurance that it will be able to fully meet its firm Fair value of new contracts at inception 1 2 obligations, that it will not be required to pay damages for failure to perform, Other changes infair values 15 (9) or that it will not experience counterparty non-performance inthe future. Fair value of contracts outstanding at the end of the period $10 S3 As of December 31, 2004, PPL estimated that a 10% adverse movement PPL will reverse approximately $3million of the $10 million unrealized trad-inmarket prices across all geographic areas and time periods would have ing gains over the first three months of 2005 as the transactions are realized. decreased the value of the commodity contracts in its non-trading portfolio by approximately $165 million, compared to adecrease of $146 million at December 31, 2003. However, the change inthe value of the non-trading 36 PPL CORPORATION 2004 ANNUAL REPORT
The following chart segregates estimated fair values of PPL's trading portfolio at December 31, 2004, based on whether the fair values are determined by quoted market prices or other more subjective means. Maturity Less Maturity in Fair Value of Contracts at Period-End Gains (Losses) Than 1Year Maturity 1-3 Years Maturity 3-5 Years Excess ofs Years Total Fair Value Source of Fair Value Prices actively quoted $3 S3 Prices provided by other external sources 6 $4 10 Prices based on models and other valuation methods (3) (3) Fair value of contracts outstanding at the end of the period $6 $4 $10 See 'Commodity Price Risk (Non-trading)' for information on the various PPL also utilizes various risk management instruments to adjust the mix sources of fair value. of fixed and floating interest rates in its debt portfolio. While PPL is exposed As of December 31, 2004, PPL estimated that a 10% adverse movement to changes inthe fair value of these instruments, any change in market value in market prices across all geographic areas and time periods would have Isrecorded with an equal and offsetting change in the value of the debt being decreased the value of the commodity contracts in its trading portfolio by hedged. At December 31,2004, PPL estimated that its potential exposure to
$5million, compared to a decrease of $3 million at December 31, 2003. achange inthe fair value of these instruments, through a10% adverse move-ment in interest rates, was approximately $19 million, compared to a$28 mil-Interest Rate Risk lion exposure at December 31, 2003.
PPL and its subsidiaries have issued debt to finance their operations. PPL utilizes various financial derivative products to adjust the mix of fixed and Foreign Currency Risk floating interest rates inits debt portfolio, adjust the duration of its debt port- PPL isexposed to foreign currency risk, primarily through investments in folio and lock in U.S. Treasury rates (and interest rate spreads over treasuries) affiliates inLatin America and Europe. Inaddition, PPL may make purchases in anticipation of future financing, when appropriate. Risk limits under the risk of equipment incurrencies other than U.S. dollars. management program are designed to balance risk exposure to volatility in PPL has adopted aforeign currency risk management program designed interest expense and changes inthe fair value of PPL's debt portfolio due to to hedge certain foreign currency exposures, including firm commitments, changes inthe absolute level of interest rates. recognized assets or liabilities and net investments. In addition, PPL enters At December 31,2004, PPL's potential annual exposure to increased into financial instruments to protect against foreign currency translation risk. interest expense, based on a10% increase ininterest rates, was estimated PPL executed net forward sale transactions for £13.7 million to hedge a at $4million, compared to a $2million exposure at December 31,2003. portion of its net investment inWPDH Limited. The estimated value of these PPL is also exposed to changes inthe fair value of its domestic and agreements as of December 31, 2004, was $2million, being the amount PPL international debt portfolios. At December 31,2004, PPL estimated that its would pay to terminate the transactions. potential exposure to achange in the fair value of its debt portfolio, through WPDH Limited held anet position in cross-currency swaps totaling a 10% adverse movement ininterest rates, was approximately $216 million, $1.1 billion to hedge the interest payments and value of its U.S. dollar-compared to $212 million at December 31,2003. denominated bonds. The estimated value of this position at December 31, PPL utilizes various risk management instruments to reduce its exposure 2004, being the amount PPL would pay to terminate it, including accrued to adverse interest rate movements for future anticipated financing. While interest, was $274 million. PPL is exposed to changes inthe fair value of these instruments, they are On the Statement of Income, gains and losses associated with hedges of designed such that any economic loss invalue should generally be offset by interest payments denominated inforeign currencies are reflected in 'Interest interest rate savings at the time the future anticipated financing is completed. Expense.! Gains and losses associated with the purchase of equipment are At December 31, 2004, PPL estimated that its potential exposure to achange reflected in 'Depreciation. Gains and losses associated with net investment in the fair value of these instruments, through a 10% adverse movement in hedges remain in 'Accumulated other comprehensive loss' on the Balance interest rates, was approximately $2million, compared to a$6million expo- Sheet until the investment is disposed. sure at December 31,2003. PPL CORPORATION 2004 ANNUAL REPORT 37
I'Management's Discussion and Analysis Nuclear Decommissioning Fund - Securities Price Risk distribution companies and other energy marketing and trading companies. Inconnection with certain NRC requirements, PPL Susquehanna maintains These concentrations of counterparties may impact PPMs overall exposure trust funds to fund certain costs of decommissioning the Susquehanna station. to credit risk, either positively or negatively, inthat counterparties may be As of December 31, 2004, these funds were invested primarily indomestic similarly affected by changes ineconomic. regulatory or other conditions. As equity securities and fixed-rate, fixed-income securities and are reflected at discussed above in Contract Valuation,' PPL records certain non-performance fair value on PPLs Balance Sheet. The mix of securities is designed to provide reserves to reflect the probability that acounterparty with contracts that returns to be used to fund Susquehanna's decommissioning and to compensate are out of the money (from the counterparty's standpoint) will default inits for inflationary increases in decommissioning costs. However, the equity secu- performance, inwhich case PPL would have to sell into alower-priced market rities included inthe trusts are exposed to price fluctuation inequity markets, or purchase from ahigher-priced market. These reserves are reflected in the and the values of fixed-rate, fixed-income securities are exposed to changes fair value of assets recorded in 'Price risk management assets on the Balance ininterest rates. PPL Susquehanna actively monitors the investment perfor- Sheet. PPL also records reserves to reflect the probability that acounterparty mance and periodically reviews asset allocation in accordance with its nuclear will not make payments for deliveries PPL has made but not yet billed. These decommissioning trust policy statement. At December 31, 2004, a hypothetical reserves are reflected in 'Unbilled revenues on the Balance Sheet. PPL has also 10% increase in interest rates and a10% decrease inequity prices would have established areserve with respect to certain sales to the California ISO for which resulted inan estimated $30 million reduction inthe fair value of the trust PPL has not yet been paid, as well as a reserve related to PPL's exposure as assets, as compared to a$24 million reduction at December 31, 2003. See aresult of the Enron bankruptcy, which are reflected in 'Accounts receivable' Note 6 to the Financial Statements for more information regarding the nuclear on the Balance Sheet. See Notes 14 and 17 to the Financial Statements. decommissioning trust funds. Related Party Transactions Credit Risk PPL is not aware of any material ownership interests or operating responsibil-Credit risk relates to the risk of loss that PPL would incur as aresult of non- ity by senior management of PPL inoutside partnerships, including leasing performance by counterparties of their contractual obligations. PPL maintains transactions with variable interest entities. or other entities doing business credit policies and procedures with respect to counterparties (including with PPL. requirements that counterparties maintain certain credit ratings criteria) and For additional information on related party transactions, see Note 15 to requires other assurances in the form of credit support or collateral incertain the Financial Statements. circumstances inorder to limit counterparty credit risk. However, PPL has con-Capital Expenditure Requirements centrations of suppliers and customers among electric utilities, natural gas The schedule below shows PPUs current capital expenditure projections for the years 2005-2009 and actual spending for the year 2004: Actual Projected 2004 2005 2006 2007 2008 2009 Construction expenditures (a)(b) Generating facilities $156 $180 $231 $ 233 $ 170 $163 Transmission and distribution facilities 451 481 505 546 536 557 Environmental 23 43 136 265 230 172 Other 43 59 57 40 19 15 Total Construction Expenditures 683 763 929 1,084 955 907 Nuclear fuel 58 68 69 76 76 78 Total Capital Expenditures $741 $831 $998 $1,160 $1,031 $985 t' Construction expenditures include AFUDC and capitalized interest, wich are expected to be less than $19 million ineach of the years 2005-2009. (b) This information excludes any potential investments by PPL Global and PPIL Development Company for new projects. 38 PPL CORPORATION 2004 ANNUAL REPORT
PPLs capital expenditure projections for the years 2005-2009 total 1) Price Risk Management about $5.0 billion. Capital expenditure plans are revised periodically to reflect See 'Risk Management - Energy Marketing &Trading and Other' in changes inmarket and asset regulatory conditions. PPL also leases vehicles, Financial Condition. personal computers and other equipment, as described inNote 10 to the
- 2) Pension and Other Postretirement Benefits Financial Statements. See Note 14 for additional information regarding poten-PPL follows the guidance of SFAS 87, 'Employers' Accounting for Pensions,'
tial capital expenditures for environmental projects. and SFAS 106, 'Employers' Accounting for Postretirement Benefits Other Than Acquisitions, Development and Divestitures Pensions,' when accounting for pension and other postretirement benefits. From time-lo-time, PPL and its subsidiaries are involved in negotiations with Under these accounting standards, assumptions are made regarding the valua-third parties regarding acquisitions, joint ventures and other arrangements tion of benefit obligations and the performance of plan assets. Delayed recogni-which may or may not result in definitive agreements. See Note 9 to the tion of differences between actual results and expected or estimated results is a Financial Statements for information regarding recent acquisitions and devel- guiding principle of these standards. This delayed recognition of actual results opment activities. allows for a smoothed recognition of changes in benefit obligations and plan At December 31, 2004, PPL Global had investments inforeign facilities, performance over the working lives of the employees who benefit under the including consolidated investments inWPD, Emel, EC and others. See Note 3 plans. The primary assumptions are as follows: to the Financial Statements for information on unconsolidated investments
- Discount Rate -The discount rate is used in calculating the present value accounted for under the equity method. of benefits, which is based on projections of benefit payments to be made Inconnection with an on-going review of its non-core international minor- inthe future.
ity ownership investments. PPL Global sold its interest inCGE in2004. See
- Expected Return on Plan Assets - Management projects the future return Note 9 to the Financial Statements for additional information. on plan assets considering prior performance, but primarily based upon the PPL is currently planning incremental capacity increases of 255 MW at plans' mix of assets and expectations for the long-term returns on those several existing domestic generating facilities. asset classes. These projected returns reduce the net benefit costs PPL PPL is continuously reexamining development projects based on market records currently.
conditions and other factors to determine whether to proceed with these
- Rate of Compensation Increase - Management projects employees' annual projects, sell them, cancel them, expand them, execute tolling agreements or pay increases, which are used to project employees' pension benefits at pursue other opportunities. retirement.
- Health Care Cost Trend Rate - Management projects the expected increases Environmental Matters in the cost of health care.
See Note 14 to the Financial Statements for adiscussion of environmental matters. Inselecting discount rates, PPL considers fixed-income security yield rates. At December 31, 2004, PPL decreased the discount rate for its domestic New Accounting Standards plans from 6.25% to 5.75% as aresult of decreased domestic fixed-income security returns. The discount rate remained at 5.50% at December 31, 2004, See Note 23 to the Financial Statements for information on new accounting for PPLs international pension plans. standards adopted in 2004 or pending adoption. Inselecting an expected return on plan assets, PPL considers tax implica-tions, past performance and economic forecasts for the types of investments Application of Critical Accounting Policies held by the plans. At December 31 2004, PPLs expected return on plan assets PPLs financial condition and results of operations are impacted by the meth- remained at 9.0% for its domestic pension plans and increased to 7.9% from ods, assumptions and estimates used inthe application of critical accounting 7.8% for its other postretirement benefit plans. For its international plans, PPL policies. The following accounting policies are particularly important to the maintained 8.30% as the expected return on plan assets at December 31, 2004. financial condition or results of operations of PPL, and require estimates or Inselecting a rate of compensation increase, PPL considers past experi-other judgments of matters inherently uncertain. Changes in the estimates or ence in light of movements in inflation rates. At December 31, 2004, PPL's other judgments included within these accounting policies could result ina rate of compensation increase remained at 4.0% for its domestic plans. For its significant change to the information presented inthe financial statements. international plans, PPLs rate of compensation increase remained at 3.75% at (These accounting policies are also discussed in Note I to the Financial December 31, 2004. Statements.) PPLs senior management has reviewed these critical accounting Inselecting health care cost trend rates, PPL considers past performance policies, and the estimates and assumptions regarding them, with its Audit and forecasts of health care costs. At December 31, 2004, PPUs health care Committee. Inaddition, PPLs senior management has reviewed the following cost trend rates were 10% for 2005, gradually declining to 5.0% for 2010. disclosures regarding the application of these critical accounting policies with the Audit Committee. PPL CORPORATION 2004 ANNUAL REPORT 39
Management's Discussion and Analysis Avariance in the assumptions listed above could have asignificant impact an increase or decrease ineach assumption, the inverse of this change would on projected benefit obligations, accrued pension and other postretirement impact the projected benefit obligation, accrued pension and other postretire-benefit liabilities, reported annual net periodic pension and other postretire- ment benefit liabilities, reported annual net periodic pension and other post-ment benefit cost and other comprehensive income (OCI). The following retirement benefit cost and OCI by asimilar amount inthe opposite direction. chart reflects the sensitivities in the 2004 Financial Statements associated Each sensitivity below reflects an evaluation of the change based solely on a with achange in certain assumptions. While the chart below reflects either change inthat assumption. Increase (Decrease) Change in Impact on Impact on Actuarial Assumption Assumption Obligation Liabilities(') Impact on Cost Impact on OCI Discount Rate (0.25)% $191 $7 S7 $108 Expected Return on Plan Assets (0.25)% N/A 11 11 (6) Rate of Compensation Increase 0.25% 31 5 5 (1) Health Care Cost Trend Rate(b 1.0% 11 1 1 N/A ('I Excludes the impact of additional minimum liability. (b)Only impacts other postretirement benefits. PPIs total net pension and other postretirement benefit obligation as for impairment whenever events or changes incircumstances indicate that a of December 31, 2004, was $886 million. PPL recognized an aggregate net long-lived asset's carrying value may not be recoverable. Examples of such accrued pension and other postretirement benefit liability of $517 million on events or changes incircumstances are: its Balance Sheet as of December 31, 2004. The total obligation is not fully
- a significant decrease inthe market price of an asset; reflected in the current financial statements due to the delayed recognition
- a significant adverse change inthe manner inwhich an asset is being criteria of the accounting standards for these obligations. used or inits physical condition; In 2004, PPL recognized net periodic pension and other postretirement
- a significant adverse change in legal factors or inthe business climate; costs charged to operating expenses of $7million. This amount represents a
- an accumulation of costs significantly in excess of the amount originally
$6million increase from 2003. This increase in expense was primarily due to expected for the acquisition or construction of an asset; the decrease in the discount rate at December 31, 2003, offset by decreased
- acurrent-period operating or cash flow loss combined with a history of postretirement medical costs resulting from increased employee cost sharing. losses or aforecast that demonstrates continuing losses; or As a result of the decrease inthe assumed discount rate at December 31,
- acurrent expectation that, more likely than not, an asset will be sold or 2004 for its domestic pension plans and the increase inthe obligations for its otherwise disposed of before the end of its previously estimated useful life.
international plans determined by their 2004 valuation, PPL was required to For along-lived asset, an impairment exists when the carrying value increase its recognized additional minimum pension liability. Recording the exceeds the sum of the estimated undiscounted cash flows expected to result change in the additional minimum liability resulted ina$53 million increase from the use and eventual disposition of the asset. Ifthe asset is impaired, an to the pension-related charge to OCI, net of taxes, translation adjustment impairment loss is recorded to adjust the asset's carrying value and unrecognized prior service costs, with no effect on net income. This to its estimated fair value. charge increased the pension-related balance inOCI, which is areduction to In determining asset impairments, management must make significant shareowners' equity, to $369 million at December 31, 2004. The charges to judgments to estimate future cash flows, the useful lives of long-lived assets, OCI will reverse infuture periods if the fair value of trust assets exceeds the the fair value of the assets and management's intent to use the assets. Changes accumulated benefit obligation. in assumptions and estimates included within the impairment reviews could Refer to Note 12 to the Financial Statements for additional information result insignificantly different results than those identified and recorded in regarding pension and other postretirement benefits. the financial statements. For determining fair value, the FASB has indicated
- 3) Asset Impairment that quoted market prices inactive markets are the best evidence of fair value.
PPL performs impairment analyses for long-lived assets, including intangibles, However, when market prices are unavailable, other valuation techniques may that are subject to depreciation or amortization inaccordance with SFAS 144, be used. PPL has generally used apresent value technique (i.e., discounted
'Accounting for the Impairment or Disposal of Long-Lived Assets.' PPL tests cash flow). Discounted cash flow iscalculated by estimating future cash flow streams and applying appropriate discount rates to determine the present value of the cash flow streams.
40 PPL CORPORATION 2004 ANNUAL REPORT
PPL has determined that when alternative courses of action to recover the The second step requires a calculation of the implied fair value of goodwill. carrying value of a long-lived asset are being considered, it uses estimated The implied fair value of goodwill is determined inthe same manner as the cash flows from the most likely approach to assess impairment whenever amount of goodwill inabusiness combination. That is,the estimated fair value one scenario is clearly the most likely outcome. If no scenario is clearly most of a reporting unit is allocated to all of the assets and liabilities of that unit as likely, then aprobability-weighted approach is used taking into consideration if the reporting unit had been acquired inabusiness combination and the esti-estimated cash flows from the alternative scenarios. For assets tested for mated fair value of the reporting unit was the price paid to acquire the reporting impairment as of the balance sheet date, the estimates of future cash flows unit. The excess of the estimated fair value of areporting unit over the amounts used inthat test consider the likelihood of possible outcomes that existed at assigned to its assets and liabilities is the implied fair value of goodwill. The the balance sheet date, including the assessment of the likelihood of the future implied fair value of the reporting unit goodwill is then compared with the carry-sale of the assets. That assessment made as of the balance sheet date is not ing value of that goodwill. It the carrying value exceeds the implied fair value, revised based on events that occur after the balance sheet date. an impairment loss is recognized inan amount equal to that excess. The loss During 2004, PPL and its subsidiaries evaluated certain gas-fired genera- recognized cannot exceed the carrying value of the reporting unit's goodwill. tion assets for impairment, as events and circumstances indicated that the PPL completed its annual goodwill impairment test inthe fourth quarter of carrying value of these assets may not be recoverable. PPL did not record an 2004. This test did not require any second-step assessments and did not result impairment of these gas-tired generation assets in 2004. For these impairment inany impairments. PPLs most significant assumptions surrounding the good-analyses, the most significant assumption was the estimate of future cash will impairment test relate to the estimates of reporting unit fair values. PPL flows. PPL estimates future cash flows using information from its corporate estimated fair values primarily based upon discounted cash flows. Although a business plan adjusted for any recent sales or purchase commitments. Key full two-step evaluation was not completed, a decrease inthe forecasted cash factors that impact cash flows include projected prices for electricity and gas flows of 10% or an increase of the discount rates by 25 basis points would as well as firm sales and purchase commitments. A10% decrease in estimated have resulted inthe carrying value of certain reporting units exceeding their future cash flows for certain gas-fired generation assets would have resulted in estimated fair values, indicating apotential impairment of goodwill. an impairment charge.
- 4) Leasing InJune 2004, asubsidiary of PPL Generation agreed to sell the 450 MW PPL applies the provisions of SFAS 13, 'Accounting for Leases," to all leasing Sundance power plant to Arizona Public Service Company, subject to the transactions. Inaddition, PPL applies the provisions of numerous other account-receipt of various state and federal regulatory approvals and customary closing ing pronouncements issued by the FASB and the EITF that provide specific conditions. At December 31, 2004, as aresult of the significant regulatory guidance and additional requirements related to accounting for various leasing approvals still needed to complete the sale, PPL management did not believe arrangements. Ingeneral, there are two types of leases from alessee's perspec-that it was more likely than not that the sale would be consummated and tive: operating leases - leases accounted for oft-balance sheet; and capital concluded that no impairment charge was required at that time. See Note 9 leases - leases capitalized on the balance sheet.
to the Financial Statements for additional information on the potential sale of Inaccounting for leases, management makes various assumptions, Sundance. including the discount rate, the fair market value of the leased assets and the PPL performs impairment analyses for goodwill inaccordance with estimated useful life, indetermining whether alease should be classified as SFAS 142, 'Goodwill and Other Intangible Assets.! PPL performs an annual operating or capital. Changes in these assumptions could result inthe difference impairment test for goodwill, or more frequently if events or changes incir-between whether a lease is determined to be an operating lease or acapital cumstances indicate that the asset might be impaired. lease, thus significantly impacting the amounts to be recognized inthe finan-SFAS 142 requires goodwill to be tested for impairment at the reporting cial statements. unit level. PPL has determined its reporting units to be one level below its Inaddition to uncertainty inherent inmanagement's assumptions, leasing operating segments. transactions and the related accounting rules become increasingly complex Goodwill istested for impairment using atwo-step approach. The first step when they involve: real estate and/or related integral equipment; sale/lease-of the goodwill impairment test compares the estimated fair value of areport-back accounting (leasing transactions where the lessee previously owned the ing unit with its carrying value, including goodwill. Ifthe estimated fair value leased assets): synthetic leases (leases that qualify for operating lease treat-of areporting unit exceeds its carrying value, goodwill of the reporting unit is ment for book accounting purposes and financing treatment for tax accounting considered not impaired. It the carrying value exceeds the estimated lair value purposes): and lessee involvement in the construction of leased assets. of the reporting unit, the second step is performed to measure the amount of impairment loss, if any. PPL CORPORATION 2004 ANNUAL REPORT 41
Management's Discussion and Analysis Al December 31, 2004, PPL continued to participate inasignificant to whether arecorded loss accrual issutficient. All three aspects of account-sale/leaseback transaction. InJuly 2000, PPL Montana sold its interest in ing for loss accruals - the initial identification and recording of aprobable the Colstrip generating plant to owner lessors who are leasing the assets loss, the identification of triggering events to reduce the loss accrual, and the back to PPL Montana under four 36-year operating leases. This transaction is ongoing assessment of the sufficiency of arecorded loss accrual - require accounted for as an operating lease inaccordance with current rules related to significant judgment by PPUs management. sale/leaseback arrangements. It for any reason this transaction did not meet Initial Identification and Recording of the Loss Accrual the requirements for off-balance sheet operating lease treatment as asale/ PPL uses its internal expertise and outside experts (such as lawyers, tax leaseback, PPL would have recorded approximately $290 million of additional specialists and engineers), as necessary, to help estimate the probability assets and approximately $331 million of additional liabilities on its balance that aloss has been incurred and the amount (or range) of the loss. sheet at December 31, 2004, and would have recorded additional expenses PPL has identified certain events which could give rise to a loss, but currently estimated at $8million, alter-tax, in2004. which do not meet the conditions for accrual under SFAS 5. SFAS 5requires See Note 10 to the Financial Statements for additional information related disclosure, but not arecording, of potential losses when it is 'reasonably pos-to operating leases. sible' that aloss has been incurred. The FASB defines 'reasonably possible"
- 5) Loss Accruals as cases inwhich 'the chance of the future event or events occurring is more PPL periodically accrues losses for the estimated impacts of various condi- than remote but less than likely.' See Note 14 to the Financial Statements for tions, situations or circumstances involving uncertain outcomes. These events disclosure of potential loss contingencies, most of which have not met the are called 'contingencies,' and PPLs accounting for such events is prescribed criteria for accrual under SFAS 5.
by SFAS 5, 'Accounting for Contingencies. SFAS 5 defines acontingency as Reducing Recorded Loss Accruals
.an existing condition, situation, or set of circumstances involving uncertainty When an estimated loss isaccrued, PPL identifies, where applicable, the trig-as to possible gain or loss to an enterprise that will ultimately be resolved gering events for subsequently reducing the loss accrual. The triggering events when one or more future events occur or fail to occur.
generally occur when the contingency has been resolved and the actual loss For loss contingencies, the loss must be accrued if (1)information isavail-isincurred, or when the risk of loss has diminished or been eliminated. The able that indicates it is 'probable' that the loss has been incurred, given the following are some of the triggering events that provide for the reduction of likelihood of the uncertain future events and (2)the amount of the loss can be certain recorded loss accruals: reasonably estimated. FASB defines 'probable' as cases inwhich 'the future
- Certain loss accruals are systematically reduced based on the expiration of event or events are likely to occur.' SFAS 5 does not permit the accrual of con-contract terms. An example of this is the loss accrual for above-market NUG tingencies that might result ingains. PPL continuously assesses potential loss purchase commitments, which is described below. This loss accrual is being contingencies for environmental remediation, litigation claims, income taxes, reduced over the lives of the NUG purchase contracts.
regulatory penalties and other events.
- Allowances for excess or obsolete inventory are reduced as the inventory PPL also has accrued estimated losses on long-term purchase commit-items are pulled from the warehouse shelves and sold as scrap or otherwise ments when significant events have occurred. For example, estimated losses disposed.
were accrued when long-term purchase commitments were assumed under
- Allowances for uncollectible accounts are reduced when accounts are writ-asset acquisition agreements and when PPL Electric's generation business was ten off alter prescribed collection procedures have been exhausted or when deregulated. Under regulatory accounting, PPL Electric recorded the above-underlying amounts are ultimately collected.
market cost of energy purchases from NUGs as part of its purchased power
- Environmental and other litigation contingencies are reduced when the costs on an as-incurred basis, since these costs were recovered in regulated contingency is resolved and PPL makes actual payments or the loss is no rates. When the generation business was deregulated, the estimated loss longer considered probable.
associated with these long-term purchase commitments to make above-market NUG purchases was recorded because PPL Electric was committed to purchase On-Going Assessment of Recorded Loss Accruals electricity at above market prices but it could no longer recover these costs in PPL reviews its loss accruals on aregular basis to assure that the recorded regulated rates. potential loss exposures are sufficient. This involves on-going communication The accounting aspects of estimated loss accruals include: (1)the initial and analyses with internal and external legal counsel, engineers, tax specialists, identification and recording of the loss; (2)the determination of triggering operation management and other parties. events for reducing arecorded loss accrual; and (3)the on-going assessment as 42 PPL CORPORATION 2004 ANNUAL REPORT
The largest loss accrual on PPLs balance sheet, and the loss accrual 6) Asset Retirement Obligations that changed most significantly in2004, was for an impairment of above- SFAS 143, Accounting for Asset Retirement Obligations,' requires legal obli-market NUG purchase commitments. This loss accrual reflects the estimated gations associated with the retirement of long-lived assets to be recognized as difference between the above-market contract terms, under the purchase a liability inthe financial statements. The initial obligation should be measured commitments, and the fair value of the electricity to be purchased. This loss at the estimated fair value. An equivalent amount should be recorded as an accrual was originally recorded at $854 million In 1998, when PPL Electric's increase inthe value of the capitalized asset and allocated to expense over the generation business was deregulated. This loss accrual was transferred to PPL useful life of the asset. Until the obligation is settled, the liability should be EnergyPlus in the July 1,2000, corporate realignment. The above-market loss increased, through the recognition of accretion expense inthe income state-accrual was $279 million at December 31,2004. ment, for changes inthe obligation due to the passage of time. When the loss accrual related to NUG purchases was recorded in 1998, Indetermining asset retirement obligations, management must make PPL Electric established the triggering events for when the loss accrual would significant judgments and estimates to calculate fair value. Fair value is devel-be reduced. Aschedule was established to reduce the liability based on pro- oped through consideration of estimated retirement costs intoday's dollars, jected purchases over the lives of the NUG contracts. All but one of the NUG inflated to the anticipated retirement date and then discounted back to the date contracts expire by 2009, with the last one ending in 2014. PPL EnergyPlus the asset retirement obligation was incurred. Changes in assumptions and reduces the above-market NUG liability based on the aforementioned schedule. estimates included within the calculations of asset retirement obligations As PPL EnergyPlus reduces the liability for the above-market NUG purchases, could result insignificantly different results than those identified and recorded it offsets the actual cost of NUG purchases, thereby bringing the net power inthe financial statements. purchase expense more in line with market prices. At December 31, 2004, PPL had asset retirement obligations totaling PPL EnergyPlus assessed the remaining $279 million above-market liabil- $257 million recorded on the Balance Sheet. PPLs most significant assump-ity at December 31, 2004, comparing the projected electricity purchases under tions surrounding asset retirement obligations are the forecasted retirement the pricing terms of the NUG contracts with the purchases assuming current cost, discount rate and inflation rate. Avariance inthe forecasted retirement projected market prices for the energy. This assessment was based on pro- cost, discount rate or inflation rate could have asignificant impact on the jected PJM market prices, including capacity, and a discount factor for the unit ARO liability. contingent nature of each NUG's output through 2014. The assessment also The following chart reflects the sensitivities related to the ARO liability used a sensitivity around the market prices, adjusting such prices downward as of December 31,2004, associated with achange inthese assumptions at by 15%. PPL management believes that the 15% range involatility is appropri- the time of initial recognition. There is no significant change to the ARO asset ate due to the significant increase inenergy prices over the last few years. For value, depreciation expense of the ARO asset or accetion expense of the ARO example, at December 31, 2004, PJM future market prices, including capacity, liability as aresult of changing the assumptions. Each sensitivity below reflects were 18% higher than the comparable projections at December 31,2003. an evaluation of the change based solely on achange in that assumption. The assessment is dependent on the market prices of energy and the Impact estimated output levels of the NUGs. Market prices of energy are dependent Change in on ARO Assumption Liability on many variables, including growth in electricity demand in PJM, available Retirement Cost 10%I(10)% $23/$(23) generation, and changes in regulatory and economic conditions. Accordingly, Discount Rate 0.25%/(0.25)% $(25)1$27 a market price sensitivity was used inthe assessment. Based on current Inflation Rate 0.25%/(0.25)% $29/S(26) projected market prices for energy, the loss accrual for the above-market NUG purchase commitments would be approximately $225 million. Even if estimated market prices were adjusted downwards by 15% during the remaining term Other Information of the NUG contracts, the loss accrual for the above-market NUG purchase PPLs Audit Committee has approved the independent auditor to provide audit commitments would be approximately $287 million. As noted above, it is very and audit-related services and other services permitted by the Sarbanes-Oxley difficult to estimate future electricity prices, which are dependent on many Act of 2002 and SEC rules. The audit and audit-related services include ser-variables and subject to significant volatility. However, based on this assess-vices in connection with statutory and regulatory filings, reviews of offering ment, PPLs management believes that the current recorded NUG above-market documents and registration statements, employee benefit plan audits and liability of $279 million was sufficient at December 31,2004. internal control reviews. PPL CORPORATION 2004 ANNUAL REPORT 43
Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareowners of PPL Corporation: Internal control over financial reporting Also, inour opinion, management's assessment, included inthe accompany-We have completed an integrated audit of PPL Corporation's 2004 consoli- ing 'Management's Report on Internal Control Over Financial Reporting,' that dated financial statements and of its internal control over financial reporting the Company maintained effective internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated as of December 31, 2004 based on criteria established inIntemal Control - financial statements inaccordance with the standards of the Public Company lntegrated Framework issued by the Committee of Sponsoring Organizations Accounting Oversight Board (United States). Our opinions, based on our of the Treadway Commission (COSO), isfairly stated, inall material respects, audits, are presented below. based on those criteria. Furthermore, inour opinion, the Company maintained, inall material respects, effective internal control over financial reporting as Consolidated financial statements of December 31, 2004, based on criteria established inIntemal Control-In our opinion, the accompanying consolidated balance sheets and the related lntegrated Framework issued by the COSO. The Company's management is consolidated statements of preferred stock, of long-term debt, of income, of responsible for maintaining effective internal control over financial reporting cash flows and of shareowners' common equity and comprehensive income and for its assessment of the effectiveness of internal control over financial present fairly, inall material respects, the financial position of PPL Corporation reporting. Our responsibility isto express opinions on management's assess-and its subsidiaries (the Company') at December 31,2004 and 2003, and the ment and on the effectiveness of the Company's internal control over financial results of their operations and their cash flows for each of the three years in reporting based on our audit. We conducted our audit of internal control over the period ended December 31, 2004 inconformity with accounting principles financial reporting inaccordance with the standards of the Public Company generally accepted inthe United States of America. These financial statements Accounting Oversight Board (United States). Those standards require that are the responsibility of the Company's management. Our responsibility is to we plan and perform the audit to obtain reasonable assurance about whether express an opinion on these financial statements based on our audits. We con-effective internal control over financial reporting was maintained inall material ducted our audits of these statements inaccordance with the standards of the respects. An audit of internal control over financial reporting includes obtain-Public Company Accounting Oversight Board (United States). Those standards ing an understanding of internal control over financial reporting, evaluating require that we plan and perform the audit to obtain reasonable assurance management's assessment, testing and evaluating the design and operating about whether the financial statements are free of material misstatement. An effectiveness of internal control, and performing such other procedures as we audit of financial statements includes examining, on atest basis, evidence sup-consider necessary inthe circumstances. We believe that our audit provides porting the amounts and disclosures inthe financial statements, assessing the a reasonable basis for our opinions. accounting principles used and significant estimates made by management, Acompany's internal control over financial reporting isa process designed and evaluating the overall financial statement presentation. We believe that our to provide reasonable assurance regarding the reliability of financial reporting audits provide a reasonable basis for our opinion. and the preparation of financial statements for external purposes inaccordance As discussed inNote I to the consolidated financial statements, the with generally accepted accounting principles. Acompany's internal control Company adopted Emerging Issues Task Force Issue No. 03-11, Reporting over financial reporting includes those policies and procedures that (i) pertain Realized Gains and Losses on Derivative Instruments That Are Subject to to the maintenance of records that, inreasonable detail, accurately and fairly FAS 133 and NotI-Held for Trading Purposes as Defined in Issue No. 02-3 and reflect the transactions and dispositions of the assets of the company; (ii) pro-FASB Interpretation ('FIN') No. 45, Guarantor's Accounting and Disclosure vide reasonable assurance that transactions are recorded as necessary to per-Requirements for Guarantees, Including Indirect Guarantees of Indebtedness mit preparation of financial statements inaccordance with generally accepted of 01hers, in2003. Also, as discussed inNote 1to the consolidated financial accounting principles, and that receipts and expenditures of the company are statements, the Company elected the fair value method of accounting for being made only inaccordance with authorizations of management and direc-stock-based compensation as prescribed by Statement of Financial Accounting tors of the company; and (iii) provide reasonable assurance regarding preven-Standards (-SFAS-) No. 123, Accounting for Stock-Based Compensation, tion or timely detection of unauthorized acquisition, use, or disposition of the as amended by SFAS No.148, Accounting for Stock-Based Compensation company's assets that could have amaterial effect on the financial statements. Transition and Disclosure, an Amendment of FASB Statement No. 123, in2003. Because of its inherent limitations, internal control over financial reporting As discussed inNote 8to the consolidated financial statements, the Company may not prevent or detect misstatements. Also, projections of any evaluation adopted SFAS No. 150, Accounting for Certain Financial Instruments with of effectiveness to future periods are subject to the risk that controls may Characteristics of both Liabilities and Equity in2003. As discussed in Note 21 become inadequate because of changes inconditions, or that the degree of to the consolidated financial statements, the Company adopted SFAS No. 143, compliance with the policies or procedures may deteriorate. Accounting forAsset Retirement Obligations, in2003. As discussed in Note 22 to the consolidated financial statements, the Company adopted FIN No. 46, Consolidation of Variable Interest Entities - an interpretation of ARB 51, as amended by FIN No. 46(R), in2003. Philadelphia, Pennsylvania February 25, 2005 44 PPL CORPORATION 2004 ANNUAL REPORT
Management's Report on Internal Control Over Financial Reporting PPLs management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term isdefined inExchange Act Rule 13a-15(f). PPLs internal control over financial reporting isa process designed to provide reasonable assurance to PPLs management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in 'Internal Control - Integrated Framework' issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in
'Internal Control - Integrated Framework,' our management concluded that our internal control over financial reporting was effective as of December 31, 2004. Our management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
PPL CORPORATION 2004 ANNUAL REPORT 45
Consolidated Statement of Income (Millions of dollars, except per share data) Fot the years ended December31, 2004 2003 2002 Operating Revenues Utility $3,900 $3.717 $3,686 Unregulated retail electric and gas 114 148 178 Wholesale energy marketing 1,247 1.222 1,039 Net energy trading margins 22 10 20 Energy related businesses 529 499 568 Total 5,812 5,596 5,491 Operating Expenses Operation Fuel 780 655 611 Energy purchases 917 1,004 904 Other operation and maintenance 1,243 1,201 1.131 Amortization of recoverable transition costs 257 260 226 Depreciation (Note 1) 412 380 367 Taxes, other than income (Note 5) 250 256 231 Energy related businesses 566 491 543 Other charges Write-down of international energy projects (Note 9) 113 Worktorce reduction (Note 20) 9 75 Write-down of generation assets (Note 9) 44 Total 4,425 4,256 4,245 Operating Income 1,387 1,340 1,246 Other income - net (Note 16) 41 58 29 Interest expense 523 473 560 Income from Continuing Operations Before Income Taxes, Minority Interest and Distributions on Preferred Securities 905 925 715 Income taxes (Note 5) 195 170 210 Minority interest (Note 9) 8 7 78 Distributions on preferred securities (Note 8) 2 29 67 Income from Continuing Operations 700 719 360 Loss from discontinued operations (net of income taxes) (Note 9) 2 20 2 Income Before Cumulative Effects of Changes In Accounting Principles 698 699 358 Cumulative etfects of changes in accounting principles (net of income taxes) (Notes 19, 21 and 22) 35 (150) Net Income $ 698 $ 734 $ 208 Earnings per Share of Common Stock (Note 4) Income from Continuing Operations: Basic $ 3.80 $ 4.16 $ 2.36 Diluted $ 3.78 $ 4.15 $ 2.36 Net Income: Basic $ 3.79 $ 4.25 $ 1.37 Diluted $ 3.77 $ 4.24 $ 1.36 Dividends Declared Per Share of Common Stock $ 1.64 $ 1.54 $ 1.44 The accompanying Notes to Consolidated Financial Statements are anintegral part otthe financial statements. 48 PPL CORPORATION 2004 ANNUAL REPORT
Consolidated Statement of Cash Flows (Mfillions of dollars) For the years ended December 31, 2004 2003 2002 Cash Flows From Operating Activities Net income $ 698 $ 734 $208 Adjustments to reconcile net income to net cash provided by operating activities Loss from discontinued operations 2 20 2 Cumulative effects of changes inaccounting principles (35) 150 Depreciation 412 380 289 Stock compensation expense 12 11 5 Amortizations - recoverable transition costs and other 242 244 198 Payments to cancel generation projects (152) Dividends received from unconsolidated affiliates 5 7 14 Pension income - net (24) (41) (42) Pension funding (10) (18) Write-down of assets 10 13 157 Gain on asset sales and insurance settlements (26) (21) Distribution requirements - preferred securities 2 29 60 Equity inearnings of unconsolidated affiliates 8 11 9 Equity inearnings of WPD prior to acquiring controlling interest in2002 (75) Deferred income taxes and investment tax credits 155 96 85 Workforce reduction - net of cash paid 9 67 Unrealized (gain) loss on derivatives (15) (38) 24 Payment and gain on NUG contract termination (75) Write-off (deferral) of storm-related costs 4 (15) Realized (gain) loss on nuclear trust fund 7 (20) Interest accretion on asset retirement obligation and other 23 22 4 Other 31 9 5 Change incurrent assets and current liabilities Accounts receivable 109 11 (48) Accounts payable (49) 7 (73) Fuel, materials and supplies (52) (13) 13 Other (9) (20) (34) Other operating activities Other assets (40) 34 (12) Other liabilities (58) (76) (5) Net cash provided by operating activities 1,437 1,340 774 Cash Flows From Investing Activities Expenditures for property, plant and equipment (703) (767) (641) Investment ingenerating assets and electric energy projects (31) (261) Acquisition of controlling interest inWPD, net of cash acquired (211) Proceeds from the sale of minority interest inCGE 123 Proceeds from sale of assets and insurance settlements and other 21 49 20 Purchases of auction rate securities (130) (15) (1,248) Proceeds from sale of auction rate securities 74 5 1,292 Net (increase) decrease inrestricted cash (51) 10 29 Other investing activities (21) (21) (37) Net cash used ininvesting activities (718) (739) (1,057) Cash Flows From Financing Activities Issuance of long-term debt 322 992 Retirement of long-term debt (1,171) (575) (823) Retirement of company-obligated mandatorily redeemable preferred securities (250) Issuance of common stock 596 426 587 Retirement of preferred stock (31) Payment of common dividends (297) (260) (198) Payment of preferred distributions (2) (27) (63) Net increase (decrease) inshort-term debt (14) (877) 411 Other financing activities (12) (35) (27) Net cash used infinancing activities (578) (387) (363) Effect of Exchange Rates on Cash and Cash Equivalents 9 7 2 Net Increase (Decrease) In Cash and Cash Equivalents 150 221 (644) Cash and Cash Equivalents at Beginning of Period 466 245 889 Cash and Cash Equivalents at End of Period $ 6156 $ 466 $ 245 Supplemental Disclosures of Cash Flow Information Cash paid (received) during the period for: Interest $ 488 $ 456 $ 412 Income taxes -net $ 14 $ (23) $ 91 The accompanying Notes to Consolidated Financial Statements arean integral part of the financial statements. PPL CORPORATION 2004 ANNUAL REPORT 47
Consolidated Balance Sheet (Millions of dollars) AtDecember31, 2004 2003 ASSETS Current Assets Cash and cash equivalents S 616 $ 466 Restricted cash (Note 18) 50 10 Accounts receivable (less reserve: 2004, $88; 2003, $93) 459 555 Unbilled revenues 407 341 Fuel, materials and supplies (Note 1) 309 256 Prepayments 57 54 Deferred income taxes (Note 5) 162 105 Price risk management assets (Note 17) 115 90 Other 129 143 2,304 2,020 Investments Investment in unconsolidated affiliates - at equity (Note 3) 51 74 Investment inunconsolidated affiliates - at cost (Note 9) 126 Nuclear plant decommissioning trust fund (Note 6) 409 357 Other 12 29 472 586 Property, Plant and Equipment - net (Note 1) Electric plant inservice Transmission and distribution 5,983 5,456 Generation 4,007 3,518 General 480 435 10,470 9,409 Construction work in progress 148 614 Nuclear fuel 153 144 Electric plant 10,771 10,167 Gas and oil plant 213 205 Other property 225 221 11,209 10,593 Regulatory and Other Noncurrent Assets (Note 1) Recoverable transition costs 1,431 1,687 Goodwill (Note 19) 1,127 1,068 Other intangibles (Note 19) 276 243 Other 942 926 3,776 3,924
$17,761 $17,123 The accompanying Notes to Consolidated Financial Statements areanintegral part of the financial statements.
48 PPL CORPORATION 2004 ANNUAL REPORT
Consolidated Balance Sheet (Millions of dollars) At December31, 2004 2003 LIABILITIES AND EQUITY Current Liabilities Short-term debt (Note 8) $ 42 $ 56 Long-term debt 866 395 Accounts payable 407 456 Above market NUG contracts (Note 14) 73 74 Taxes 164 178 Interest 129 121 Dividends 79 70 Price risk management liabilities (Note 17) 167 82 Other 368 343 2,295 1,775 Long-term Debt 6,792 7.464 Long-term Debt with Affiliate Trusts (Notes 15 and 22) 89 681 Deterred Credits and Other Noncurrent Liabilities Deferred income taxes and investment tax credits (Note 5) 2,426 2.205 Accrued pension obligations (Note 12) 476 451 Asset retirement obligations (Note 21) 257 242 Above market NUG contracts (Note 14) 206 278 Other (Note 12) 874 663 4,239 3,839 Commitments and Contingent Liabilities (Note 14) Minority Interest 56 54 Preferred Stock without Sinking Fund Requirements 51 51 Shareowners Common Equity Common stock 2 2 Capital in excess of par value 3,577 2,977 Treasury stock (838) (837) Earnings reinvested 1,870 1.478 Accumulated other comprehensive loss (Note 1) (323) (297) Capital stock expense and other (49) (64) 4,239 3,259
$17,761 $17,123 The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
PPL CORPORATION 2004 ANNUAL REPORT 49
Consolidated Statement of Shareowvners' Common Equity and Comprehensive Income (Millions of dollams except per share amounts) For the years ended December31, 2004 2003 2002 Common stock at beginning of year $ 2 $ 2 $ 2 Common stock at end of year 2 2 2 Capital in excess of par value at beginning of year 2,977 2,543 1,960 Common stock issued 575 426 587 Other 25 8 (4) Capital in excess of par value at end of year 3,577 2,977 2,543 Treasury stock at beginning of year (837) (836) (836) Treasury stock purchased (1) (1) Treasury stock at end of year (838) (837) (836) Earnings reinvested at beginning of year 1,478 1.013 1,023 Net income (b) 698 734 208 Cash dividends declared on common stock (306) (269) (218) Earnings reinvested at end of year 1,870 1,478 1,013 Accumulated other comprehensive loss at beginning of year (C) (297) (446) (251) Foreign currency translation adjustments (b 112 106 125 Unrealized gain (loss) on available-for-sale securities (b) 20 24 (3) Minimum pension liability adjustments (b) (53) (10) (301) Unrealized gain (loss) on qualifying derivatives (bI (105) 29 (16) Accumulated other comprehensive loss at end of year (323) (297) (446) Capital stock expense and other at beginning of year (64) (52) (41) Issuance costs and other charges to issue common stock (9) (18) Other 15 (3) 7 Capital stock expense and other at end of year (49) (64) (52) Total shareowners' common equity $4,239 $3,259 $2,224 Common stock shares at beginning of year (at 177,362 165,736 146,580 Common stock issued through the ESOP, DRIP, ICP, ICPKE, structured equity program and public offering 11,737 11,652 19,156 Treasury stock purchased (27) (26) Common stock shares at end of year 189,072 177,362 165,736 (a) Shares in thousands; S.01 par value. 390 million shares authorized. Each share entitles the holder to one vote on any question presented to any shareowners meeting. (b) Statement of Comprehensive Income (Note 1): Net income $ 698 $734 $ 208 Other comprehensive income (loss): Foreign currency translation adjustments. net of tax expense (benefit) of $0,SO.5(5) 112 106 125 Unrealized gain (loss) on available-for-sale securities. net of tax expense (benefit) of $18, $14. $(2) 20 24 (3) Minimum pension liability adjustments, net of tax expense (benefit) of S(24), $(4), 5(131) (53) (10) (301) Unrealized gain (loss) on qualifying derivatives. net of lax expense (benetil) of S(60), $15,S (10) (105) 29 (16) Total other comprehensive income (loss) (26) 149 (195) Comprehensive income $ 672 $883 $ 13 (" See Note 1for disclosure of balances for each component of Accumulated Other Comprehensive Loss. The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. 50 PPL CORPORATION 2004 ANNUAL REPORT
Consolidated Statement of Preferred Stock Outstanding Shares Optional Outstanding Shares Redemption Price (Millions of dollars) AlDecember31. 2004 2003 2004 Authorized perSharel .b) PPL ELECTRIC(a) Preferred Stock - $100 par, cumulative, without sinking fund requirements 4-1/2% $25 $25 247,524 629,936 $110.00 Series Preferred 3.35% 2 2 20,605 103.50 4.40% . 12 12 117,676 102.00 4.60% 3 3 28,614 103.00 6.75% 9 9 90,770 103.04 Total Series Preferred 26 26 257,665 10,000,000
$51 $51 DECREASES INPREFERRED STOCK tWl 2004 2003 2002 Shares Amount Shares Amount Shares Amount Series Preferred 6.125% (167,500) $(17) 6.15% (97,500) (10) 6.33% (46,000) (4)
Decreases In Preterred Stock normally represent: (i) the redemption of stock pursuant to mandatory sinking fund requirements; or (ii) shares redeemed pursuant to optional redemption provisions. tat Each share of PPL Electric's preferred stock entitles the holder to one vote on matters on which PPL Electric's shareowners are entitled to vote. There were 10 million shares of PPLs preferred stock and 5 million shares of PPL Electric's preference stock authorized; none were outstanding at December 31, 2004 and 2003. (b)The Involuntary liquidation price of the preferred stock Is$100 per share. The optional voluntary liquidation price Isthe optional redemption price per share inetfect, except for the 4-1/2% Preferred Stock and the 6.75% Series Preferred Stock for which such price is$100 per share (plus in each case any unpaid dividends). (c) Decreases In2003 were redemptions of previously outstanding preferred stock with sinking fund requirements. The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements. PPL CORPORATION 2004 ANNUAL REPORT 51
Consolidated Statement of Long-term Debt Outstanding (Millions of dollars) At December 31. 2004 2003 Maturity (a) Bonds: 6-1/2% - 7.7% First Mortgage Bonds Ib) $ 225 $ 297 2004-2024 3.125% - 6.40% First Mortgage Pollution Control Bonds lb) 314 314 2008-2029 4.30% 1/4% Senior Secured Bonds (b) 841 900 2007-2013 6.83% to 7.15% Series 1999-1 Transition Bonds 1,159 1,423 2004-2008 5.875% - 9.25% Unsecured Bonds 2,051 It) 1,982 2004-2028 6.20% - 6.40% Inflation-linked Bonds 161 150 2006-2022 2.0% Pollution Control Revenue Bonds 9 9 2027 6.8% - 9.0% Bolivian Bonds 22 2005-2010 Notes: 6.17% - 8.375% Medium-term Notes 632 737 2004-2007 4.33% - 6.40% Senior Unsecured Notes 1,001 500 2009-2014 8.05% - 8.30% Senior Secured Notes is 437 437 2013 2.625% Convertible Senior Notes 400 400 2023 7.29% Subordinated Notes 290 2006 8.70% - 9.64% Unsecured Promissory Notes 10 12 2010-2022 Senior Floating Rate Notes (3.36% at December 31, 2004) 99 2006 Term loan - variable rate (2.56% at December 31, 2003) 625 2008 Trust securities - variable rate (3.435% at December 31, 2003) 31 2008 Other long-term debt 15 27 2004-2013 7,666 7,844 Fair value swaps 17 28 Unamortized discount (25) (13) 7,658 7,859 Less amount due within one year (866) (395) Total long-term debt $6,792 $7,464 Long-term Debt with Affiliate Trusts: 7.29% Subordinated Notes (d) $ 592 2006 8.23% Subordinated Debentures (d) $ 89 89 2027 Total long-term debt with attiliate trusts $ 89 $ 681 See Note 8for information on debt issuances, debt retirements and other movements inlong-term debt. (I) Aggregate maturities of long-term debt through 2009 are (millions of dollars): 2005, $866; 2006, $1,244: 2007. $1,022; 2008, $623; and 2009, $687. (b)The First Mortgage Bonds and the First Mortgage Pollution Control Bonds were issued under, and are secured by, the lien of the 1945 First Mortgage Bond Indenture. The lien of the 1945 First Mortgage Bond Indenture covers substantially all electric transmission and distribution plant owned by PPL Electric. The Senior Secured Bonds were issued under the 2001 Senior Secured Bond Indenture. The Senior Secured Bonds are secured by (i)an equal principal amount of First Mortgage Bonds issued under the 1945 First Mortgage Bond Indenture and (ii)the lien of the 2001 Senior Secured Bond Indenture. which covers substantially all electric transmission and distribution plant owned by PPL Electric and which isjunior to the lien of the 1945 First Mortgage Bond Indenture.
"' Represents lease financing consolidated through avariable interest entity. See Note 22 for additional information.
(d) Represents debt with wholly owned trusts that were deconsolidated eflective December 31, 2003, as aresult of the adoption of FIN 46, 'Consolidation oa Variable Interest Entities, an Interpretation of ARB No. 51, for certain entities. See Notes 8and 22 for further discussion.
"' Increase due to an increase inforeign currency exchange rates.
The accompanying Notes to Consolidated Financial Statements are an integral part ofthe financial statements. 52 PPL CORPORATION 2004 ANNUAL REPORT
Notes to Consolidated Financial Statements Terms andabbreviations appearing inNotes toConsolidated Financial Statements areexplained intheglossary. Dollars areinmillions, except pershare data. unless otherwisenoted. Effective December 31, 2003, PPLs consolidated financial statements
. Summary of Significant include the accounts of the lessors under the operating leases for the Accounting Policies Sundance, University Park and Lower Mt. Bethel generation facilities. These Business and Consolidation entities were not included inthe consolidated financial statements for periods PPL isan energy and utility holding company that, through its subsidiaries, is ending prior to December 31, 2003. See Note 22 for further discussion.
primarily engaged inthe generation and marketing of electricity inthe north- Effective December 31, 2003, PPL deconsolidated PPL Capital Funding eastern and western U.S. and inthe delivery of electricity inPennsylvania, the Trust I and SIUK Capital Trust I , both of which are wholly owned trusts. Both entities were included inPPL's consolidated financial statements for periods U.K. and Latin America. Based inAllentown, PA. PPLs principal direct subsid-iaries are PPL Energy Funding, PPL Electric, PPL Gas Utilities, PPL Services ending prior to December 31, 2003. See Note 22 for further discussion. and PPL Capital Funding. The consolidated financial statements of PPL include its share of undivided PPL Energy Funding isthe parent of PPL Energy Supply, which serves as interests in jointly-owned facilities, as well as its share of the related operating the holding company for PPIs principal unregulated subsidiaries. PPL Energy costs of those facilities. See Note 13 for additional information. Supply isthe parent of PPL Generation, PPL EnergyPlus and PPL Global. Use of Estimates PPL Generation owns and operates aportfolio of domestic power generat- The preparation of financial statements inconformity with U.S. GAAP requires ing assets. These power plants are located inPennsylvania, Montana, Arizona, management to make estimates and assumptions that affect the reported Illinois, Connecticut, New York and Maine and use well-diversified fuel sources amounts of assets and liabilities, the disclosure of contingent liabilities at the including coal, nuclear, natural gas, oil and hydro. PPL EnergyPlus markets or date of the financial statements and the reported amounts of revenues and brokers electricity produced by PPL Generation, along with purchased power, expenses during the reporting period. Actual results could differ from those natural gas and oil incompetitive wholesale and deregulated retail markets, estimates. primarily inthe northeastern and western portions of the U.S. PPL Global owns and operates international energy businesses that are primarily focused on the Loss Accruals distribution of electricity. Loss accruals are recorded inaccordance with SFAS 5, 'Accounting for PPL Electric isa rate-regulated subsidiary of PPL. PPL Electric's principal Contingencies. Potential losses are accrued when (1)information is avail-businesses are the transmission and distribution of electricity to serve retail able that indicates it is 'probable' that the loss has been incurred, given the customers inIts franchised territory ineastern and central Pennsylvania, and likelihood of the uncertain future events and (2)the amount of the loss can be the supply of electricity to retail customers inthat territory as aPLR. reasonably estimated. The consolidated financial statements of PPL include its own accounts Guarantees as well as the accounts of all entities inwhich PPL has a controlling financial Inaccordance with the provisions of FIN 45, 'Guarantor's Accounting and interest. Investments inentities inwhich the company has the ability to exer- Disclosure Requirements for Guarantees, Including Indirect Guarantees of cise significant influence but does not have acontrolling financial interest are Indebtedness of Others, an Interpretation of FASB Statements No. 5,57, and accounted for under the equity method. See Note 3for further discussion. All 107 and Rescission of FASB Interpretation No. 34," which was adopted by other investments are carried at cost or fair value. All significant intercompany PPL and its subsidiaries effective January 1,2003, the fair values of guaran-transactions have been eliminated. Any minority interests are reflected inthe tees related to arrangements entered into prior to January 1,2003, as well as consolidated financial statements. guarantees excluded from the initial recognition and measurement provisions It isthe policy of PPL to consolidate or record equity inearnings of of FIN 45, are not recorded inthe financial statements. See Note 14 for further foreign entities on a lag, based on the availability of financial data on aU.S. discussion of recorded and unrecorded guarantees. GAAP basis: Accounting Records
- PPL and its subsidiaries consolidate the results of foreign entities inwhich The system of accounts for PPL Electric and PPL Gas Utilities are maintained they have a controlling financial interest (WPD, Emel, EC, the Bolivian in accordance with the Uniform System of Accounts prescribed by the FERC subsidiaries and other investments) on aone-month lag.
- Earnings from foreign equity method investments are recorded on athree- and adopted by the PUC.
month lag. Cash Equivalents Effective August 21, 2002, PPL deconsolidated CEMAR and began All highly liquid debt instruments purchased with original maturities of three months or less are considered lo be cash equivalents. accounting for itusing the cost method. See Note 9 for further discussion, PPL invests inauction rate and similar securities which provide for periodic including the sale of this investment. reset of interest rates and are highly liquid. Even though PPL considers these debt securities as part of its liquid portfolio, it does not include these securities in cash and cash equivalents due to the stated maturity of the securities. These securities are included in 'Current Assets - Other' on the Balance Sheet. PPL CORPORATION 2004 ANNUAL REPORT 53
Notes to Consolidated Financial Statements Restricted Cash Following are the classes of PP&E, with the associated accumulated Bank deposits that are restricted by agreement or that have been designated for depreciation, at December 31: aspecific purpose are classified as restricted cash. The change inrestricted 2004 2003 cash isreported as an investing activity inthe Statement of Cash Flows. On the Electric plant Balance Sheet, the current portion of restricted cash is shown as 'Restricted Generation $ 8,877 S 8,347 cash' within current assets, while the noncurrent portion is included in'Other' Transmission and distribution 7,991 7,324 within other noncurrent assets. See Note 18 for the components of restricted cash. General 736 733 Construction work inprogress 148 614 Allowance for Doubtful Accounts Nuclear fuel 314 308 Accounts receivable collectibility is evaluated using acombination of factors. Gas and oil plant 336 321 Other property 290 276 Reserve balances are analyzed to assess the reasonableness of the balances in comparison to the actual accounts receivable balances and write-ofls. 18,692 17.923 Less: Accumulated depreciation and amortization 7,483 7,330 Adjustments are made to reserve balances based on the results of analysis.
$11,209 $10,593 the aging of receivables, and historical and industry trends.
Additional specific reserves for uncollectible accounts receivable, such Following are the weighted-average rates of depreciation at December 31: as bankruptcies, are recorded on acase-by-case basis after having been 2004 2003 researched and reviewed by management. Unusual items, trends inwrite-offs, Generation 2.11% 2.01% the age of the receivable, counterparty creditworthiness and economic condi- Transmission and distribution 2.86% 3.16% tions are considered as abasis for determining the adequacy of the reserve General 3.41% 3.75% for uncollectible account balances. The annual provisions for depreciation have been computed principally in Fuels, Materials and Supplies accordance with the following ranges of assets lives: generation 5-65 years; PPL and its subsidiaries value inventory at the lower of cost or market primarily transmission and distribution, 15-80 years; and general 3-80 years. using the average cost method. PPL Gas Utilities values aportion of its natural Included in PP&E above are capitalized costs of software projects that gas inventory using the last-in, first-out method, consistent with its rate-mak- were developed or obtained for internal use. At December 31, 2004 and 2003, ing treatment. The carrying value of that inventory was $5million and $14 mil- capitalized software costs were $82 million and $76 million, and there was lion at December 31, 2004 and 2003, and the excess of replacement cost over $43 million and $31 million of accumulated amortization. Such capitalized carrying value was $7million and $5million at December 31, 2004 and 2003. amounts are amortized ratably over the expected lives of the projects when Property, Plant and Equipment they become operational, generally not to exceed 10 years. During 2004, 2003 and 2002, PPL amortized capitalized software costs of $11 million, PP&E is recorded at original cost, unless impaired. Ifimpaired, the asset is
$11 million, and $5million.
written down to fair value at that time, which becomes the asset's new cost basis. Original cost includes material, labor, contractor costs, construction Impairments - Property, Plant and Equipment, Goodwill and overheads and financing costs, where applicable. The cost of repairs and Intangible Assets minor replacements are charged to expense as incurred. PPL records costs PPL and its subsidiaries review long-lived assets, including intangibles, that are associated with planned major maintenance projects inthe period inwhich subject to depreciation or amortization for impairment when events or circum-the costs are incurred. No costs are accrued inadvance of the period inwhich stances indicate carrying amounts may not be recoverable. An impairment loss the work is performed. is recognized if the carrying amount of long-lived assets isnot recoverable AFUDC is capitalized as part of the construction costs for regulated from undiscounted future cash flow. The impairment charge is measured by the projects. Interest iscapitalized as part of construction costs for non-regulated difference between the carrying amount of the asset and its fair value. projects. Goodwill is reviewed for impairment at the reporting unit level, annually Depreciation is computed over the estimated useful lives of property using or more frequently when events or circumstances indicate that the carrying various methods including the straight-line, composite and group methods. value may be greater than the implied fair value. PPLs reporting units are one PPL and its subsidiaries periodically review and adjust the depreciable lives of level below its operating segments. If the carrying value of the reporting unit their fixed assets. When acomponent of PP&E is retired that was depreciated exceeds its fair value, the implied fair value of goodwill must be calculated. If under the composite or group method, the original cost is charged to accumu- the implied fair value of goodwill is less than its carrying value, the difference lated depreciation. When all or asignificant portion of an operating unit that represents the amount of impairment. See Notes 9and 19 for adiscussion of was depreciated under the composite or group method is retired or sold, the asset impairment charges recorded. property and the related accumulated depreciation account is reduced and any Asset Retirement Obligations gain or loss is included in income, unless otherwise required by regulators. In2001, the FASB issued SFAS 143, 'Accounting for Asset Retirement Obligations," which addresses the accounting for obligations associated with the retirement of tangible long-lived assets. SFAS 143 requires legal obligations 54 PPL CORPORATION 2004 ANNUAL REPORT
associated with the retirement of long-lived assets to be recognized as a inaccordance with an amortization schedule filed with the PUG. The assets of liability inthe financial statements. The initial obligation should be measured PPL Transition Bond Company, including the intangible transition property, are at the estimated fair value. An equivalent amount should be recorded as an not available to creditors of PPL or PPL Electric. The transition bonds are obli-increase inthe value of the capitalized asset and allocated to expense over the gations of PPL Transition Bond Company and are non-recourse to PPL and PPL useful life of the asset. Until the obligation is settled, the liability should be Electric. The remaining competitive transition costs are also being amortized increased, through the recognition of accretion expense in the income state- based on an amortization schedule previously filed with the PUG, adjusted for ment, for changes inthe obligation due to the passage of time. See Note 21 those competitive transition costs that were converted to intangible transition for adiscussion of accounting tor asset retirement obligations. costs. As a result of the conversion of asignificant portion of the competitive transition costs into intangible transition costs, amortization of substantially Goodwill and Other Intangible Assets all of the remaining competitive transition costs will occur in2009. Goodwill represents the excess of the purchase price paid over the estimated fair Included in 'Other' above as of December 31, 2004 and 2003, are approxi-value of the assets acquired and liabilities assumed inthe acquisition of abusi-mately $11 million and $15 million of storm restoration costs associated with ness. Upon the adoption of SFAS 142, 'Goodwill and Other Intangible Assets," the September 2003 Hurricane Isabel. PPL Electric deferred these costs in on January 1,2002, PPL and its subsidiaries stopped amortizing goodwill. accordance with the PUC declaratory order of January 2004. The $4million Other intangible assets that have finite useful lives are valued at cost and reduction in deferred costs is the result of a PUC order entered inDecember amortized over their useful lives based upon the pattern in which the economic 2004. The remaining costs will be recovered through customer transmission benefits of the intangible asset are consumed or otherwise used up. and distribution rates, and will be amortized over ten years beginning in2005. Investments in Debt and Marketable Equity Securities InMarch 2004, PPL Electric filed aproposed distribution rate increase of Investments indebt securities are classified as held-to-maturity, and measured $164 million (subsequently amended to $160 million) and, at the same time, at amortized cost, when there is an intent and ability to hold the securities to notified the PUC of an estimated increase in transmission service charges maturity. Debt securities and marketable equity securities that are acquired and of $57 million. In December 2004, the PUC entered its order granting PPL held principally for the purpose of selling them inthe near-term are classified Electric a distribution rate increase of $137 million and approved PPL Electric's as trading. All other investments indebt and marketable equity securities are proposed mechanism for collecting the additional $57 million intransmission-classified as available-for-sale. Both trading and available-for-sale securities related charges. are carried at fair value. Any unrealized gains and losses for trading securities Accounting for Derivatives and Other Contracts Held are included inearnings. Unrealized gains and losses for available-for-sale for Trading Purposes securities are reported, net of tax, inother comprehensive income or are recog-PPL enters into energy and energy-related contracts to hedge the variability of nized currently inearnings when adecline infair value is determined to be other expected cash flows associated with its generating units and for trading pur-than temporary. The specific identification method is used to calculate realized poses. PPL enters into interest rate derivative contracts to hedge its exposure gains and losses on debt and marketable equity securities. See Note 6for addi-to changes inthe fair value of its debt instruments and to hedge its exposure tional information on securities held inthe nuclear decommissioning trusts. to variability inexpected cash flows associated with existing debt instruments Regulation or forecasted transactions. PPL also enters into foreign currency derivative PPL Electric, PPL Gas Utilities, and Elfec account for regulated operations contracts to hedge foreign currency exposures, including firm commitments, in accordance with the provisions of SFAS 71, 'Accounting for the Effects of recognized assets or liabilities, forecasted transactions, net investments, or Certain Types of Regulation.' which requires rate-regulated entities to reflect foreign earnings translation. the effects of regulatory decisions intheir financial statements. Contracts that meet the definition of aderivative are accounted for under The following regulatory assets were included inthe 'Regulatory and Other SFAS 133, 'Accounting for Derivative Instruments and Hedging Activities, as Noncurrent Assets' section of the Balance Sheet at December 31: amended and interpreted. Certain energy contracts have been excluded from 2004 2003 the requirements of SFAS 133 because they meet the definition of a 'normal Recoverable transition costs $1,431 $1,687 purchase or normal sale' under DIG Issue C15, "Scope Exceptions: Normal Taxes recoverable through future rates 276 250 Purchases and Normal Sales Exception for Certain Option-Type Contracts and Other 20 24 Forward Contracts in Electricity. These contracts are reflected inthe financial
$1,727 $1,961 statements using the accrual method of accounting.
Additionally, PPL adopted SFAS No. 149, "Amendment of Statement 133 Based on the PUC Final Order, PPL Electric began amortizing its competitive on Derivative Instruments and Hedging Activities," as of July 1,2003. The transition (or stranded) costs, $2.97 billion, over an 11-year transition period requirements of SFAS 149, which required prospective application, placed effective January 1,1999. InAugust 1999, competitive transition costs of additional limitations on the use of the normal purchase or normal sale excep- $2.4 billion were converted lo intangible transition costs when they were securi-tion. Therefore, the accounting for certain types of transactions has been tized by the issuance of transition bonds. The intangible transition costs are changed on aprospective basis to conform with SFAS 149. being amortized over the life of the transition bonds, through December 2008, PPL CORPORATION 2004 ANNUAL REPORT 55
Notes to Consolidated Financial Statements All derivative contracts that are subject to the requirements of SFAS 133 bilateral sales of electricity at major market delivery points are netted with and its amendments are reflected on the balance sheet at their fair value. On purchases that offset the sales at those same delivery points. Amajor market the date the derivative contract is executed, PPL designates the derivative as a delivery point isany delivery point with liquid pricing available. hedge of the fair value of arecognized asset or liability or of an unrecognized See Note 17 for additional information on SFAS 133, its amendments and firm commitment ('fair value' hedge), ahedge of aforecasted transaction or of related accounting guidance. the variability of cash flows to be received or paid related to arecognized asset Revenue Recognition or liability ('cash flow' hedge), aforeign currency fair value or cash flow hedge Operating revenues, except for "Energy related businesses,' are recorded based ('foreign currency' hedge), ahedge of a net investment ina foreign operation on energy deliveries through the end of the calendar month. Unbilled retail or atrading derivative. Changes inthe fair value of a derivative that is highly revenues result because customers' meters are read and bills are rendered effective as, and is designated and qualifies as, afair value hedge, along throughout the month, rather than all being read at the end of the month. Unbilled with the loss or gain on the hedged asset or liability that isattributable to the revenues for amonth are calculated by multiplying an estimate of unbilled kWh hedged risk, are recorded incurrent-period earnings. Changes in the fair value by the estimated average cents per kWh. Unbilled wholesale energy revenues of aderivative that is highly effective as, and is designated as and qualifies as, are recorded at month-end to reflect estimated amounts until actual dollars and a cash flow hedge are recorded inother comprehensive income, until earnings MWhs are confirmed and invoiced. At that time, unbilled revenue is reversed are affected by the variability of cash flows being hedged. Changes in the fair and actual revenue isrecorded. value of derivatives that are designated as and qualify as foreign currency "Energy related businesses' revenue includes revenues from the mechanical hedges are recorded ineither current-period earnings or other comprehensive contracting and engineering subsidiaries and PPL Global's proportionate share income, depending on whether the hedge transaction is afair value hedge or of affiliate earnings under the equity or cost method of accounting, as described a cash flow hedge. Ii aderivative is used as ahedge of anet investment ina inthe "Business and Consolidation' section of Note 1.The mechanical contract-foreign operation, its changes infair value, to the extent effective as ahedge, ing and engineering subsidiaries record profits from construction contracts are recorded within other comprehensive income. Changes inthe fair value on the percentage-of-completion method of accounting. Income from time and of derivatives that are not designated as hedging instruments are reported material contracts is recognized currently as the work is performed. incurrent-period earnings. Unrealized gains and losses from changes inmarket prices of energy con- Utility Revenue tracts accounted for as fair value hedges are reflected in'Energy purchases' The Statement of Income 'Utility' line item contains revenues from domestic on the Statement of Income, as are changes inthe underlying positions. and international rate-regulated delivery operations. Realized gains and losses from energy contracts accounted for as fair value WPD revenues are stated net of value-added tax. hedges or cash flow hedges, when recognized on the Statement of Income, Income Taxes are reflected in'Wholesale energy marketing' revenues, 'Fuel,' or 'Energy The income tax provision for PPL and its subsidiaries is calculated in accor-purchases,' consistent with the hedged item. Gains and losses from interest dance with SFAS 109, "Accounting for Income Taxes." PPL and its domestic rate and foreign currency derivative contracts that hedge interest payments, subsidiaries file aconsolidated U.S. federal income tax return. when recognized on the Statement of Income, are accounted for in Interest Significant management judgment is required indeveloping PPUs provision Expense.' Gains and losses from foreign currency derivative contracts that for income taxes, including the determination of deferred tax assets and liabili-economically hedge foreign earnings translation are recognized in'Other ties and any valuation allowances that might be required against the deferred Income - net.' Gains and losses from foreign currency derivative contracts tax assets. PPL and its subsidiaries record valuation allowances to reduce that hedge foreign currency payments for equipment, when recognized on the deferred tax assets to the amounts that are more likely than not to be realized. Statement of Income, are accounted for in 'Depreciation.' PPL and its subsidiaries have considered future taxable income and ongoing Inthe fourth quarter of 2002, PPL adopted the accounting requirements prudent and feasible tax planning strategies inassessing the need for valuation under EITF 02-3, 'Issues Involved inAccounting for Derivative Contracts allowances. It PPL and its subsidiaries determined that they would be able to Held for Trading Purposes and Contracts Involved inEnergy Trading and Risk realize deferred tax assets in the future inexcess of net deferred tax assets, Management Activities.' As such, PPL reflects its net realized and unreal-adjustments to the deferred tax assets would increase income by reducing tax ized gains and losses associated with all derivatives that are held for trading expense inthe period that such determination was made. Likewise, if PPL and purposes inthe 'Net energy trading margins' line on the Statement of Income. its subsidiaries determined that they would not be able to realize all or part of Non-derivative contracts that met the definition of energy trading activities as net deferred tax assets inthe future, adjustments to the deferred tax assets defined by EITF 98-10, 'Accounting for Energy Trading and Risk Management would decrease income by increasing tax expense inthe period that such Activities' are reflected inthe financial statements using the accrual method determination was made. of accounting. Prior periods were restated. Annual tax provisions include amounts considered sufficient to pay PPL adopted the final provisions of EITF 03-11, "Reporting Realized Gains assessments that may result from examination by taxing authorities of prior and Losses on Derivative Instruments That Are Subject to FASB Statement year tax returns; however, the amount ultimately paid upon resolution of No. 133 and Not Held for Trading Purposes' as Defined in Issue No. 02-3,- issues raised by such authorities may differ materially from the amount prospectively as of October 1,2003. As aresult of the adoption, non-trading 56 PPL CORPORATION 2004 ANNUAL REPORT
accrued and may materially impact PPLs financial statements. Inevaluating Prior to 2003, PPL accounted for stock-based compensation inaccordance the exposure associated with various tax filing positions. PPL and its subsid- with APB Opinion No. 25, as permitted by SFAS 123. Effective January 1, iaries accrue charges for probable exposures based on management's best 2003, PPL and its subsidiaries adopted the fair value method of accounting estimate of the amount that should be recognized. PPL and its subsidiaries for stock-based compensation, as prescribed by SFAS 123, using the prospec-maintain an allowance for tax contingencies, the balance of which manage- tive method of transition permitted by SFAS 148, 'Accounting for Stock-ment believes to be adequate. Based Compensation - Transition and Disclosure, an Amendment of FASB PPL Energy Supply and PPL Electric deferred Investment tax credits when Statement No. 123. The prospective method of transition requires PPL and its they were utilized and are amortizing the deferrals over the average lives of the subsidiaries to use the fair value method under SFAS 123 for all stock-based related assets. See Note 5for additional discussion regarding income taxes. compensation awards granted, modified or settled on or after January 1, 2003. The provision for PPL Electric's deferred income taxes for regulated assets Thus, all awards granted prior to January 1,2003, continue to be accounted is based upon the ratemaking principles reflected inrates established by the for under the intrinsic value method of APB Opinion No. 25, to the extent such PUC and the FERC. The difference inthe provision for deferred income taxes awards are not modified or settled. Stock-based compensation isrecognized for regulated assets and the amount that otherwise would be recorded under on astraight-line basis over the vesting period of the awards and IsIncluded in U.S. GAAP Isdeferred and included intaxes recoverable through future rates Other operation and maintenance expense on PPLs Statement of Income. in 'Regulatory and Other Noncurrent Assets - Other on the Balance Sheet. Use of the fair value method prescribed by SFAS 123 requires PPL and See Note 5for additional information. its subsidiaries to recognize compensation expense for stock options issued. Fair value for the stock options is determined using the Black-Scholes options Leases pricing model. PPL and its subsidiaries apply the provisions of SFAS 13, Accounting for PPL and its subsidiaries were not required to recognize compensation Leases,' as amended and interpreted, to all transactions that qualify for lease expense for stock options issued and accounted for under the intrinsic value accounting. See Note 10 for a discussion of accounting for leases under which method of APB Opinion No. 25, since PPL grants stock options with an exer-PPL and its subsidiaries are lessees. cise price that is not less than the fair market value of PPL's common stock on In2002, PPL began commercial operation of its 79.9 MW oil-powered the date of grant. For stock options granted and accounted for under the fair station in Shoreham, New York. The Long Island Power Authority has con-value method of SFAS 123, stock option expense for PPL was approximately tracted to purchase all of the plant's capacity and ancillary services as part
$6million for 2004 and $3million for 2003. As currently structured, awards of a 15-year power purchase agreement with PPL EnergyPlus. The capacity of restricted stock, restricted stock units and stock units result inthe same payments inthe power purchase agreement result inthe plant being classi-amount of compensation expense under the fair value method of SFAS 123 fied as a direct financing lease, under which PPL EnergyPlus is the lessor. In as they would under the intrinsic value method of APB Opinion No. 25.
December 2004, PPL recorded asales-type lease related to an 8 MW on-site See Note 23 for adiscussion of SFAS 123 (revised 2004), Share-Based electrical generation plant, under which asubsidiary of PPL Energy Supply Payment. See Note 11 for a discussion of stock-based compensation. is the lessor. The following table illustrates the pro forma effect on net income and EPS As of December 31, 2004 and 2003, PPL had receivable balances of as ifthe fair value method had been used to account for all outstanding stock-
$273 million and $277 million (included in Current Assets - Other and based compensation awards inthe years shown: 'Regulatory and Other Noncurrent Assets - Other') and unearned revenue balances of $158 million and $167 million (included in 'Deferred Credits 2004 2003 2002 and Other Noncurrent Liabilities - Other'). The receivable balances Include Net Income Net Income - as reported $ 698 $ 734 $ 208 $65 million of an unguaranteed residual value. Rental income received during Add: Stock-based employee compensation 2004 2003 and 2002 was $14 million, $15 million and $5million. Total expense Included inreported net income, future minimum lease payments expected to be received on both leases are net of tax 8 5 3 estimated at $16 million for each of the years from 2005 through 2009. Deduct Total stock-based compensation expense determined under the fair value methodfor all awards, netoftax 10 9 8 Stock-Based Compensation Pro forma Net Income $ 696 $ 730 $ 203 PPL grants stock options, restricted stock, restricted stock units and stock units to employees and directors under several stock-based compensation EPS Basic - asreported $3.79 $4.25 $1.37 plans. SFAS 123, Accounting for Stock-Based Compensation,' encourages Basic-pro forma $3.78 S4.23 $1.34 entities to record compensation expense for stock-based compensation plans Diluted -as reported $3.77 $4.24 $1.36 at fair value but provides the option of measuring compensation expense using Diluted-pro torma $3.76 S4.22 $1.33 the intrinsic value method prescribed by APB Opinion No. 25, 'Accounting for Stock Issued to Employees! The fair value method under SFAS 123 isthe preferable method of accounting for stock-based compensation, as it provides a consistent basis of accounting for all stock-based awards, thereby facilitating a better measure of compensation cost and improved financial reporting.
PPL CORPORATION 2004 ANNUAL REPORT 57
Notes to Consolidated Financial Statements Pension and Other Postretirement Benefits Gains or losses relating to foreign currency transactions are recognized PPL and certain of its subsidiaries sponsor various pension and other post- currently in income. The aggregate transaction gain (loss) was an insignificant retirement and postemployment benefit plans. PPL follows the guidance of amount in2004, $(1) million in 2003 and $(9) million in2002. SFAS 87, 'Employers' Accounting for Pensions,' and SFAS 106, 'Employers' Independent System Operator Accounting for Postretirement Benefits Other Than Pensions,' when account-Certain PPL subsidiaries participate in PJM inseveral roles. Certain PPL sub-ing for these benefits. sidiaries also participate inthe New England ISO (ISO-NE) and the New York PPL and certain of its subsidiaries also provide supplemental retirement ISO (NYISO) in aless significant way than in PJM. InPJM, PPL EnergyPlus is benefits to directors, executives and other key management employees through amarketer, a load-serving entity to its customers who selected it as asupplier unfunded nonqualified retirement plans. under the Customer Choice Act and aseller for PPLs generation subsidiaries. The majority of employees of PP's domestic subsidiaries will become PPL Electric is atransmission owner and provider of last resort inPJM. In eligible for certain health care and life insurance benefits upon retirement ISO-NE, PPL EnergyPlus is amarketer, aload-serving entity, and a seller for through contributory plans. Postretirement benefits under the PPL Retiree PPLs New England generating assets. Inthe NYISO, PPL EnergyPlus acts as Health Plans (covering retirees of PPL Electric and various other affiliated PPL amarketer. PPL Electric does not participate inISO-NE or NYISO. companies) and certain employees of PPL Gas Utilities are paid from funded Afunction of interchange accounting is to match participants' MWh VEBA trusts sponsored by the respective companies. entitlements (generation plus scheduled bilateral purchases) against their See Note 12 for adiscussion of pension and other postretirement benefits. MWh obligations (load plus scheduled bilateral sales) during every hour of Comprehensive Income every day. If the net result during any given hour is an entitlement, the par-Comprehensive income consists of net income and other comprehensive ticipant is credited with aspot market sale to the ISO at the respective market income, defined as changes incommon equity from transactions not related price for that hour; if the net result isan obligation, the participant is charged to shareowners. Other comprehensive income consists of foreign currency with aspot market purchase from the ISO at the respective market price for translation adjustments recorded by PPL Global, unrealized gains or losses that hour. ISO purchases and sales are not allocated to individual customers. on available-for-sale securities and qualifying derivatives, and the excess of PPL records the hourly net sales and purchases inits financial statements additional pension liability over unamortized prior service costs, net of taxes. as sales to and purchases from the respective ISOs, in accordance with the Comprehensive income is reflected on the PPL Statement of Shareowners FERC and industry accounting. Common Equity and Comprehensive Income, and 'Accumulated other com-Reclassiflcations prehensive loss' is presented on the PPL Balance Sheet. Certain amounts in the 2003 and 2002 financial statements have been The accumulated other comprehensive loss of PPL consisted of the reclassified to conform to the current presentation. The reclassifications did following after tax amounts at December 31: not alfect net income or total equity. 2004 2003 Foreign currency translation adjustments $ 75 S(37 New Accounting Standards Net unrealized gains on available-for-sale securities 40 20 See Note 23 for adiscussion of new accounting standards adopted in2004 Minimum pension liability (369) (316) or pending adoption. Unrealized gains (losses) on qualifying derivatives (69) 36 5(323) $(297)
- 2. Segment and Related Information Treasury Stock Treasury shares are reflected on the balance sheet as an offset to common PPUs reportable segments are Supply, Delivery and International. The Supply equity under the cost method of accounting. Management has no definitive segment primarily consists of the domestic energy marketing, domestic plans for the future use of these shares. Treasury shares are not considered generation and domestic development operations of PPL Energy Supply. The outstanding incalculating EPS. At December 31, 2004 and 2003, PPL had Delivery segment includes the regulated electric and gas delivery operations 31,045,853 and 31,019,352 shares of treasury stock outstanding. of PPL Electric and PPL Gas Utilities. The International segment includes operations of the international energy businesses of PPL Global. The majority Foreign Currency Translation and Transactions of PPL Global's international businesses are located inthe U.K., Chile, Assets and liabilities of international operations, where the local currency is El Salvador and Bolivia.
the functional currency, are translated at year-end exchange rates, and related Segments include direct charges, as well as an allocation of indirect corpo-revenues and expenses are translated at average exchange rates prevailing rate costs, for services provided by PPL Services. These service costs include during the year. Adjustments resulting from translation are recorded inaccu- functions such as financial, legal, human resources and information services. mulated other comprehensive loss. 58 PPL CORPORATION 2004 ANNUAL REPORT
Financial data for the segments are as follows: 2004 2003 2002 2004 2003 2002 Cash Flow Data Expenditures for properly, plant and equipment Income Statement Data Supply $228 $270 $291 Revenues from external customers Delivery 196 251 237 Supply $1,846 $1.804 $1,707 International 279 246 113 Delivery 2,869 2,778 2,706 International 1.097 1,014 1.078 703 767 641 Investment ingenerating assets 5,812 5.596 5,491 and electric energy projects Intersegment revenues Supply 31 261 Supply 1,500 1,444 1.431 International " 211 Delivery 157 160 183 Equity Inearnings of unconsolidated affiliates $ 31 $ $472 Supply (10) (14) (12) As ofDecember 31. 2004 2003 International 2 3 3 Balance Sheet Data (8) (11) (9) Net investment inunconsolidated affiliates - atequity Depreciation Supply $ 36 $ 48 Supply 152 120 129 International 15 26 Delivery 114 110 100 International 146 150 138 51 74 Total assets 412 380 367 Supply 6,673 6,491 Amortizations - recoverable transition Delivery 5,698 5,690 costs and other International 5,390 4,942 Supply (25) (27) (38) Delivery 267 271 236 $17,761 $17.123 242 244 198 2004 2003 2002 Interest income Supply 15 (2) (5) Geographic Data Delivery 16 7 20 Revenues from external customers International 8 7 13 Domestic $4,715 $4,582 $4,413 Foreign 1,097 1,014 1,078 39 12 28 Interest expense $5,812 $5,596 $5,491 Supply 124 41 107 Delivery 196 214 214 As of December31, 2004 2003 International 203 218 239 A71 91 r Property, plant and equipment - net
--- Domestic $ 7,359 S 7.219 Income taxes - total Supply 119 177 119 Foreign 3,850 3,374 Delivery 17 23 24 $11,209 S10,593 International 59 (30) 67 (a) 2003 Includes two cumulative-effect changes inaccounting principle recorded InJanuary 195 170 210 and December 2003. See Notes 21and 22 for additional information.
Deferred income taxes and Investment tax credits (b) 2002 Includes the cumulative-effect change inaccounting principle recorded inMarch 2002. Supply 18 19 (21) See Note 19 for additional Information. The International segment also includes the wTite-Delivery 87 22 21 downs of the CEMAR Investment recorded in March and June 2002, as described inNote 9. International 50 55 85 "c)The 2002 amount represents the acquisition of the controlling interest inWPD. 155 96 85 Net Income Supply ') 421 502 356 Delivery 80 36 48 International (1) 197 196 (196)
$ 698 $ 734 $ 208 PPL CORPORATION 2004 ANNUAL REPORT 59
Notes to Consolidated Financial Statements The basic and diluted EPS calculations, and the reconciliation of the shares
- 3. Investment in Unconsolidated (inthousands) used inthe calculations, are shown below:
Affiliates - at Equity 2004 2003 2002 Investment inunconsolidated affiliates accounted for under the equity method Income (Numerator) were as follows as of December 31 (equity ownership percentages as of Income trom continuing operations $ 700 $ 719 $ 360 Loss from discontinued operations (net of tax) (2) (20) (2) December 31, 2004): Cumulative effects of changes inaccounting 2004 2003 principles (net of tax) 35 (150) Aguaytia Energy, LLC - 11.4% S9 S 11 NetIncome $ 698 $ 734 $ 208 Bangor Pacific Hydro Associates-50.0% 15 15 Shares (Denominator) MicDos 9 Shares or Basic EPS 184,228 172,795 152,492 Sale Harbor Water Power Corporation - 33.3% 15 15 Add: Incremental shares PPL Capital Funding Trust I 18 Convertible Senior Notes 67 Other 12 6 Stock options and other share-based awards 698 597 317 Total $51 $74 Shares for Diluted EPS 184,993 173,392 152.809 The 50% investment interest in MicDos was sold inJune 2004. See Note 9 Basic EPS Income from continuing operations $ 3.80 $4.16 S2.36 for additional information. PPL no longer has its 100% interest inPPL Capital Loss from discontinued operations (net ot tax) (0.01) (0.11) (0.01) Funding Trust I as aresult of exchanges of securities involving the trust pre- Cumulative effects of changes inaccounting ferred securities inJanuary and February 2004 and the liquidation of the trust principles (net of tax) 0.20 (0.98) in March 2004. See Note 8for additional information. Net Income $ 3.79 $4.25 $1.37 APPL subsidiary has a50% interest ina partnership that owns the Griffith Diluted EPS gas-fired generation station. The partnership arrangement is essentially acost- Income trom continuing operations $ 3.78 S4.15 $2.36 sharing arrangement, inthat each of the partners has rights to one-half of the Loss trom discontinued operations (net of tax) (0.01) (0.11) (0.01) Cumulative elfects of changes inaccounting plant capacity and energy, and an obligation to cover one-half of the operating principles (net of tax) 0.20 (0.99) costs of the station. Accordingly, the equity investment is not reflected inthe Net Income $ 3.77 $4.24 $1.36 table above and is classified as 'Electric Plant inService - Generation' on the Balance Sheet. InMay 2001, PPL and PPL Capital Funding Trust I issued 23 million PEPS Units that contained apurchase contract component for PPLs common stock. The purchase contracts were only dilutive if the average price of PPUs
- 4. Earnings Per Share common stock exceeded athreshold appreciation price, which was adjusted for cash distributions on PPL common stock. The threshold appreciation price Basic EPS is calculated using the weighted-average number of common shares was initially set at $65.03 and was adjusted to $63.38 as of April 1,2004, outstanding during the period. Diluted EPS is calculated using weighted aver- based on dividends paid on PPLs common stock since issuance. The purchase age shares outstanding that are increased for additional shares that would be contracts were settled in May 2004. Since the average price did not exceed the outstanding if potentially dilutive securities were converted to common stock. threshold appreciation price, the purchase contracts were excluded from the Potentially dilutive securities consist of: diluted EPS calculations for 2004, 2003 and 2002.
- stock options, restricted stock and restricted stock units granted under InJanuary 2004, PPL completed an exchange offer resulting in the the incentive compensation plans; exchange of approximately four million PEPS Units for PEPS Units, Series B.
- stock units representing common stock granted under the directors The primary difference inthe units related to the debt component. The purchase compensation programs; contract components of both units, which were potentially dilutive, were identi-
- common stock purchase contracts that were acomponent of the PEPS cal. The threshold appreciation price for the purchase contract component of Units and PEPS Units, Series B; and the PEPS Units, Series Bwas adjusted inthe same manner as that of the PEPS
- convertible senior notes. Units and was $63.38 as aresult of the adjustment as of April 1,2004. These purchase contracts were settled in May 2004. Since the average price did not exceed the threshold appreciation price, the purchase contracts were excluded from the diluted EPS calculations for 2004. See Note 8 for amore detailed discussion of the exchange offer.
60 PPL CORPORATION 2004 ANNUAL REPORT
In May 2003, PPIL Energy Supply issued $400 million of 2.625% Convertible Senior Notes due 2023. The notes are guaranteed by PPIL and, as 5. Income and Other Taxes originally issued, could be converted into shares of PPIL common stock if: For 2004, 2003 and 2002, the statutory U.S. corporate federal income tax
- during any fiscal quarter starting after June 30, 2003, the market price of rate was 35%. The statutory corporate net income tax rate for Pennsylvania PP~s common stock trades at or above $59.67 per share over acertain was 9.99%.
period during the preceding fiscal quarter; 'Income from Continuing Operations Before Income Taxes. Minority
- PPL calls the debt for redemption; Interest and Distributions on Preferred Securities' included the following
- the holder exercises its right to put the debt on any five-year anniversary components for the years ended December 31:
of the offering; 2004 2003 2002
- the long-term credit rating assigned to the notes by Moody's Investors Domestic income $641 $727 $605 Service, Inc. and Standard & Poor's Ratings Services falls below Ba2 and Foreign income 264 198 110 BB or the notes are not rated; or
$905 $925 $715
- certain specified corporate transactions occur, e.g., change in control and certain distributions to the holders of PPIL common stock. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for accounting purposes The initial conversion rate is 20.1106 shares per $1,000 principal amount of and their basis for income tax purposes and the tax effects of net operating notes. It will be adjusted if certain specified distributions, whether inthe form loss and tax credit carryforwards.
of cash, stock, other equity interests, evidence of indebtedness or assets, are Net deferred tax assets have been recognized based on management's made lo holders of PPL common stock. Additionally, the conversion rate can be estimates of future taxable income for U.S. and certain foreign jurisdictions increased by PPIL if its Board of Directors has made adetermination that to do inwhich PP~s operations have historically been profitable. so would be inthe best interests of either PPL or holders of PPIL common stock. Significant components of PP~s deferred income tax assets and liabilities Depending upon which of the conversion events identified above occurs, from continuing operations were as follows: the Convertible Senior Notes, as originally issued, could have been settled in cash or shares. However, the notes were modified in November 2004 to require 2004 2003 cash settlement of the principal amount, permit settlement of any conversion Deferred Tax Assets Deferred investrrent tax credits $ 42 $ 4B premium incash or stock and eliminate aprovision that required settlement in NUG contracts and buybacks 135 16B stock inthe event of default. These modifications were made in response to the Accrued pension costs 86 81 FASB's ratification of EITF Issue 04-8, 'The Effect of Contingently Convertible Federal tax credit carryforw/ards 58 9 Instruments on Diluted Earnings per Share,' as well as other anticipated rules Foreign loss carryforwards 152 278 relating to EPS. See Note 23 for a discussion of EITF Issue 04-8, and Note 8 Foreign - pensions 51 67 Foreign - other 26 38 for a discussion of the consent solicitation that effected these modifications. Contribution inaid of construction 65 63 The maximum number of shares that could potentially be issued to settle Other 219 218 the conversion premium, based upon the current conversion rate, is 8,044,240 Valuation allowance (164) (293) shares. Based on PPUs common stock price at December 31, 2004, the con- 670 677 version premium equated to 536,732 shares, or approximately $29 million. Deferred Tax Llabilities As currently structured, the Convertible Senior Notes will have a dilutive Plant - net 1,291 1,073 impact when the average market price of PPL common stock exceeds the con- Restructuring - CTC 526 617 version price of $49.73. The Convertible Senior Notes did not have adilutive Taxes recoverable through future rates 115 106 impact on 2003 EPS. Reacquired debt costs 14 11 Foreign - plant 770 792 The following number of stock options to purchase PPL common shares Foreign - other 55 1 were excluded in the periods computations of diluted EPS because the effect Other domestic 62 61 would have been antidilutive. 2,833 2,661 (Thousands of Shares) 2004 2003 2002 Net deferred tax liability $2.163 $1,9B4 Antidilutive stock options 1,133 1,683 1,294 See Note 23 for adiscussion of EITF Issue 03-6 'Participating Securities and the Two-Class Method under FASB Statement No. 128, 'Earnings Per Share'.' PPL CORPORATION 2004 ANNUAL REPORT 61
Notes to Consolidated Financial Statements Details of the components of income tax expense, areconciliation of PPL had federal alternative minimum tax credit carryforwards with an federal income taxes derived from statutory tax rates applied to income from indefinite carryforward period of $58 million and $9million at December 31, continuing operations for accounting purposes, and details of taxes other 2004 and 2003. PPL also had state net operating loss carryforwards that than income are as follows: expire between 2005 and 2023 of approximately $77 million and $78 million 2004 2003 2002 at December 31, 2004 and 2003. Valuation allowances have been established Income Tax Expense for the amount that more likely than not will not be realized. Current - Federal $ 45 $ 26 $ 41 PPL Global had foreign net operating loss carryforwards of approximately Current - State (32) 13 (9) $27 million and $13 million at December 31, 2004 and 2003. PPL Global also Current - Foreign 27 35 52 had foreign capital loss carryforwards of $486 million atDecember 31, 2004 40 74 84 and $920 million at December 31, 2003. All of these losses have an unlimited Deterred - Federal 102 39 70 carryforward period. However, it is more likely than not that these losses will Deferred-State 17 24 27 not be utilized and, as such, afull valuation allowance has been provided Deterred - Foreign 51 48 44 against the related deferred lax asset. 170 111 141 PPL Global does not pay or record U.S. income taxes on the undistributed Investment tax credit, net - federal (15) (15) (15) earnings of its foreign subsidiaries where management has determined that Total income tax expense from the earnings are permanently reinvested. The cumulative undistributed earn-continuing operations $195 $170 $210 ings are included in'Earnings reinvested' on the Balance Sheet. The amounts Total income tax expense - Federal $132 S 50 $ 96 considered permanently reinvested at December 31, 2004 and 2003, were Total income tax expense- State (15) 37 18 $750 million and $530 million. Ifthe earnings were remitted as dividends, Total income tax expense - Foreign 78 83 96 PPL Global may be subject to additional U.S. taxes, net of allowable foreign Total income tax expense from continuing operations $195 $170(a) S210 tax credits. It is not practical to estimate the amount of additional taxes that might be payable on these foreign earnings.
"' Excludes $26 million of current and deterred federal and state taxexpense related to the cumulative effect of changes inaccounting principles recorded net of tax. In October 2004, President Bush signed the American Jobs Creation Act of 2004 (the Act). The Act creates a temporary incentive for U.S. corporations to In2004, 2003 and 2002. PPL realized stock option tax benefits, recorded repatriate accumulated income earned abroad by providing an 85% dividends as an increase to capital inexcess of par value, of approximately $3million, received deduction for certain dividends from controlled foreign corporations. $5million and an insignificant amount. The deduction is subject to anumber of limitations, and uncertainty remains 2004 2003 2002 as to how to interpret numerous provisions inthe Act. As such, PPL is not in Reconciliation of Income Tax Expense a position to decide on whether, and to what extent, it might repatriate foreign Indicated federal income tax on pre-tax income earnings that have not yet been remitted to the U.S. based on its analysis to before cumulative effects of changes inaccount- date. However, it is reasonably possible that PPL Energy Supply may repatriate ing principles atstatutory tax rate - 35% $ 317 $324 $250 some amount between zero and $500 million, with the respective tax liability Increase (decrease) due to:
State income taxes 11 25 11 ranging from zero to $27 million. PPL expects to be in aposition to finalize Amortization of investment tax credit (10) (10) (11) its assessment by December 31, 2005. Write-down of international energy projects (83) 14 The Act also provides, beginning in 2005, atax deduction from income for Difference related to income recognition of certain qualified domestic production activities. FSP FAS 109-1, 'Application of foreign affiliates (net of foreign income taxes) (32) (7) 18 Stranded cost securitization (22) FASB Statement No. 109, 'Accounting for Income Taxes,' to the Tax Deduction Federal income tax credits (74) (52) (50) on Qualified Production Activities Provided by the American Jobs Creation Act Contribution of property (2) (9) of 2004,- specifies that this tax deduction will be treated as aspecial deduction Other 7 (18) (22) and not as atax rate reduction. For 2004, this deduction had no effect with (122) (154) (40) respect to PPL's or deferred tax assets and liabilities associated with such Total Income tax expense from qualified domestic production activities. Additionally, as the Act specifically continuing operations $ 195 $170 $210 excludes the gross receipts from the transmission of electricity from the defini-EffectIve Income tax rate 21.5% 18.4% 29.4% tion of qualifying domestic production gross receipts, PPL Electric will not Taxes, Other than Income receive atax benefit from this new deduction. State gross receipts $156 $155 $154 Stateutilityrealty (10) 3 3 State capital stock 22 27 7 Property - foreign 54 44 42 Other - foreign 1 Domestic property and other 27 27 25
$ 250 $256 $231 62 PPL CORPORATION 2004 ANNUAL REPORT
December 31. 2003
- 6. Nuclear Decommissioning Gross Gross Unrealized Unrealized The expected cost to decommission the Susquehanna station is based on a Gains Losses FairValue 2002 site-specific study that estimated the cost to dismantle and decommis- Cash and cash equivalents $ 8 sion each unit immediately following final shutdown. PPL Susquehanna's Equity securities $42 $ (6) 215 90% share of the total estimated cost of decommissioning the Susquehanna Debt securities Govemrnment obligations 1 (6) 115 station was approximately $936 million measured in2002 dollars. This esti-Olher debt securities (1) 19 mate includes decommissioning the radiological portions of the station and Total debt securities 1 (1) 134 the cost of removal of non-radiological structures and materials.
Total $43 $(13) $357 Beginning inJanuary 1999, inaccordance with the PUC Final Order, approximately $130 million of decommissioning costs are being recovered The following table shows proceeds from and realized gains and losses on from PPL Electric's customers through the OTC over the 11-year life of the sales of securities held inthe trust: CTC rather than the remaining life of Susquehanna. The recovery includes 2004 2003 a return on unamortized decommissioning costs. Under the power supply Proceedsfromsales $113 $140 agreements between PPL Electric and PPL EnergyPlus, these revenues are Gross realized gains 3 14 passed on to PPL EnergyPlus. Similarly, these revenues are passed on to PPL Gross realized losses<') (17) (3) Susquehanna under apower supply agreement between PPL EnergyPlus and a) 2004 includes a$(10) million adjustment to the net realized gains recorded in2003. PPL Susquehanna. The adjustment was Included ingross realized losses inthis table. Effective January 1,2003, PPL adopted SFAS 143, 'Accounting for Asset Net pre-tax unrealized gains associated with current year activities Retirement Obligations.'.Accretion expense, as determined under the provi-increased accumulated other comprehensive income by $24 million ($15 mil-sions of SFAS 143, was $18 million and $16 million in2004 and 2003, and is lion after tax) and $41 million ($23 million after tax) in2004 and 2003. Net included in'Other operation and maintenance.' In2002, decommissioning pre-tax gains (losses) reclassified from accumulated other comprehensive expenses were $22 million and were recorded as acomponent of depreciation income and realized In'Other Income - net' inthe Statement of Income were expense. Accrued nuclear decommissioning expenses, as determined under
$(14) million ($(8) million after tax) and $11 million ($6 million after tax) in the provisions of SFAS 143, were $236 million and $218 million at December 31, 2004 and 2003.
2004 and 2003, and are included in'Asset Retirement Obligations.! See Prior to 2003, any trust activity was reflected on the balance sheet inthe Note 21 for additional information on SFAS 143. trust fund account and noncurrent liabilities. Beginning inJanuary 2003, upon The amounts collected for decommissioning, less applicable taxes, are adoption of SFAS 143, any realized gains and losses were recognized in 'Other deposited inexternal trust funds for investment and can be used only for Income - net.' future decommissioning costs. To the extent that the actual costs for decom-The proceeds from the sales of securities are reinvested inthe trust. These missioning exceed the amounts inthe nuclear decommissioning trust funds, funds along with deposits of amounts collected from customers are used to PPL Susquehanna would be obligated to fund 90% of the shortfall. pay income taxes and fees related to managing the trust. Due to the restricted PPL classifies investments inthe trust funds for decommissioning the nature of these investments, they are not Included incash and cash equivalents nuclear plant as available-for-sale. The following tables show the fair values of PPL. and gross unrealized gains and gross unrealized losses for the securities The government obligations and other debt securities that exist at held inthe trust funds. December 31, 2004, mature on the following schedule: December 31, 2004 Gross Gross Within I year $ 7 Unrealized Unrealized Alter 1year through 5years 44 Gains Losses Fair Value After 5years through 10 years 42 Cash and cash equivalents $ 11 After 10 years 26 Equity securities $70 279 Total maturities of debt obligations $119 Debt securities Government obligations 1 $(3) 102 PPL Susquehanna intends to file with the NRC in 2006 for 20-year Other debt securities 17 license renewals for each of the Susquehanna units. If approved, the operating Total debt securities 1 (3) 119 licenses would be extended from 2022 to 2042 for Unit 1 and from 2024 to Total $71 $(3) $409 2044 for Unit 2. PPL CORPORATION 2004 ANNUAL REPORT 63
Notes to Consolidated Financial Statements The subsidiaries of PPL are separate legal entities. PPL's subsidiaries are
- 7. Financial Instruments not liable for the debts of PPL. Accordingly, creditors of PPL may not satisfy At December 31, 2004 and 2003, the carrying value of cash and cash equiva- their debts from the assets of the subsidiaries absent a specific contractual lents, investments inthe nuclear decommissioning trust funds, other invest- undertaking by a subsidiary to pay PPUs creditors or as required by applicable ments and short-term debt approximated fair value due to the short-term law or regulation. Similarly, absent aspecific contractual undertaking or as nature of the instruments, variable interest rates associated with the financial required by applicable law or regulation, PPL is not liable for the debts of instruments or the carrying value of the instruments being based on estab- its subsidiaries. Accordingly, creditors of PPLs subsidiaries may not satisfy lished market prices. Price risk management assets and liabilities are valued their debts from the assets of PPL absent aspecific contractual undertaking using either exchange-traded market quotes or prices obtained through third- by PPL to pay the creditors of its subsidiaries or as required by applicable party brokers and are recorded at fair value. Financial instruments where the law or regulation.
carrying amount on the Balance Sheet and the estimated fair value (based on Financing Activities quoted market prices for the securities where available and estimates based PEPS Units Transactions on current rates where quoted market prices are not available) are different, InNovember 2003, PPL initiated an offer to exchange up to $573 million of are set forth below: its outstanding PEPS Units for up to $573 million of its PEPS Units, Series B December 31, 2004 December 31, 2003 and acash payment by PPL of $0.375 for each validly tendered and accepted Carrying Carrying outstanding PEPS Unit. See Note 22 for adiscussion of the PEPS Units. The Amount FaIr Value Amount Fair Value exchange offer, which closed inJanuary 2004, resulted in$99 million, or Long-term debt $7,658 $8,141 $7,859 $8,443 Long-term debt with affiliate trusts 89 84 681 612 17.28%, of the outstanding PEPS Units being exchanged. InFebruary 2004, pursuant to the terms of the PEPS Units, PPL remar-keted $257 million of the PPL Capital Funding Trust I trust preferred securities that were acomponent of the PEPS Units. The trust preferred securities were
- 8. Credit Arrangements and remarketed at a price of 107.284% of their aggregate stated liquidation amount, Financing Activities resulting inayield to maturity of 3.912% based on the reset distribution rate of 7.29% per annum. Under the terms of the PEPS Units, holders were entitled to Credit Arrangements surrender their trust preferred securities for remarketing inorder to settle the InFebruary 2004, PPL Energy Supply reduced the size of its $500 million purchase contract component of the PEPS Units inMay 2004. Holders of an three-year credit facility expiring inJune 2004 to $200 million. InJune 2004, aggregate of $218 million of the trust preferred securities elected not to partici-PPL Energy Supply replaced this facility and its $300 million three-year pate inthe remarketing. Those holders retained their trust preferred securities facility expiring inJune 2005 with an $800 million five-year facility expiring at adistribution rate of 7.29% per annum.
inJune 2009. PPL Energy Supply also has a $300 million three-year credit Additionally, inFebruary 2004, PPL Capital Funding issued $201 million facility that expires inJune 2006. Also inJune 2004, PPL Electric replaced of senior unsecured notes guaranteed by PPL inexchange for $185 million of its $200 million 364-day facility expiring inJune 2004 with a$200 million the trust preferred securities of PPL Capital Funding Trust I and apayment of five-year facility expiring inJune 2009. PPL Electric also has a$100 million
$400,000 incash. The senior notes bear interest at a rate of 4.33% per year three-year credit facility that expires in June 2006. At December 31, 2004, no that is payable semi-annually on March 1and September 1of each year, from cash borrowings were outstanding under any credit facilities of PPL Electric or September 1,2004, through the maturity date of March 1,2009. The senior PPL Energy Supply. Both PPL Electric and PPL Energy Supply have the ability notes are not redeemable by PPL or PPL Capital Funding, and the holders will to cause the lenders under their respective facilities to Issue letters of credit.
not be entitled to require PPL or PPL Capital Funding to repurchase the senior At December 31, 2004, PPL Electric had no letters of credit outstanding under notes before maturity. The senior notes were issued inan SEC Rule 144A its credit facilities, and PPL Energy Supply had $250 million of letters of private offering to qualified institutional buyers and were exchanged in full for credit outstanding under its credit facilities. senior notes registered with the SEC pursuant to an exchange offer completed In December 2004, WPD (South West) borrowed £108 million (approxi-by PPL and PPL Capital Funding inJuly 2004. The registered senior notes mately $208 million at current exchange rates) under its credit facilities. This issued pursuant to the exchange offer have the same terms as the senior notes is not reflected on the Balance Sheet at December 31, 2004, due to the one-issued in the 144A private offering. month reporting lag. In October 2004, WPD (South West) replaced its expiring The January and February 2004 exchanges resulted inthe cancellation
£100 million 364-day credit facility expiring inOctober 2004 with a £100 mil-of an aggregate of $284 million of the trust preferred securities and an aggre-lion 364-day credit facility expiring inOctober 2005, extended its £150 million gate of $9million of PPL Capital Funding Trust I's common securities held five-year credit facility to October 2009 and added a£150 million three-year by PPL Capital Funding, as well as acorresponding cancellation of the credit facility expiring inOctober 2007. WPD also has a£2.5 million uncom-mitted borrowing line, which has £1.275 million (approximately $2million at current exchange rates) of letters of credit outstanding.
64 PPL CORPORATION 2004 ANNUAL REPORT
$293 million of PPL Capital Funding 129% subordinated notes due 2006 InSeptember 2004, asubsidiary of PPL Gas Utilities repurchased all underlying these trust securities. The cancellation of the underlying PPL remaining $2million of its outstanding 9.64% Notes due 2010 at an approxi-Capital Funding subordinated notes together with the issuance of the new mately equivalent market value. PPL Capital Funding debt, as aresult of the exchanges, resulted ina net InNovember 2004, PPL Capital Funding retired $100 million of its 6.79% decrease of $9million of long-term debt, including 'Long-term Debt with Medium Term Notes due November 2004 at par value. Affiliate Trusts, .as reflected inthe Balance Sheet. Following these exchanges, During 2004, aBolivian subsidiary of PPL Global issued $13 million of there remained outstanding $290 million of trust preferred securities and bonds with interest rates varying from 6.8% to 7.4% and serial maturities from $9million of trust common securities, as well as $299 million of underlying December 2005 to December 2008. Inaddition, the PPL Global subsidiary PPL Capital Funding 7.29% subordinated notes due 2006. issued bonds denominated in UFVs (inflation-indexed bolivianos) totaling In March 2004, PPL liquidated PPL Capital Funding Trust 1,resulting in 72.3 million bolivianos (approximately $9million at current exchange rates) the cancellation of all of the outstanding trust preferred securities and the trust with interest rates ranging from 8%to 9%and with maturities inDecember common securities. Inexchange for the cancellation of the trust securities, PPL 2007 and May 2010. The proceeds of both issuances were used to repay Capital Funding Trust I caused $290 million of underlying PPL Capital Funding intercompany loans, short-term bank borrowings, and $9million of its multi-7.29% subordinated notes due 2006 to be distributed to the holders of the trust currency denominated Inter-American Development Bank note maturing in preferred securities and $9million of PPL Capital Funding 7.29% subordinated November 2009. notes due 2006, held by the trust, to be cancelled. The impact to PPL Capital InAugust 2004, PPL Energy Supply issued $300 million of 5.4% Senior Funding as aresult of these cancellations was an additional net decrease of Notes maturing inAugust 2014. These securities were issued under PPL $9million of long-term debt, including 'Long-term Debt with Affiliate Trusts,' Energy Supply's existing shelf registration statement on file with the SEC. The as reflected in the Balance Sheet. proceeds of the notes will be applied to the repayment at maturity of approxi-In May 2004, pursuant to the terms of the PEPS Units, Series B,PPL remar- mately $320 million of PPL Capital Funding's 7-3/4% Medium-term Notes keted approximately $99 million of the PPL Capital Funding notes due 2006 that that are due inApril 2005. PPL EnergyPlus currently is using the proceeds were acomponent of the PEPS Units, Series B.The notes were remarketed at a to satisfy its collateral obligation under one of its PLR contracts with PPL price of 100.5% of their aggregate principal amount with afloating reset interest Electric. See Note 15 for adiscussion of the collateral requirement under this rate initially equal to 2.31%, which isthree-month LIBOR plus a spread of 105 PLR contract. basis points, or 1.05%. Interest on the notes resets quarterly at three-month InNovember 2004, PPL and PPL Energy Supply successfully completed LIBOR plus aspread of 105 basis points, and is payable quarterly from May 18, their solicitation of consents from the holders of PPL Energy Supply's out-2004. through, but excluding, the maturity date of May 18, 2006. Under the standing $400 million 2.625% Convertible Senior Notes due 2023 to amend terms of the PEPS Units, Series B,holders were entitled to surrender their PPL certain provisions of the Indenture dated May 21, 2003, pursuant to which the Capital Funding notes for remarketing inorder to settle the purchase contract Convertible Senior Notes were issued. The purpose of the consent solicita-component of the PEPS Units, Series BinMay 2004. tion was to modify the terms of the Convertible Senior Notes inresponse to The purchase contract component of the PEPS Units and the PEPS Units, changes to the calculation of diluted EPS resulting from EITF Issue 04-8, 'The Series Bsettled inMay 2004. Pursuant to the settlement of the purchase Effect of Contingently Convertible Instruments on Diluted Earnings per Share,' contracts, PPL issued an aggregate of approximately 11 million shares of its as well as other anticipated rules relating to EPS. See Note 23 for adiscussion common stock and received aggregate proceeds of approximately $575 million. of EITF Issue 04-8 and additional information. InJune 2004, subsidiaries of PPL Energy Supply used these proceeds and InDecember 2004, PPL Energy Supply reactivated its commercial paper cash on hand to purchase, for approximately $660 million, the Sundance and program to provide an additional financing source to fund its short-term liquid-University Park generation assets that it had been leasing, through asynthetic ity needs, If and when necessary or appropriate. lease arrangement, from atrust that was consolidated by PPL Energy Supply At December 31, 2004, PPL Energy Supply had no commercial paper out-inaccordance with FIN 46, 'Consolidation of Variable Interest Entities, an standing under its commercial paper program, and PPL Energy Supply currently Interpretation of ARB No. 51.- See Note 22 for adiscussion of FIN 46. Under has no plans to access the commercial paper market inthe near-term. the terms of the synthetic lease arrangement, the PPL Energy Supply subsid- InDecember 2004, WPD retired $178 million of its 6.75% Unsecured iary had the right at any time to purchase these assets for an amount sufficient Bonds, which will be reflected inthe 2005 Financial Statements due to the to pay oft the consolidated trust's related financing, including accrued and one-month reporting lag. unpaid interest. Repayment of the consolidated trust's debt resulted ina loss InMarch 2004, PPL Electric retired approximately $25 million of its out-of approximately $9million pre-tax, which is reflected in 'Interest Expense.! standing First Mortgage Bonds, 6.875% Series due March 2004, at par value. Also inMarch, PPL Electric redeemed approximately $6million aggregate OtherFinancingActivities principal amount of its First Mortgage Bonds, 7.30% Series due 2024, at par InApril 2004, PPL Capital Funding repurchased $4million of its 8-3/8% value, through the application of cash deposited with the trustee to release Medium-term Notes due 2007 at amarket value of approximately $5million. certain transmission lines and other equipment from the lien of the 1945 First This repurchase resulted inaloss of approximately $1million pre-tax, which Mortgage Bond Indenture. is reflected in'Interest Expense.' PPL CORPORATION 2004 ANNUAL REPORT 65
Notes to Consolidated Financial Statements InApril 2004, PPL Electric completed an offer to repurchase its outstand- Dividends and Dividend Restrictions ing First Mortgage Bonds, 6-1/2% Series due 2005. Pursuant to the offer, PPL In February 2004, PPL announced an increase to its quarterly common stock Electric repurchased approximately $41 million of the bonds at amarket value dividend, effective April 1,2004, from 38.5 cents per share to 41 cents per of $43 million. PPL Electric also repurchased inthe open market $45 million share (equivalent to $1.64 per annum). InFebruary 2005, PPL announced of 5-7/8% Senior Secured Bonds and $14 million of 6-1/4% Senior Secured an increase to its quarterly common stock dividend payable April 1,2005, to Bonds at market values of $48 million and $16 million, respectively. These 46 cents per share (equivalent to $1.84 per annum). Future dividends, declared repurchases resulted ina loss of approximately $7million pre-tax, which is at the discretion of the Board of Directors, will be dependent upon future earn-reflected inother noncurrent assets as an unamortized loss on reacquired ings, cash flows, financial requirements and other factors. debt. The purpose of the repurchases was to reduce future interest expense. The PPL Montana Colstrip lease places certain restrictions on PPL In August 2004, PPL Electric began participating inan asset-backed Montana's ability to declare dividends. At this time, PPL believes that these commercial paper program through which PPL Electric obtains financing by covenants will not limit PPL's or PPL Energy Supply's ability to operate as selling and contributing its eligible accounts receivable and unbilled revenue desired and will not affect their ability to meet any of their cash obligations. to aspecial purpose, wholly owned subsidiary on an ongoing basis. The Certain of PPL Global's international subsidiaries also have financing arrange-subsidiary has pledged these assets to secure loans from acommercial paper ments which limit their ability to pay dividends. However, PPL does not, at conduit sponsored by afinancial institution. PPL Electric expects to use the this time, expect that any of such limitations would significantly impact PPUs proceeds from the credit agreement for general corporate purposes and to or PPL Energy Supply's ability to meet their cash obligations. cash collateralize letters of credit. The subsidiary's borrowing limit under this PPL Electric's 2001 Senior Secured Bond Indenture restricts dividend pay-credit agreement is $150 million, and interest under the credit agreement var- ments inthe event that PPL Electric fails to meet interest coverage ratios or fails ies based on the commercial paper conduit's actual cost to issue commercial to comply with certain requirements included inits Articles of Incorporation paper that supports the debt. At December 31, 2004, $96 million of accounts and Bylaws to maintain its separateness from PPL and PPLs other subsidiaries. receivable and $128 million of unbilled revenue were pledged under the credit PPL Electric does not, at this time, expect that any of such limitations would agreement. At December 31, 2004, there was $42 million of short-term debt significantly impact its ability to declare dividends. outstanding under the credit agreement at an interest rate of 2.33%, with such Mandatorily Redeemable Securities debt being used to cash collateralize letters of credit issued on PPL Electric's On July 1,2003, PPL adopted the provisions of SFAS 150, 'Accounting for behalf. At December 31, 2004, based on the accounts receivables and unbilled Certain Financial Instruments with Characteristics of Both Liabilities and revenues pledged, an additional $100 million was available for borrowing. The Equity.' As a result, PPL changed its classification of the trust preferred funds used to cash collateralize the letters of credit are reported in 'Restricted securities of PPL Capital Funding Trust I, which were issued as acomponent cash' on the Balance Sheet. PPL Electric's sale to its subsidiary of the of the PEPS Units, PPL Energy Supply changed its classification of the trust accounts receivable and unbilled revenue is an absolute sale of the assets, and preferred securities issued by SIUK Capital Trust I and PPL Electric changed PPL Electric does not retain an interest inthese assets. However, for financial its classification of its preferred stock with sinking fund requirements. Under reporting purposes, the subsidiary's financial results are consolidated in PPL SFAS 150, these securities were required to be classified as liabilities instead Electric's financial statements. PPL Electric will continue to perform certain of 'mezzanine" equity on the balance sheet because they were considered record-keeping and cash collection functions with respect to the assets in mandatorily redeemable securities. As of December 31, 2004 and 2003 no return for aservicing fee from the subsidiary. PPL Electric expects the subsid-amounts were included inlong-term debt for any of these securities because of iary to renew the credit agreement on an annual basis. the following: PPL deconsolidated PPL Capital Funding Trust I inaccordance In2004, PPL Transition Bond Company made principal payments on tran-with FASB Interpretation No.46, 'Consolidation of Variable Interest Entities, sition bonds totaling $264 million. an Interpretation of ARB No. 51," effective December 31, 2003 and terminated At December 31, 2004, PPL Electric had no commercial paper outstanding the trust in2004; PPL Energy Supply deconsolidated SIUK Capital Trust I in under its commercial paper program. accordance with FIN 46 effective December 31, 2003; and there was no pre-InFebruary 2005, the Lehigh County Industrial Development Authority ferred stock with sinking fund requirements of PPL Electric outstanding (due to (LCIDA) issued $115.5 million of 4.70% Pollution Control Revenue Refunding preferred stock redemptions). See Note 22 for adiscussion of the deconsolida-Bonds due 2029 on behalf of PPL Electric. The proceeds of the LCIDA bonds tion of the trusts. As a result of the deconsolidation of the trusts, the subor-will be used inMarch 2005 to refund the LCIDA's $115.5 million of 6.40% dinated debt securities that support the trust preferred securities, rather than Pollution Control Revenue Refunding Bonds due 2029. PPL Electric has the trust preferred securities themselves, are reflected in long-term debt as of entered into a loan agreement with the LCIDA pursuant to which the LCIDA has December 31, 2004 and 2003 to the extent they were still outstanding. loaned to PPL Electric the proceeds of the LCIDA bonds on payment terms that SFAS 150 also required the distributions on these mandatorily redeemable correspond to the LCIDA bonds. The scheduled principal and interest payments securities to be included as acomponent of 'Interest Expense' instead of on the LCIDA bonds are insured. Inorder to secure its obligations to the insur-
"Distributions on Preferred Securities' inthe Statement of Income, effective ance provider, PPL Electric issued $115.5 million aggregate principal amount July 1,2003. 'Interest Expense' for 2003 includes distributions on these secu-of its Senior Secured Bonds (under its 2001 Senior Secured Bond Indenture),
rities totaling $27 million for PPL. As a result of the adoption of FIN 46 by PPL, which also have payment terms that correspond to the LCIDA bonds. 66 PPL CORPORATION 2004 ANNUAL REPORT
no amount is reflected in 'Interest Expense for these mandatorily redeemable The turbine upgrade for PPL Susquehanna Unit 1was completed in securities in2004. Periods ending prior to July 1,2003, were not restated April 2004. This project provides a nominal power increase of 49 MW of to conform to these presentations since SFAS 150 specifically prohibits the generation capacity, of which PPL Susquehanna has a90% undivided interest. restatement of financial statements for periods prior to its adoption. Through December 31, 2004, approximately $82 million had been incurred on the Unit 1upgrade. InMay 2004, the 582 MW Lower Mt. Bethel plant ineastern Pennsylvania
- 9. Acquisitions, Development and was placed in service. Construction of the natural gas-fired power plant began Divestitures inDecember 2001. Through December 31, 2004, approximately $459 million had been capitalized inconnection with the original plant construction.
Domestic Generation Projects During 2004, asubsidiary of PPL Energy Supply placed inservice 11 MW In 2002, PPL Global evaluated its options with respect to six unassigned of distributed generation generating capacity to serve commercial and indus-turbines and other related equipment that were complete or substantially trial customers under long-term agreements. complete. These units were intended to be used at the Kings Park site on Long See Note 8for a discussion of the June 2004 purchase of the Sundance Island, New York. At that time, given low energy prices and the unavailability of and University Park generation assets from alessor trust consolidated by apower contract, PPL Global was reevaluating its options with respect to the PPL Energy Supply. Kings Park project. InJune 2004, asubsidiary of PPL Generation agreed to sell the 450 MW Due to the uncertainty of the project and the absence of other viable Sundance power plant located inPinal County, Arizona, to Arizona Public projects, avaluation based upon replacement costs of the turbines and the Service Company (APS) for approximately $190 million incash, subject to other related equipment was completed. This resulted inthe recognition of a the receipt of various state and federal regulatory approvals and customary $44 million impairment charge in 2002, which is reported on the Statement of closing conditions. InJanuary 2005, each party waived the remaining con-Income as 'Write-down of generation assets,' acomponent of 'Other charges. tractual obligation for approval by the state regulator, the Arizona Corporation Adeferred income tax benefit of $18 million was recognized on the write-down. Commission. The sale still requires approvals by the FERC under the Federal InJanuary 2003, PPL announced that it had decided not to proceed with Power Act. PPL estimates that a loss on sale or impairment charge of about development of the 300 MW Kings Park project. In March 2003, PPL Global $47 million after tax, or $0.25 per share, could be recorded in 2005 depending sold its interest inKings Park Energy, LLC. At that time, the six unassigned gas on the timing and likelihood of obtaining FERC approvals. PPL cannot predict combustion turbine generators and other related equipment to be used at the whether or when the FERC approvals for this transaction will be obtained. Kings Park site were transferred to PPL Generation and retained as spare parts. In November 2003, PPL Generation sold four of the six spare gas combus- International Energy Projects tion turbine generators and related equipment for approximately $33 million. Acquisitions PPL Generation received substantially all of the proceeds in January 2004. WPD The pre-tax loss on the safe of about $3million is included in 'Other Income In2002, PPL Global acquired the remaining 49% equity Interest in WPDH - net' on the Statement of Income in 2003. In February 2004, asubsidiary of Limited and WPDL from Mirant for approximately $236 million, including PPL Generation sold one spare gas combustion turbine generator and related acquisition costs. The acquisition of Mirant's 49% interest provides PPL equipment for approximately $10 million. InJune 2004, the subsidiary sold the Global with complete ownership of WPD. remaining spare gas combustion turbine generator and related equipment for Prior to the acquisition, PPL Global held 51% of the equity interest inWPD approximately $9million. The net loss from these two sales was insignificant. but shared control with Mirant pursuant to a shareholders agreement. The In2003, PPL Maine entered Into an agreement inprinciple with acoalition shareholders' agreement was terminated inconnection with the closing of the of government agencies and private groups to sell three of its nine hydroelectric acquisition. No regulatory approvals were required for this transaction. dams inMaine. The parties reached a final agreement inJune 2004 and submit- The purchase of Mirant's interest inWPD was accounted for as a step-ted the plan to the FERC for approval. Under the agreement, anon-profit organi- acquisition and resulted inthe consolidation of WPD's accounts by PPL and zation designated by the coalition would have a live-year option to purchase PPL Energy Supply. the dams for approximately $25 million, and PPL Maine would receive rights The assets acquired and liabilities assumed were recorded at estimated fair to increase energy output at its other hydroelectric dams inMaine. The coalition value as determined by management based on information available at the time has announced plans to remove or bypass the dams subject to the agreement of acquisition. In2003, management completed its review and determination of inorder to restore runs of Atlantic salmon and other migratory fish to the the fair values assigned to assets acquired and liabilities assumed. The lair value Penobscot River. The agreement requires several approvals by the FERC, and of PP&E, based on an independent appraisal, was approximately $800 million PPL cannot predict whether or when these regulatory approvals will be obtained. lower than the preliminary valuation. Accordingly, PP&E was reduced, with offsetting increases ingoodwill and reductions in deferred income taxes. PPL CORPORATION 2004 ANNUAL REPORT 67
Notes to Consolidated Financial Statements The following table summarizes the final allocation of the purchase price interest in CEMAR to anew owner. Since PPL Global no longer controlled or based on fair values of the assets acquired and liabilities assumed at the date managed CEMAR, it deconsolidaled the assets and liabilities of CEMAR from of acquisition, plus the book value of assets and liabilities underlying PPL its financial statements and stopped recording CEMAR's operating results at Global's previous 51% equity ownership: that lime. InFebruary 2003, due to the inability to discharge their obligations under the continuing intervention, PPL-relaled officers and directors of Current assets S 236 CEMAR resigned from their respective positions. Investments(') (450) InApril 2004, PPL Global transferred its interest inCEMAR to two PP&E 2.629 Goodwill 740 companies controlled by aprivate equity fund managed by GP Investimentos, Other intangibles 4 a Brazilian private equity firm. The sale resulted in acredit of approximately Other 244 $23 million, and is included in'Other Income - net' on the Statement of Total assets acquired 3,403 Income. This credit is aresult of the reversal of the negative carrying value Current liabilities 767 and the associated cumulative translation adjustment. Long-term debt 1,668 Other 732 Other Write-downs of International Energy Projects Total liabilities assumed 3,167 In2002, PPL Global evaluated certain investments for impairment and recorded a$5million impairment charge inconnection with its investment Net assets acquired S 236 inCGE, a$4million impairment of a corporate joint venture's investment in
° Includes the reversal of PPL Globals equity investment. Brazil, and a$4million write-down of certain non-electrical assets inBolivia.
The goodwill reflected above includes the remaining value of PPL Global's DiscontinuedOperations 51% share of the goodwill recognized by WPD on its acquisition of Hyder, in InDecember 2003, PPL Global's Board of Managers authorized PPL Global addition to the $568 million of non-deductible goodwill arising upon acquisi- to sell its investment inaLatin American telecommunications company, and lion of Mirant's 49% interest. approved aplan of sale. Itwas determined that the viability of this non-strate-The PPL income statements include consolidated WPD results for the twelve- gic business was not economical. As a result, PPL Global recorded an $18 mil-month periods ended November 30. This reflects PPL Global's policy of record- lion write-down inthe carrying value of the company's net assets to their ing the results of foreign controlled subsidiaries on aone-month lag. The portion estimated fair value of approximately $1million as of December 31, 2003. of earnings attributable to Mirant, $73 million for the year ended December 31, InJune 2004, PPL Global sold this investment to local management for a 2002, is reported on the Statement of Income in'Minority Interest.' nominal amount. The operating results of the Latin American telecommunica-tions company, which was aloss of approximately $2million in2004, 2003 TransEmel and 2002, as well as the write-down of its net assets, which was an insignifi-Emel acquired the remaining 40% interest inaprovider of transmission service cant amount in2004 and approximately $18 million in2003, are recorded to northern Chile in2003 at a net cost of $3million, bringing its total owner-as 'Loss from Discontinued Operations" on the Statement of Income. The ship interest inTransEmel to 100%. As aresult of this acquisition, the operat-discontinued operation had assets of $5million and liabilities of $4million at ing results of TransEmel have been consolidated beginning January 1,2003. December 31, 2003, and are included in'Current Assets - Other' and 'Current The portion of earnings attributable to the minority shareholder is reported on Liabilities - Other' on the Balance Sheet. the Statement of Income in 'Minority Interest.' Other Sales Sale of CEMAR In2003, a subsidiary of WPD sold certain Hyder properties. PPL Global In2001, PPL Global estimated that the long-term viability of its CEMAR invest-received approximately $17 million from the sales, and recorded apre-tax ment was jeopardized and that there was minimal probability of positive future gain of about $2million. This gain is included in'Other Income - net" on the cash flows. At that time, PPL Global recorded an impairment loss of $217 mil-Statement of Income. lion inthe carrying value of its net assets inCEMAR. InMarch 2002, PPL In March 2004, PPL Global completed the sale of its minority interest in Global recorded afurther impairment loss of $6million, which was charged to shares of CGE for approximately $123 million. The sale resulted in acharge of "Write-down of international energy projects." InJune 2002, PPL made adeci-approximately $15 million pre-tax, which is included in operating expenses, as sion to exit the investment. At that time, PPL Global's remaining portion of its
'Energy related businesses,' on the Statement of Income. This charge was due CEMAR investment, which related to foreign currency translation adjustments to the write-off of the associated cumulative translation adjustment, primarily (CTA), was written-off. The $94 million charge was also recorded in 'Write-as a result of the devaluation of the Chilean peso since the original acquisition down of international energy projects.' Accounting guidance prohibited the in2000.
inclusion of CTA inimpairment calculations prior to designating such assets InJune 2004, PPL Global completed the sale of its 50% ownership interest as held for disposal. in MicDos for approximately $8million. There was an insignificant loss on this InAugust 2002, ANEEL authorized an administrative intervention in transaction. CEMAR and fully assumed operational and financial control of the company. The intervenor appointed by ANEEL initiated efforts to transfer the ownership 68 PPL CORPORATION 2004 ANNUAL REPORT
DelSur Tender Offer Other Leases In April 2004, EC launched atender offer to acquire up to all of the outstand- PPL and its subsidiaries have leases for vehicles, office space, land, buildings, ing shares of DelSur for an aggregate purchase price of up to $17 million. personal computers and other equipment. Rental expense for all operating The offer closed in May, with apurchase of 163,927 shares for approximately leases was as follows: $65 million in 2004, $85 million in2003 and $62 mil- $5million, increasing EC's ownership of DelSur by 5.34%. Additional shares lion In2002. are purchased as they become available. At December 31,2004, EC owned Total future minimum rental payments for all operating leases are esti-approximately 86.4% of DelSur. mated as follows: Other 2005 $ 77 WPD has an equity interest InTeesside Power Limited (Teesside), the owner 2006 70 of the 1,875 MW Teesside Power Station, located innortheast England. 2007 62 Through its European affiliates, Enron was an owner, operator and power 2008 60 2009 57 purchaser of the station's output. As a result of Enron being placed into receiv-Thereafter 457 ership inthe U.K. and its default on obligations under the power purchase
$783 agreements, in2001, WPD wrote off its entire equity investment inTeesside.
In 2002, PPL Global recognized an $8million tax benefit on the worthlessness Inconnection with the acquisition of the fiber optic network discussed in of WPD's investment inTeesside. Note 9,a subsidiary of PPL Telcom assumed acapital lease obligation through 2020 for the right to use portions of the fiber optic network. The balance out-Other standing at December 31,2004 was $11 million. Total future minimum rental In 2003, asubsidiary of PPL Telcom acquired the fiber optic network of a payments for this capital lease are estimated at $1million for each of the years Fairfax, Virginia-based company for approximately $21 million, consisting of from 2005 through 2009, and $13 million thereafter. $9million in cash and a$12 million capital lease obligation for the right to use portions of a fiber optic network. The 1,330-route-mile metropolitan area fiber network connects New York, northern New Jersey, Philadelphia, Baltimore and Washington, D.C. The acquisition required certain regulatory approvals and
- 11. Stock-Based Compensation authorizations inthe area served by the network. Under the PPL Incentive Compensation Plan (ICP) and the Incentive InJune 2004, aPPL subsidiary evaluated its investment inatechnology Compensation Plan for Key Employees (ICPKE) (together, the Plans), restricted supplier for impairment. As aresult of the evaluation, the subsidiary recorded shares of PPL common stock, restricted stock units and stock options may be an impairment charge of approximately $10 million pre-tax, which is included granted to officers and other key employees of PPL, PPL Electric and other in Other Income - net' on the Statement of Income. affiliated companies. Awards under the Plans are made by the Compensation and Corporate Governance Committee (CCGC) of the PPL Board of Directors, in the case of the ICP, and by the PPL Corporate Leadership Council (CLC), in
- 10. Leases the case of the ICPKE. The ICP limits the total number of awards that may be granted under Itafter April 23,1999, to 7,884,715 awards, or 5%of the total Colstrip Generating Plant shares of common stock that were outstanding at April 23, 1999. The ICPKE PPL Montana leases a50% interest in Colstrip Units 1 and 2and a30%
limits the total number of awards that may be granted under it after April 25, interest in Unit 3, under four 36-year non-cancelable operating leases. These 2003, to 8,286,804 awards, or 5%of the total shares of common stock that leases provide two renewal options based on the economic useful life of the were outstanding at January 1,2003, reduced by outstanding awards for which generation assets. PPL Montana is required to pay all expenses associated common stock was not yet issued as of April 25,2003. Inaddition, each Plan with the operations of the generation units. The leases place certain restric-limits the number of shares available for awards inany calendar year to 2%of tions on PPL Montana's ability to incur additional debt, sell assets and declare the outstanding common stock of PPL on the first day of such calendar year. dividends and require PPL Montana to maintain certain financial ratios related The maximum number of options that can be awarded under each Plan to any to cash flow and net worth. The amount outstanding under these leases at single eligible employee inany calendar year is 1.5 million shares. Any portion December 31, 2004, was $278 million. There are no residual value guarantees of these options that has not been granted may be carried over and used in any inthese leases. However, upon an event of default or an event of loss, the lessee subsequent year. If any award lapses, is forfeited or the rights of the participant could be required to pay a termination value of amounts sufficient to allow the terminate, the shares of common stock underlying such an award are again lessor to repay amounts owing on the lessor notes and make the lessor whole available for grant. Shares delivered under the Plans may be in the form of for its equity investment and anticipated return on investment. The events of authorized and unissued common stock, common stock held intreasury by default include payment defaults, breaches of representations or covenants, PPL or common stock purchased on the open market (including private pur-acceleration of other indebtedness of PPL Montana, change incontrol of PPL chases) inaccordance with applicable securities laws. Montana and certain bankruptcy events. The termination value was estimated to be $613 million at December 31, 2004. PPL CORPORATION 2004 ANNUAL REPORT 69
Notes to Consolidated Financial Statements Restricted Stock Asummary of restricted stock/unit grants follows: Restricted shares of PPL common stock are outstanding shares with full Restricted Weighted Restricted Weighted voting and dividend rights. Restricted stock awards are subject to a restriction Shares Average Fair Units Average Fair Granted Value Granted Value or vesting period as determined by the CCGC inthe case of the ICP, and the 2004 233,055 $46.05 CLC inthe case of the ICPKE. Inaddition, the shares are subject to forfeiture 2003 42,090 $36.23 139,732 $35.09 or accelerated payout under Plan provisions for termination, retirement, dis- 2002 147,735 $34.12 ability and death of employees. Restricted shares vest fully if control of PPL changes, as defined by the plans. Compensation expense related to restricted stock and restricted stock unit awards was $6million, $5million and $5million for PPL for 2004, 2003 and Restricted Stock Units 2002. At December 31, 2004, PPL had 366,201 restricted shares and 341,199 In 2003, the Plans were amended to allow for the grant of restricted stock restricted units outstanding. These awards currently vest from three to 25 years units. Restricted stock units are awards based on the fair market value of PPL from the date of grant. common stock. Actual PPL common shares will be issued upon completion of arestriction or vesting period as determined by the CCGC inthe case of the Stock Options ICR and the CLC inthe case of the ICPKE. Recipients of restricted stock units Under the Plans, stock options may also be granted with an option exercise may also be granted the right to receive dividend equivalents through the end price per share not less than the fair market value of PPLs common stock on of the restriction period or until the award is forfeited. Restricted stock units the date of grant. The options are exercisable beginning one year after the date are subject to forfeiture or accelerated payout under the Plan provisions for ter- of grant, assuming the individual is still employed by PPL or asubsidiary, in mination, retirement, disability and death of employees. Restricted stock units installments as determined by the CCGC inthe case of the ICP, and the CILC in vest fully if control of PPL changes, as defined by the Plans. the case of the ICPKE. Options outstanding at December 31, 2004, vest over a three-year period from the date of grant inequal installments. The CCGC and CLC have discretion to accelerate the exercisability of the options. All options expire no later than ten years from the grant date. The options become exercis-able immediately if control of PPL changes, as defined by the Plans. A summary of stock option activity follows: 2004 2003 2002 Number of Weighted Average Number of Weighted Average Number of Weighted Average Options Exercise Price Options Exercise Price Options Exercise Price Outstanding at beginning ofyear 2,912,258 $35.56 3,008,685 $32.09 2.255,051 $31.36 Granted 760,440 45.18 816.110 36.23 840,430 33.49 Exercised (653,653) 31.40 (860,915) 24.09 (62.710) 22.82 Forfeited (38,070) 42.74 (51,622) 35.32 (24.086) 36.18 Outstanding at end of year 2,980,975 38.83 2.912.258 35.56 3.008.685 32.09 Options exercisable at end of year 1,550,337 37.54 1,354,075 34.64 1,400,701 29.88 Weighted-average fair value ofoptions granted $12.31 $11.92 $11.68 The estimated fair value of each option granted was calculated using aBlack-Scholes option-pricing model. The weighted average assumptions used inthe model were as follows: 2004 2003 2002 Risk-tree interest rate 3.79% 3.81% 5.35% Expected option life 7.47 yrs. 7.75 yrs. 10 yrs. Expected stock volatility 32.79% 39.94% 39.11% Dividend yield 3.51% 3.48% 3.34% The following table summarizes information about stock options at December 31, 2004: Options Outstanding Options Exercisable Weighted-Average Weighted- Weighted-Number Remaining Average Number Average Range of Exercise Prices Outstanding Contractual Lite Exercise Prices Exercisable Exercise Price 519.00-S24.00 38,090 5.1 S21.42 38,090 $21.42 525.00-529.00 192,453 4.3 26.84 192,453 26.84 530.00-35.00 564.822 7.1 33.49 333,113 33.49 S36.00-539.00 714,747 8.1 36.23 226.068 36.23 540.00-544.00 736,923 6.1 43.16 736.923 43.16 545.00-549.00 733,940 9.1 45.18 23,690 45.18 Total options outstanding had aweighted-average remaining life of 7.4 years at December 31, 2004. 70 PPL CORPORATION 2004 ANNUAL REPORT
Directors Stock Units period and have a10-year term, during which time employees are entitled Under the Directors Deferred Compensation Plan, stock units are used to to receive acash payment of any appreciation inthe price of PPLs common compensate members of PPUs Board of Directors who are not employees stock over the grant date value. At December 31,2004, there were 91,502 of PPL. Such stock units represent shares of PP1's common stock to which stock appreciation rights outstanding. Compensation expense for all periods board members are entitled after they cease serving as a member of the reported was insignificant. Board of Directors. Board members are also entitled to defer any or all of their cash compensation into stock units. The stock unit accounts of each board member are increased based on dividends paid or other distributions on PPUs 12. Retirement and Postemployment common stock. There were 116,389 stock units outstanding at December 31, Benefits 2004. Compensation expense was $2million for 2004 and insignificant for 2003 and 2002. Pension and Other Postretirement Benefits The following disclosures distinguish between PPUs domestic and interna-Stock Appreciation Rights tional pension plans. WPD uses stock appreciation rights to compensate senior management PPL uses a December 31 measurement date for its domestic pension and employees. Stock appreciation rights are granted with areference price to other postretirement benefit plans and its international pension plans. PPUs common stock at the date of grant. These awards vest over athree-year Net pension and other postretirement benefit costs (credits) were as follows: Pension Benefits Other Postretirement Benefits 2004 2003 2002 2004 2003 2002 Domestic International Domestic International Domestic International Servicecost. S 49 $ 15 $ 42 $ 14 $ 40 $ 13 $ 6 $ 7 $ 5 Interest cost 112 139 105 124 99 98 29 31 26 Expected return on plan assets (151) (205) (143) (188) (147) (179) (17) (13) (12) Net amortization and deferral 4 11 (6) 4 (31) 3 19 25 15 Net periodic pension and postretire-ment costs (credits) prior to special termination benefits 14 (40) (2) (46) (39) (65) 37 50 34 Special termination benefits 9 62 4 Net periodic pension and postretire-ment benefit cost (credit) $ 14 $ (40) $ 7 $ (46) $ 23 S (65) $37 $50 $38 Net periodic pension cost charged (credited) to operating expense, excluding amounts charged to construction and other non-expense accounts, were: 2004 2003 2002 Domestic International Domestic International Domestic International Operating Expensera' S12 . S(36) $(2) S(40) $(31) $(58) tat The domestic amounts for 2003 and 2002 exclude the $9million and $62 million cost of special termination benefits, which are Included separately on the Statement of Income, within the 'Workforce reduction' charge for those years. PPL CORPORATION 2004 ANNUAL REPORT 71
Notes to Consolidated Financial Statements PPL uses an accelerated amortization method for the recognition of gains of plan participants. Gains and losses in excess of 30% of the plan's projected and losses for its pension plans. Under the accelerated method, gains and benefit obligation are amortized on astraight-line basis over aperiod equal to losses inexcess of 10% but less than 30% of the greater of the plan's pro- one-half of the average future service period of the plan participants. jected benefit obligation or the market-related value of plan assets are amor- Other postretirement benefit costs charged to operating expense, tized on astraight-line basis over the estimated average future service period excluding amounts charged to construction and other non-expense accounts, were $31 million in 2004, $43 million in 2003 and $27 million in 2002. The following assumptions were used inthe valuation of the benefit obligations at December 31 and determination of net periodic benefit cost for the years ended December 31: 2004 2003 2002 Pension Benefits Domestic International Domestic International Domestic International Discount rate
- obligations 5.75% 5.50% 6.25% 5.50% 6.75% 5.75% - cost 6.25% 5.50% 6.75% 5.75% 7.25% 5.75%
Expected return on plan assets
- obligations 9.0% 8.30% 9.0% 8.30% 9.0% 8.31% -cost 9.0% 8.30% 9.0% 8.31% 9.2% 8.31%
Rate of compensation increase
- obligations 4.0% 3.75% 4.0% 3.75% 4.0% 3.75% - cost 4.0% 3.75% 4.0% 3.75% 4.25% 3.75%
Other Postretirement Benefits 2004 2003 2002 Aone-percentage point change inthe assumed health care costs trend Discount rate assumption would have the following effects in2004:
- obligations 5.75% 6.25% 6.75% One Percentage Point -cost 6.25% 6.75% 7.25%
Expected return on plan assets increase Decrease
- obligations 7.90% 7.80% 7.80% Effect on service cost and interest cost components $1 S(1) -cost 7.80% 7.80% 7.60% Effect on postretirement benefit obligation 12 (10)
Rate of compensation increase
- obligations 4.0% 4.0% 4.0% The expected long-term rate of return for PPLs domestic pension plans -cost 4.0% 4.0% 4.25% considers the plans' historical experience, but is primarily based on the plans' mix of assets and expectations for long-term returns of those asset classes.
Assumed Health Care Cost The expected long-term rate of return for PPLs other postretirement benefit Trend Rates at December 31, 2004 2003 2002 plans isbased on the VEBA trusts' mix of assets and expectations for long-Health care cost trend rate assumed for next year term returns of those asset classes considering that aportion of those assets
- obligations 10% 11% 12% are taxable.
- cost 11% 12% 7% The expected rate of return for PPMs international pension plans considers Rate to which the cost trend rate isassumed to decline (the ultimate trend rate) that aportfolio largely invested in equities would be expected to achieve an
- obligations 5% 5% 5% average rate of return inexcess of aportfolio largely invested in long-term
- cost 5% 5% 6% bonds. The historical experience has been an excess return of 2%to 4%per Year that the rate reaches the ultimate trend rate annum on average over the return on long-term bonds.
- obligations 2010 2010 2010
- cost 2010 2010 2006 72 PPL CORPORATION 2004 ANNUAL REPORT
The funded status of the PPL plans was as follows: Pension Benefits Other Postretirement Benefits - 2004 2003 2004 2003 Domestic International Domestic International Change In Benefit Obligation Benefit Obligation, January 1 $1,772 $2,474 $1,558 $2,126 $512 $423 Servicecost 49 15 42 14 6 7 Interest cost 112 139 105 124 29 31 Participant contributions 5 5 4 1 Plan amendments 3 (47) 48 Actuarial (gain) loss 115 180 127 101 17 30 Special lermination benefits 9 Actual expense paid (1) (1) Net benetits paid (78) (160) (71) (131) (36) (28) Currency conversion 278 235 Benefit Obligation, December31 1,969 2.931 1,772 2,474 485 512 Change In Plan Assets Planassetsatfairvalue,January1 1,653 2,164 1,376 1,757 219 163 Actual return on plan assets 184 232 329 332 20 27 Employer contributions 9 3 20 42 56 Participant contributions 5 5 4 1 Actual expense paid (1) (1) Net benefits paid (78) (160) (71) (131) (36) (28) Currency conversion 239 201 Plan assets atlair value, December31 1,767 2,483 1,653 2,164 249 219 Funded Status Funded Status ol Plan (202) (448) (119) (310) (236) (293) Unrecognized actuarial (gain) loss (100) 676 (187) 477 141 134 Unrecognized prior service cost 154 32 167 33 23 76 Unrecognized transition assets (23) (27) 69 78 Currency conversion 69 57 Netamountrecognizedatendof year S (171) $ 329 S (166) $ 257 $ (3) $ (5) Amounts recognized Inthe Balance Sheet consist of: Prepaid benefit cost $ 7 $ 329 S 4 $ 257 $ 8 $ 4 Accrued benefit liability (178) (170) (11) (9) Additional minimum liability (37) (635) (28) (516) Intangible asset 9 36 9 37 Accumulated other comprehensive income (pre-tax) 28 503 19 434 Cumulative translation adjustment 96 45 Net amountrecognizedatendofyear $ (171) $ 329 $ (166) $ 257 $ (3) $ (5) Total accumulated benefit obligation for defined benefit pension plans $1,710 $2,789 $1,553 $2,423 PPL CORPORATION 2004 ANNUAL REPORT 73
Notes to Consolidated Financial Statements Information for pension plans with projected benefit obligations inexcess PPI's investment strategy with respect to its other postretirement benefit of plan assets follows: obligations is to fund the VEBA trusts with voluntary contributions and to 2004 2003 invest inatax efficient manner utilizing aprudent mix of assets. Based on the Domestic Int'l Domestic Intl current VEBA and postretirement plan structure, atargeted asset allocation Projected benefit obligation $1,969 $2,931 S1,765 $2,474 range of 50% to 60% equity and 40% to 50% debt is maintained. Accumulated benefit obligation $1,710 $2,789 $1,546 $2,423 Fair value of assets $1,767 $2,483 $1,646 $2,164 Plan Assets - International Pension Plans WPD operates three defined benefit plans, the WPD Group segment of the Information for pension plans with accumulated benefit obligations in Electricity Supply Pension Scheme (ESPS), the Western Power Utilities Pension excess of plan assets follows: Scheme and the Infralec 1992 Scheme. The assets of all three schemes are held 2004 2003 separately from those of WPD in trustee-administered funds. Domestic Intl Domestic Intl PPUs international pension plan asset allocation and target allocation is Projected benefit obligation $174 $2,931 $142 $2,474 detailed below. Accumulated benetit obligation $159 $2,789 $130 $2,423 Percentage of plan assets Target asset Fairvalueof assets $ 95 $2,483 $ 76 $2,164 atDecember 31, allocation Information for other postretirement benefit plans with accumulated Asset Category 2004 2003 postretirement benefit obligations inexcess of plan assets follows: Equity securities 74% 75% 75% Debt securities 22% 21% 23% 2004 2003 Real estate and other 4% 4% 2% Accumulated postretirement benefit obligation $485 $512 Total 100% 100% 100% Fair value of assets $249 $219 Inconsultation with its investment advisor and with WPD, the group Plan Assets - Domestic Pension Plans trustees of the WPD Group of the ESPS have drawn up aStatement of The asset allocation for the PPL Retirement Plan Master Trust and the target Investment Principles to comply with the requirements of U.K. legislation. allocation, by asset category, is detailed below. The group trustees' primary investment objective is to maximize invest-Percentage of plan assets Target asset ment returns within the constraint of avoiding excessive volatility inthe at December 31, allocation funding position. Asset Category 2004 2003 Equity securities 73% 73% 70% Expected Cash Flows - Domestic Pension and Other Debt securities 22% 22% 25% Postretlrement Benefit Plans Real estate and other 5% 5% 5% There are no contributions required for PPUs primary domestic pension plan Total 100% 100% 100% or any of PPUs other domestic subsidiary pension plans. However, PPL sub-sidiaries expect to contribute approximately $10 million to their pension plans The domestic pension plan assets are managed by outside investment in2005 to ensure future compliance with minimum funding requirements. managers and are rebalanced as necessary to maintain the target asset alloca-PPL sponsors various non-qualified supplemental pension plans for tion ranges. PPUs investment strategy with respect to the domestic pension which no assets are segregated from corporate assets. PPL expects to make assets isto achieve asatisfactory risk-adjusted return on assets that, incom-approximately $2million of benefit payments under these plans in 2005. bination with PPUs funding policy and tolerance for return volatility, will ensure PPL is not required to make contributions to its other postretirement that sufficient dollars are available to provide benefit payments. benefit plans, but has historically funded these plans inamounts equal to the Plan Assets - Domestic Other Postretirement Benefit Plans postretirement benefit costs recognized. Continuation of this past practice The asset allocation for the PPL other postretirement benefit plans by asset would provide for PPL to contribute $36 million to its other postretirement category is detailed below. benefit plans in2005. Percentage of plan assets atDecember 31, Asset Category 2004 2003 Equity securities 60% 56% Debt securities 40% 44% Total 100% 100% 74 PPL CORPORATION 2004 ANNUAL REPORT
The following benefit payments, which reflect expected future service, 106-1. FSP FAS 106-2 details the accounting for the effects of the Act under as appropriate, are expected to be paid and the following federal subsidy pay- SFAS 106 and requires certain disclosures. FSP FAS 106-2 is effective for ments are expected to be received: the first interim or annual period beginning after June 15, 2004. Other Postretirement PPL has consulted with its independent actuary and determined that Expected portions of certain of its other postretirement benefit plans provide benefits Benefit Federal that may be actuarially equivalent to Medicare Part Dbenefits, pending final Pension Payment Subsidy detailed guidance from the U.S. Department of Health and Human Services. For 2005 S 79 $ 37 2006 80 40 52 those significant plans that provide benefits that are at least actuarially equiva-2007 84 44 2 lent to Medicare Part D,PPL remeasured its plan assets and accumulated 2008 89 48 3 benefit obligation as of July 1,2004, under the prospective method of adoption 2009 95 52 3 of FSP FAS 106-2. The prospective method of adoption allows for measuring 2010-2014 605 321 7 the effects of the Act as of the date of adoption of FSP FAS 106-2. As aresult, PPLs accumulated postretirement benefit obligation was reduced by approxi-Expected Cash Flows - International Pension Plans mately $12 million as of July 1,2004, and resulted inan unrecognized actuarial The pension plans of WPD are subject to formal actuarial valuations every gain of a similar amount. PPL's postretirement benefit cost recognized in2004 three years, which are used to determine funding requirements. Future contri-was reduced by approximately $1million. butions were evaluated in accordance with the latest valuation performed as On January 21, 2005, the final regulations for implementing the Act were of March 31, 2004, inrespect of WPD's principal pension scheme, the ESPS, released. Although PPL has not been able to obtain afirm estimate of the effect to determine contribution requirements for 2005 and forward. WPD expects to of the regulations, any adjustments to the initial impact as disclosed above for make contributions of approximately $38 million in2005. changes in the accumulated postretirement benefit obligation and postretire-The following benefit payments, which reflect expected future service, ment benefit cost are expected to be insignificant based on the preliminary as appropriate, are expected to be paid: discussions with our actuaries. Pension 2005 S 168 Savings Plans 2006 172 Substantially all employees of PPL's domestic subsidiaries are eligible to 2007 177 participate indeferred savings plans (401(k)s). Contributions to the plans 2008 181 charged to operating expense approximated $13 million in2004 and 2009 186 $11 million in both 2003 and 2002. 2010-2014 1,001 Employee Stock Ownership Plan Medicare Prescription Drug, Improvement and PPL sponsors a non-leveraged ESOP, in which substantially all employees, Modernization Act of 2003 excluding those of PPL Global, PPL Montana, PPL Gas Utilities and the In December 2003, the Medicare Prescription Drug, Improvement and mechanical contractors, are enrolled after one year of credited service. Modernization Act of 2003 (the Act) was signed into law. The Act introduces Dividends paid on ESOP shares are treated as ordinary dividends by PPL. aprescription drug benefit under Medicare Part Dand also provides for a Under existing income tax laws, PPL is permitted to deduct the amount of tax-free federal subsidy to sponsors of retiree health care benefit plans that those dividends for income tax purposes and to contribute the resulting tax provide an actuarially equivalent level of prescription drug benefits. The savings (dividend-based contribution) to the ESOP. subsidy would be 28% of eligible drug costs for retirees that are over age The dividend-based contribution isused to buy shares of PPLs common 65 and covered under PPLs other postretirement benefit plans. stock and isexpressly conditioned upon the deductibility of the contribution InJanuary 2004, the FASB issued FSP FAS 106-1, Accounting and for federal income tax purposes. Contributions to the ESOP are allocated Disclosure Requirements Related to the Medicare Prescription Drug. to eligible participants' accounts as of the end of each year, based 75% on Improvement and Modernization Act of 2003. FSP FAS 106-1 permitted shares held in existing participants' accounts and 25% on the eligible parti-companies to defer accounting for the effects of the Act, as the impact of cipants' compensation. the Act on the provisions of SFAS 106, Employers' Accounting for Amounts charged as compensation expense for ESOP contributions Postretirement Benefits Other than Pensions,' had not been determined approximated $5million ineach of 2004, 2003 and 2002. These amounts were as of such time. PPL elected to defer recognizing the effects of the Act in offset by the dividend-based contribution tax savings and had no impact on accounting for its other postretirement benefit plans until authoritative PPLs earnings. guidance on the accounting for the federal subsidy was issued. ESOP shares outstanding at December 31,2004, were 4,628,117, or 2%of In May 2004, the FASB issued FSP FAS 106-2 'Accounting and total common shares outstanding, and are included inall EPS calculations. Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which supersedes FSP FAS PPL CORPORATION 2004 ANNUAL REPORT 75
Notes to Consolidated Financial Statements Postemployment Benefits In addition to the interests mentioned above, PPL Montana isthe operator Certain PPL subsidiaries provide health and life insurance benefits to disabled of the jointly-owned, coal-fired generating units comprising the Colstrip steam employees and income benefits to eligible spouses of deceased employees. generation facility. At December 31, 2004 and 2003, PPL Montana had a50% Postemployment benefits charged to operating expenses were not significant leasehold interest inColstrip Units 1and 2 and a30% leasehold interest in in 2004. 2003 and 2002. Colstrip Unit 3under operating leases. See Note 10 for additional information. Certain of PPL Global subsidiaries, including Emel, EC, Elfec and Integra, PPL Montana's share of direct expenses associated with the operation provide limited non-pension benefits to all current employees. All active and maintenance of these facilities is included inthe corresponding operating employees are entitled to benefits inthe event of termination or retirement in expenses on the Statement of Income. Each joint-owner inthese facilities accordance with government-sponsored programs. These plans generally obli- provides its own financing. As operator of all Colstrip Units, PPL Montana gate acompany to pay one month's salary per year of service to employees in invoices each joint-owner for their respective portion of the direct expenses. the event of involuntary termination. Under certain plans, employees with five The amount due from joint-owners was approximately $6million and $9mil-or more years of service are entitled to this payment inthe event of voluntary or lion at December 31, 2004 and 2003. involuntary termination. At December 31, 2004, NorthWestern owned a30% leasehold interest The liabilities for these plans are accounted for under the guidance of EITF inColstrip Unit 4. PPL Montana and NorthWestern have a sharing agreement 88-1 'Determination of Vested Benefit Obligation for aDefined Benefit Pension to govern each party's responsibilities regarding the operation of Colstrip Plan,' using what iscommonly referred to as the 'shut down' method, where Units 3and 4,and each party is responsible for 15% of the respective operat-acompany records the undiscounted obligation as if it were payable at each ing and construction costs, regardless of whether aparticular cost is specified balance sheet date. The combined liabilities for these plans at December 31, to Colstrip Unit 3 or 4.However, each party is responsible for its own fuel-2004 and 2003, were $9million and $8million, and are recorded in'Deferred related costs. Credits and Noncurrent Liabilities - Other' on the Balance Sheet.
- 14. Commitments and Contingent
- 13. Jointly-Owvned Facilities Liabilities At December 31, 2004, subsidiaries of PPL owned interests in the facilities Energy Purchases and Sales Commitments listed below. The Balance Sheet of PPL includes the amounts noted inthe Energy Purchase Commitments table below: PPL enters into long-term purchase contracts to supply the fuel requirements Electric Construction for its generation facilities. These include contracts to purchase coal, natural Gonership Plant in Other Accumulated Work in Interest Service PropertyDepreciation Progress gas, oil and uranium. These contracts extend for terms through 2019. PPL also enters into long-term contracts for the storage and transport of natural gas.
PPL Generation Generating Stations These contracts extend through 2014 and 2032, respectively. Additionally, PPL Susquehanna 90.00% $4,345 $3.483 $20 enters into long-term contracts to purchase power to meet load requirements Gritfith(') 50.00% 151 and emissions allowances for its generation facilities. These contracts extend Conemaugh 16.25% 196 76 1 for terms through 2010. Keystone 12.34% 99 52 2 PPL Energy Supply entered into long-term power purchase agreements with Wyman Unit 4 8.33% 15 4 Merrill Creek Reservoir 8.37% $22 13 two wind project developers to purchase the full output of their facilities when they are placed incommercial operation, which is expected by the end of 2005. tat A PPL subsidiary has a 50% interest in apartnership that owns the Grittith gas-fired gener-ating station. The partnership arrangement isessentialty a cost-sharing arrangement, inthat One of the power purchase agreements is for 100 MW and extends for aterm of each of the partners has rights to one-half of the plant capacity and energy, and an obligation 15 years, while the other is for 20 MW and extends for aterm of 20 years. to cover one-halt of the operating costs of the station. Accordingly, the equity investment is classified as 'Electric Plant inService - Generation' on the Balance Sheet. Liability for Above Market NUG Contracts In 1998, PPL Electric recorded aloss accrual for above market contracts with Each PPL Generation subsidiary provided its own funding for its share of NUGs of $854 million, due to its generation business being deregulated. the facility. Each receives a portion of the total output of the generating stations Effective January 1999, PPL Electric began reducing this liability as an offset equal to its percentage ownership. The share of fuel and other operating costs to 'Energy purchases' on the Statement of Income. This reduction is based associated with the stations is reflected on the Statement of Income. on the estimated timing of the purchases from the NUGs and projected market prices for this generation. The final existing NUG contract expires in2014. Inconnection with the corporate realignment in2000, the remaining balance of this liability was transferred to PPL EnergyPlus. At December 31, 2004, the remaining liability associated with the above market NUG contracts was
$279 million.
76 PPL CORPORATION 2004 ANNUAL REPORT
Energy Sales Commitments supply BGS contract for a fixed percentage of customer load (approximately PPL Energy Supply enters into long-term power sales contracts inconnection 450 MW) for Atlantic City Electric Company, Jersey Central Power & Light with its load-serving activities or associated with certain of its power plants. Company and Public Service Electric & Gas Company. These contracts com-These power sales contracts extend for terms through 2017. All long-term con- menced inJune 2004. tracts were executed at pricing that approximated market rates, including profit InApril 2003, PPL EnergyPlus entered into an agreement with Arizona margin, at the time of execution. Public Service Company to provide 112 MW of capacity and associated elec-As part of the purchase of generation assets from Montana Power, PPL tricity from July through September of 2003 and 150 MW from June through Montana assumed a power purchase agreement and apower sales agreement, September of 2004 and 2005. See Note 9 for information regarding the pos-which were still ineffect at December 31, 2004. Inaccordance with purchase sible sale of the Sundance power plant to Arizona Public Service Company. accounting guidelines, PPL Montana recorded liabilities of $65 million as the InJanuary 2004, PPL EnergyPlus began supplying 12.5% of Connecticut estimated fair value of these agreements at the acquisition date. The power Light & Power Company's Transitional Standard Offer load, under athree-year sales agreement was re-evaluated under DIG Issue C20, 'Scope Exceptions: fixed-price contract. During peak hours, PPL EnergyPlus' obligation to supply Interpretation of the Meaning of Not Clearly and Closely Related in Paragraph the Transitional Standard Offer load may reach 625 MW. 10(b) Regarding Contracts with aPrice Adjustment Feature.' and is now Legal Matters reflected at its fair value as a derivative instrument. The liability for the power PPL and its subsidiaries are involved innumerous legal proceedings, claims purchase agreement is being reduced over the term of the agreement, through and litigation inthe ordinary course of business. PPL and its subsidiaries can-2010, as an adjustment to 'Energy purchases" on the Statement of Income. The not predict the outcome of such matters, or whether such matters may result unamortized balance of the liability related to the power purchase agreement at In material liabilities. December 31,2004, was $54 million and is included in 'Deferred Credits and Other Noncurrent Liabilities - Other' on the Balance Sheet. Montana Power Shareholders'Litigation On July 1,2002, PPL EnergyPlus began to sell to NorthWestern an aggre- In August 2001, a purported class-action lawsuit was filed by agroup of share-gate of 450 MW of energy supplied by PPL Montana. Under two five-year holders of Montana Power against Montana Power, the directors of Montana agreements, PPL EnergyPlus is supplying 300 MW of around-the-clock elec- Power, certain advisors and consultants of Montana Power and PPL Montana. tricity and 150 MW of unit-contingent on-peak electricity. PPL Montana also The plaintiffs allege, among other things, that Montana Power was required makes short-term energy sales to NorthWestern. to, and did not, obtain shareholder approval of the sale of Montana Power's In September 2003, NorthWestern filed avoluntary petition for relief generation assets to PPL Montana in 1999. Although most of the claims inthe seeking to reorganize under Chapter 11 of the U.S. Bankruptcy Code, and in complaint are against Montana Power, its board of directors, and its consul-November 2004, NorthWestern announced that it had officially emerged from tants and advisors, two claims are asserted against PPL Montana. In the first bankruptcy protection. NorthWestern had assumed the two energy supply claim, plaintiffs seek adeclaration that because Montana Power shareholders agreements with PPL EnergyPlus inthe bankruptcy proceeding and iscurrent did not vote on the 1999 sale of generating assets to PPL Montana, that sale on all payments under the agreements. .was null and void ab initio.' The second claim alleges that PPL Montana was In April 2003, the Maryland Public Service Commission authorized the privy to and participated inastrategy whereby Montana Power would sell competitive provision of the Standard Offer Service (SOS) to allow utilities its generation assets to PPL Montana without first obtaining Montana Power to procure SOS for customers through the competitive selection of wholesale shareholder approval, and that PPL Montana has made net profits inexcess supply. InMarch 2004, PPL EnergyPlus was awarded an 11-month fixed-price of $100 million as the result of this alleged illegal sale. In the second claim, SOS contract for customer load (approximately 60 MW) for Potomac Electric plaintiffs request that the court impose a 'resulting and/or constructive trust' Power Company. This contract commenced inJuly 2004. on both the generation assets themselves and all profits, plus interest on the As aresult of New Jersey's Electric Discount and Energy Competition amounts subject to the trust. This lawsuit is currently pending inthe U.S. Act, the New Jersey Board of Public Utilities authorized and made available District Court of Montana, Butte Division. InJuly 2004, the plaintiffs notified to power suppliers, on a competitive basis, the opportunity to provide Basic the District Court that the parties had reached an oral partial settlement of the Generation Service (BGS) to all non-shopping New Jersey customers. In case that would result inthe dismissal of PPL Montana as a defendant, and in February 2003, PPL EnergyPlus was awarded a34-month fixed-price BGS January 2005 a global settlement agreement was filed with the District Court contract for a fixed percentage of customer load (approximately 1,000 MW) for along with a motion to approve the agreement. Under the terms of the global Atlantic City Electric Company, Jersey Central Power & Light Company and settlement agreement, the plaintiffs' claims against PPL Montana would be dis-Public Service Electric &Gas Company. InFebruary 2003, PPL EnergyPlus missed and PPL Montana would not have to pay any amounts to the plaintiffs. also was awarded a10-month hourly energy price supply contract for about The global settlement agreement must still be approved by the District Court. 500 MW. These contracts commenced inAugust 2003. Additionally, in PPL cannot predict whether the global settlement agreement will be approved February 2004, PPL EnergyPlus was awarded a12-month hourly energy price or the outcome of this matter if it is not approved. PPL CORPORATION 2004 ANNUAL REPORT 77
Notes to Consolidated Financial Statements NorthWestern Corporation Litigation state-owned property upon Montana's admission to statehood, and that the Inconnection with the acquisition of the Montana generation assets, the use thereof for placement of dam structures, affiliated structures and reservoirs Montana Power APA, which was previously assigned to PPL Montana by should, under an existing regulatory scheme, trigger lease payments for use of PPL Global, includes aprovision concerning the proposed purchase by PPL land underneath. The plaintiffs also sought relief on theories of unjust enrich-Montana of aportion of NorthWestern's interest inthe 500-kilovolt Colstrip ment, trespass and negligence. No specific amount of damages or future rental Transmission System (CTS) for $97 million. During 2002, PPL Montana had value has been claimed by the plaintiffs. The defendants filed separate motions been in discussions with NorthWestern regarding the proposed purchase of to dismiss the individual plaintiffs' and school district's complaint, as well as the CTS and the claims that PPL Montana believes it has against NorthWestern the complaint of the State of Montana. InSeptember 2004, the federal court arising from the Montana Power APA and related agreements. Notwithstanding granted the motions to dismiss the individual plaintilts' and school districts' such discussions, inSeptember 2002, NorthWestern filed alawsuit against complaint but denied the similar motions as to the State of Montana's com-PPL Montana inMontana state court seeking specific performance of PPL plaint. Following the federal court's September decision, PPL Montana and the Montana's purchase of the CTS or, alternatively, damages for breach of contract. other defendants filed amotion to dismiss the State of Montana's complaint for Pursuant to PPL Montana's application, the matter was removed to the U.S. lack of diversity jurisdiction and also filed amotion to vacate certain portions District Court of Montana, Butte Division. Following removal, NorthWestern of the decision. The federal court has not yet ruled on these motions. asserted additional claims for damages against PPL Montana, including a In November 2004, PPL Montana, Avista Corporation and PacifiCorp com-claim for punitive damages. PPL Montana filed defenses denying liability for menced an action for declaratory judgment inMontana First Judicial District NorthWestern's claims as well as counterclaims against NorthWestern seeking Court seeking adetermination that no lease payments or other compensation for damages PPL Montana believes it has suffered under the Montana Power APA the hydropower facilities' use and occupancy of streambeds can be collected by and related agreements. the State of Montana. The State subsequently filed counterclaims and amotion InOctober 2004, the federal district court inDelaware, where NorthWestern's for summary judgment. InFebruary 2005, the individual plaintiffs and school bankruptcy proceeding had been pending, approved ajoint stipulation between districts who were dismissed from the federal court proceeding, along with a PPL Montana and NorthWestern under which NorthWestern agreed to establish state teachers' union, filed amotion to intervene as additional defendants inthis asegregated reserve to be used for any distributions to be made to satisfy any state court proceeding, and also filed aproposed answer and counterclaims to final judgment that PPL Montana may be awarded pursuant to PPL Montana's be used if their motion to intervene is granted. The state court has not yet ruled counterclaims. This segregated reserve has been funded with shares of on any of the above-described motions. PPL Montana and PPL Services cannot NorthWestern common stock equal to $50 million, valued as of the effective predict the outcome of either the federal or the state court proceeding. date of NorthWestern's plan of reorganization. Also in October, the federal Regulatory Issues district court inDelaware confirmed NorthWestern's plan of reorganization, California ISO and W1/estern Markets and inNovember 2004, NorthWestern announced that it officially emerged Through its subsidiaries, PPL made approximately $18 million of sales to the from bankruptcy protection. California ISO during the period from October 2000 through June 2001, of The trial for this matter is expected to commence inthe Montana federal which $17 million has not been paid to PPL subsidiaries. Given the myriad of district court inthe last half of 2005. PPL cannot predict the outcome of electricity supply problems presently faced by the California electric utilities this litigation. and the California ISO, PPL cannot predict whether or when it will receive Montana Hydroelectric Litigation payment. As of December 31, 2004, PPL has fully reserved for possible under-In October 2003, a lawsuit was filed against PPL Montana, PPL Services, recoveries of payments for these sales. Avista Corporation, PacifiCorp and nine John Doe defendants inthe U.S. Regulatory proceedings arising out of the California electricity supply District Court of Montana, Missoula Division, by two residents allegedly act- situation have been filed at the FERC. The FERC has determined that all sellers ing in arepresentative capacity on behalf of the State of Montana. InJanuary of energy into markets operated by the California ISO and the California Power 2004, the complaint was amended to, among other things, include the Great Exchange, including PPL Montana, should be subject to refund liability for the Falls school districts as additional plaintiffs. In May 2004, the Montana period beginning October 2, 2000, through June 20, 2001, and initiated an evi-Attorney General filed amotion to allow the State of Montana to intervene as an dentiary hearing concerning refund amounts. InApril 2003, the FERC changed additional plaintill inthe litigation. This motion was granted without objection. the manner inwhich this refund liability is to be computed and ordered further Both the individual plaintiffs' and the school districts' complaint and the State's proceedings to determine the exact amounts that the sellers, including PPL complaint sought declaratory judgment, compensatory damages and attorneys Montana, would be required to refund. InSeptember 2004, the U.S. Court fees and costs for use of state and/or 'school trust' lands by hydropower facil- of Appeals for the Ninth Circuit held that the FERC had the additional legal ities and to require the defendants to adequately compensate the State and/or authority to order refunds for periods prior to October 2,2000, and ordered the State School Trust fund for full market value of lands occupied. Generally, the FERC to determine whether or not it would be appropriate to grant such the suit is founded on allegations that the bed of navigable rivers became additional refunds. 78 PPL CORPORATION 2004 ANNUAL REPORT
InJune 2003, the FERC took several actions as aresult of anumber of Through its subsidiaries, PPL is a licensed electricity supplier inMontana and related investigations. The FERC terminated proceedings pursuant to which it awholesale supplier inthe western U.S. InJune 2004, the Montana Attorney had been considering whether to order refunds for spot market bilateral sales General served PPL Montana and more than 20 other companies with subpoe-made inthe Pacific Northwest, including sales made by PPL Montana, during nas requesting documents, and PPL Montana has provided responsive docu-the period December 2000 through June 2001. The FERC explained that the ments to the Montana Attorney General. As with the other investigations taking totality of the circumstances made refunds unfeasible and inequitable, and that place as a result of the issues arising out of the electricity supply situation in it had provided adequate relief by adopting a price cap throughout the western California and other western states, PPL and its subsidiaries believe that they U.S. The FERC also denied pending complaints against long-term contracts have not engaged in any improper trading or marketing practices affecting the inthe western U.S. In these complaints, various power buyers had challenged Montana retail electricity market. selected long-term contracts that they entered into during 2000 and 2001, While PPL and its subsidiaries believe that they have not engaged inany complaining that the power prices were too high and reflected manipulation of improper trading practices, they cannot predict whether, or the extent to which, those energy markets. The FERC found that the complainants had not met their any PPL subsidiaries will be the target of any additional governmental investiga-burden of showing that changing or canceling the contracts was 'in the public tions or named inother lawsuits or refund proceedings, the outcome of any such interest and that the dysfunction inthe California markets did not justify lawsuits or proceedings or whether the ultimate impact on them of the electricity changing these long-term contracts. These orders have been appealed to the supply situation inCalifornia and other western states will be material. U.S. Court of Appeals for the Ninth Circuit. Intwo separate orders, the FERC PJM Capacity Litigation also ordered 65 different companies, agencies or municipalities to show cause InDecember 2002, PPL was served with a complaint against PPL, PPL why they should not be ordered to disgorge profits for 'gaming' or anomalous EnergyPlus and PPL Electric filed inthe U.S. District Court for the Eastern market behavior during 2000 and 2001. These orders to show cause address District of Pennsylvania by a group of 14 Pennsylvania boroughs that appar-both unilateral and joint conduct identified as the 'Enron trading strategies.! ently alleges, among other things, violations of the federal antitrust laws in Neither PPL EnergyPlus nor PPL Montana was included inthese orders to connection with the pricing of installed capacity in the PJM daily market during show cause, and they previously have explained in responses to data requests the first quarter of 2001. These boroughs were wholesale customers of PPL from the FERC that they have not engaged in such trading strategies. Finally, Electric. The claims of the boroughs are similar to those previously alleged by the FERC issued anew investigation order directing its staff to investigate a single borough in litigation brought inthe same court that is still pending. any bids made into the California markets in excess of $250/MWh during the Inaddition, inNovember 2003, PPL and PPL EnergyPlus were served with a period from May 20001o October 2000, a period of time prior to the period complaint which was filed inthe same court by Joseph Martorano, IlIl(d/b/a examined inconnection with most of the proceedings described above. To their ENERCO), that also alleges violations of the federal antitrust laws inearly knowledge, neither PPL EnergyPlus nor PPL Montana is being investigated by 2001. The complaint indicates that ENERCO provides consulting and energy the FERC under this new order. procurement services to clients inPennsylvania and New Jersey. InSeptember Litigation arising out of the California electricity supply situation has 2004, this complaint was dismissed by the District Court and the plaintiff has been filed in California courts against sellers of energy to the California ISO. appealed the dismissal to the U.S. Court of Appeals for the Third Circuit. The plaintiffs and intervenors in these legal proceedings allege, among other Each of the U.S. Department of Justice - Antitrust Division, the FERC and things, abuse of market power, manipulation of market prices, unfair trade the Pennsylvania Attorney General conducted investigations regarding PPLs practices and violations of state antitrust laws, and seek other relief, including PJM capacity market transactions in early 2001 and did not find any reason treble damages and attorneys' fees. While PPLs subsidiaries have not been to take action against PPL. named by the plaintiffs inthese legal proceedings, PPL Montana was named Although PPL believes the claims inthese complaints are without merit, by adefendant inits cross-complaint inaconsolidated court proceeding, it cannot predict the outcome of these matters. which combined into one master proceeding several of the lawsuits alleging antitrust violations and unfair trade practices. This generator denies that any New England Investigation unlawful, unfair or fraudulent conduct occurred but asserts that, if it is found InJanuary 2004, PPL became aware of an investigation by the Connecticut liable, the other generators and power marketers, including PPL Montana, Attorney General and the FERC's Office of Market Oversight and Investigation caused, contributed to and/or participated inthe plaintiffs' alleged losses. (M01OI) regarding allegations that natural gas-fired generators located In InFebruary 2004, the Montana Public Service Commission initiated a New England illegally sold natural gas instead of generating electricity during limited investigation of the Montana retail electricity market for the years the week of January 12,2004. Subsequently, PPL and other generators were 2000 and 2001, focusing on how that market was affected by transactions served with a data request by OM01. The data request indicated that PPL was involving the possible manipulation of the electricity grid inthe western U.S. not under suspicion of aregulatory violation, but that OMOI was conducting The investigation includes all public utilities and licensed electricity suppliers an initial investigation. PPL has responded to this data request. PPL also has inMontana, as well as other entities that may possess relevant information. responded to data requests of ISO - New England and data requests served PPL CORPORATION 2004 ANNUAL REPORT 79
Notes to Consolidated Financial Statements by subpoena from the Connecticut Attorney General. Both OMOI and ISO - cation. The PJM Industrial Customer Coalition, the PP&L Industrial Customer New England have issued preliminary reports finding no regulatory or other Alliance and the consumer advocates of Maryland and Pennsylvania filed violations concerning these matters. While PPL does not believe that it com- pleadings opposing the filings by the other PPL subsidiaries. These parties mitted any regulatory or other violations concerning the subject matter of these challenge the FERC's continued reliance on market-based rates to yield just investigations, PPL cannot predict the outcome of these investigations. and reasonable prices for wholesale electric transactions and suggest that the FERC change its tests for market power to include capacity and ancillary PJM Billing services markets. While PPL believes its filings demonstrate that all PPL sub-InDecember 2004, Exelon Corporation, on behalf of its subsidiary, PECO sidiaries pass the new tests established by the FERC inJune 2004, PPL cannot Energy, Inc. (PECO), filed acomplaint against PJM and PPL Electric with the predict the outcome of these proceedings. FERC alleging that PJM had overcharged PECO from April 1998 through May 2003 as a result of an error by PJM in the State Estimator Program used in FERC ProposedRules connection with billing all PJM customers for certain transmission, spot market InJuly 2002, the FERO issued aNotice of Proposed Rulemaking entitled energy and ancillary services charges. Specifically, the complaint alleges Remedying Undue Discrimination through Open Access Transmission Service that PJM mistakenly identified PPL Electric's Elroy substation transformer as and Standard Electricity Market Design." The proposed rule is currently avail-belonging to PECO and that, as a consequence, during times of congestion, able for public comment and contains a proposed implementation date of PECO's bills for transmission congestion from PJM erroneously reflected July 31, 2003. However, since the issuance of the proposed rule, the FERC energy that PPL Electric took from the Elroy substation and used to serve PPL has delayed the implementation date. This far-reaching proposed rule, inits Electric's load. The complaint also requests the FERC, among other things, to current form, purports to establish uniform transmission rules and astandard direct PPL Electric to refund to PJM $39 million, plus interest of approximately market design by, among other things:
$8million, and for PJM to refund these same amounts.to PECO. PPL Electric
- enacting standard transmission tariffs and uniform market mechanisms, and PPL Energy Supply do not believe that they or any PPL subsidiaries have
- monitoring and mitigating "market power,'
any financial responsibility or liability to PJM or PECO as aresult of PJM's
- managing transmission congestion through pricing and tradable financial alleged error. PPL cannot predict the outcome of this matter or the impact on rights, any PPL subsidiary.
- requiring independent operational control over transmission facilities,
- forming state advisory committees on regional transmission organizations FERC Market-Based Rate Authority and resource adequacy, and In December 1998, the FERC issued an order authorizing PPL EnergyPlus to
- exercising FERC jurisdiction over all transmission service.
make wholesale sales of electric power and related products at market-based rates. Inthat order, the FERC directed PPL EnergyPlus to file an updated mar- InApril 2003, the FERC issued awhile paper describing certain moditica-ket analysis within three years of the date of the order, and every three years tions to the proposed rule. The FERC has requested comments and is holding thereafter. PPL EnergyPlus filed its initial updated market analysis in December numerous public comment sessions concerning the white paper. 2001. Several parties thereafter filed interventions and protests requesting that Ifadopted, this proposed rule may have asignificant impact on PPL and PPL EnergyPlus be required to provide additional information demonstrating its subsidiaries, which cannot be predicted at this time. that it has met the FERC's market power tests necessary for PPL EnergyPlus to InNovember 2003, the FERC adopted aproposed rule to require all continue its market-based rate authority. PPL EnergyPlus has responded that existing and new electric market-based tariffs and authorizations to include the FERC does not require the economic test suggested by the intervenors and provisions prohibiting the seller from engaging inanticompetitive behavior or that, in any event, it would meet such economic test if required by the FERC. the exercise of market power. The FERC order adopts a list of market behavior InJune 2004, FERC approved certain changes to its standards for granting rules that apply to all electric market-based rate tariffs and authorizations, market-based rate authority. As aresult of the schedule adopted by the FERC, including those of PPL EnergyPlus and any other PPL subsidiaries that hold PPL EnergyPlus, PPL Electric, PPL Montana and most of PPL Generation's market-based rate authority. PPL does not expect this rule to have asignificant subsidiaries were required to file inNovember 2004 updated analyses dem- impact on its subsidiaries. onstrating that they should continue to maintain market-based rate authority Wallingford Deactivation under the new standards. PPL made two filings, one for PPL Montana and In January 2003, PPL negotiated an agreement with ISO - New England that one for most of the other PPL subsidiaries. The Montana Public Service would declare that four of the five units at PPLs Wallingford, Connecticut facil-Commission and the Montana Consumer Counsel filed pleadings opposing ity are 'reliability must run" units and put those units under cost-based rates. the filing by PPL Montana. The Montana Public Service Commission requested This agreement and the cost-based rates are subject to the FERC's approval, that the FERC hold a hearing on the market-based rate renewal application, and PPL filed a request with the FERC for such approval. PPL requested while the Montana Consumer Counsel suggested applying an altered version authority for cost-based rates because the current and anticipated wholesale of the FERC's tests for assessing market power in reviewing the renewal appli-80 PPL CORPORATION 2004 ANNUAL REPORT
prices inNew England are insufficient to cover the costs of keeping these units PPL owns a limited partnership interest inthe entity that owns and oper-available for operation. InMarch 2003, PPL filed an application with the New ates the Tyrone facility. InApril 2004, this entity received aprivate letter ruling England Power Pool to temporarily deactivate these four units. In May 2003, from the IRS. Similar to its conclusions relating to the Somerset facility, the the FERC denied PPLs request for cost-based rates in light of the FERC's IRS concluded that the synthetic fuel to be produced at the Tyrone facility changes to the market and bid mitigation rules of ISO - New England made qualifies for Section 29 tax credits. Inreliance on this private letter ruling, this inasimilar case involving generating units owned by NRG Energy, Inc. PPL entity has sold synthetic fuel produced at the Tyrone facility resulting inan subsequently has explained to the FERC that its changes to the market and aggregate of approximately $15 million of tax credits as of December 31, bid mitigation rules of ISO - New England will not provide sufficient revenues 2004. The Tyrone facility commenced commercial operations in the third to PPL, and PPL continues to seek approval of its cost-based rates. However, quarter of 2004, after being relocated to Kentucky from Pennsylvania. PPL has informed the New England Power Pool that it will not pursue its PPL also purchases synthetic fuel from unaffiliated third parties, at request to temporarily deactivate certain Wallingford units. InFebruary 2004, prices below the market price of coal, for use at its coal-fired power plants. PPL appealed the FERC s denial of its request for cost-based rates to the U.S. InJune 2003, the IRS announced that it had reason to question the Court of Appeals for the District of Columbia Circuit. PPL cannot predict the scientific validity of certain test procedures and results that have been outcome of this matter. presented to it by taxpayers with interests insynthetic fuel operations as evidence that the required significant chemical change has occurred, and IRS Synthetic Fuels Tax Credits that it was reviewing information regarding these test procedures and prac-PPL, through its subsidiaries, has interests intwo synthetic fuel production tices. In October 2003, the IRS announced that it had completed Its review facilities: the Somerset facility located in Pennsylvania and the Tyrone facility and determined that the test procedures and results used by taxpayers are located inKentucky. PPL receives tax credits pursuant to Section 29 of the scientifically valid, if the procedures are applied ina consistent and unbiased Internal Revenue Code based on the sale of synthetic fuel from these facilities manner. The IRS indicated that it would require taxpayers to comply with to unaffiliated third-party purchasers. Section 29 of the Internal Revenue Code certain sampling and data/record retention practices to obtain or maintain provides tax credits for the production and sale of solid synthetic fuels pro-aruling on significant chemical change. duced from coal. Section 29 tax credits are currently scheduled to expire PPL believes that the October 2003 IRS announcement and its receipt of at the end of 2007. the private letter ruling for the Tyrone facility following this announcement To qualify for the Section 29 tax credits, the synthetic fuel must meet three confirms that PPL is justified in its reliance on the private letter rulings for the primary conditions: (i) there must be asignificant chemical change inthe coal Somerset and Tyrone facilities, and that the test results that PPL presented to feedstock, (ii) the product must be sold to an unaffiliated entity, and (iii) the the IRS in connection with its private letter rulings are scientifically valid. In production facility must have been placed in service before July 1,1998. In addition, PPL believes that the Somerset facility and the Tyrone facility have addition, Section 29 provides for the phase-out of the synthetic fuel tax credit been operated incompliance with their respective private letter rulings and when the reference price for crude oil, as adjusted for inflation, exceeds a Section 29 of the Internal Revenue Code. certain threshold. The reference price is the annual average wellhead price per In October 2003, following the IRS announcement, It was reported that the barrel for all unregulated domestic crude oil. The average reference price for U.S. Senate Permanent Subcommittee on Investigations, of the Committee on crude oil through October 31, 2004, was $36.18 per barrel. Accordingly, the tax Governmental Affairs, had begun an investigation of the synthetic fuel industry credit phase-out did not impact results in 2004. Accounting for inflation, PPL and its producers. That investigation is ongoing. PPL cannot predict when the estimates that the 2005 tax credit phase-out would start at $51.15 per barrel investigation will be completed or the potential results of the investigation. and the tax credit would be totally eliminated at $64.20 per barrel. During 2004, certain other owners or operators of synthetic fuel facilities APPL subsidiary owns and operates the Somerset facility. InNovember reported that the IRS had questioned whether their facilities were placed inser-2001, PPL received aprivate letter ruling from the IRS pursuant to which, vice before July 1,1998. Whether or not afacility meets the 'placed inservice' among other things, the IRS concluded that the synthetic fuel produced at the requirement is based on the particular facts and circumstances relating to the Somerset facility qualifies for Section 29 tax credits. The Somerset facility operation of that facility. PPL is not aware of the facts and circumstances relat-uses the Covol technology to produce synthetic fuel, and the IRS issued the ing to the operation of the facilities being questioned by the IRS or the specific private letter ruling after its review and approval of that technology. Inreli-IRS position in these other matters. However, PPL believes that the Tyrone ance on this private letter ruling, PPL has sold synthetic fuel produced at the and Somerset facilities meet the in-service requirement. Somerset facility resulting inan aggregate of approximately $205 million of tax credits as of December 31, 2004. PPL CORPORATION 2004 ANNUAL REPORT 81
Notes to Consolidated Financial Statements Environmental Matters - Domestic is evaluating under CAIR the possible installation of SCR technology to reduce Due to the environmental issues discussed below or other environmental mat- nitrogen oxide emissions at Brunner Island Unit 3 at a later date. The combined ters, PPL subsidiaries may be required la modify, replace or cease operating cost of the scrubbers at Montour and Brunner Island and of the SCR at Brunner certain facilities to comply with statutes, regulations and actions by regulatory Island is expected to be approximately $730 million. bodies or courts. Inthis regard, PPL subsidiaries also may incur capital expen- The EPA has proposed mercury and nickel regulations and is expected to ditures or operating expenses in amounts which are not now determinable, finalize these regulations In2005. The proposed mercury regulations affect but which could be significant. coal-fired plants. With respect to mercury, the EPA has proposed two alterna-tive approaches: an emission trading program to take effect beginning January Air 2010 or a requirement to take effect in March 2008 that every unit install maxi-The Clean Air Act deals, inpart, with acid rain, attainment of federal ambient mum achievable control technology (MACT). The proposed nickel regulations ozone standards, fine particulate matter standards and toxic air emissions in impose MACT requirements on oil-fired units to take effect in2008. The nickel the U.S. PPLs subsidiaries are insubstantial compliance with the Clean Air regulations would affect Martins Creek Units 3and 4.The cost of complying Act. The Bush administration's Clear Skies Initiative and proposals of certain with these regulations Isnot now determinable, but could be significant. members of Congress would amend the Clean Air Act. These amendments The Ozone Transport Commission (consisting of Pennsylvania and ten could require significant further reductions inemissions of nitrogen oxide other states and the District of Columbia) has passed a resolution calling for and sulfur dioxide and reductions in emission of mercury. Although the Bush reductions insulfur dioxide, nitrogen oxide and mercury emissions that are administration's Clear Skies Initiative does not include limits on carbon dioxide more stringent than those proposed by EPA or contemplated by the Clear Skies emissions, rising concerns about global warming have prompted several Initiative. Should Pennsylvania implement such reductions, the cost to PPL is states to pass legislation capping carbon emissions and other bills have been not now determinable but could be significant. introduced at the federal level proposing mandatory carbon dioxide reductions. In1999, the EPA initiated enforcement actions against several utilities, An initiative is underway in nine Northeast states to propose acap-and-trade asserting that older, coal-fired power plants operated by those utilities have, program, the details of which are expected to be released inmid-2005 for car-over the years, been modified inways that subject them to more stringent bon dioxide emission from fossil fuel-fired power plants. Increased pressure
'New Source requirements under the Clean Air Act. The EPA has since issued is also coming from investor organizations and the international community.
notices of violation and commenced enforcement activities against other Pennsylvania and Montana have not, at this time, established any formal utilities. The future direction of the EPA's enforcement initiative is presently programs to address carbon dioxide and other greenhouse gases. Ifthese or unclear. However, states and environmental groups have also been bringing other legislative or regulatory initiatives result inmandatory reductions being enforcement actions alleging violations of New Source requirements by coal-imposed, the cost of such reductions could be significant. fired plants. At this time, PPL is unable to predict whether such EPA, state or The EPA has developed new standards for ambient levels of ozone and citizens enforcement actions will be brought with respect to any of its affiliates' fine particulates inthe U.S. These standards have been upheld following court plants. However, the EPA regional offices that regulate plants in Pennsylvania challenges. To facilitate attainment of these standards, the EPA has proposed (Region 111) and Montana (Region VIII) have indicated an intention to issue a rule (now called the Clean Air Interstate Rule - CAIR) for 29 midwestern information requests to all utilities in their jurisdiction. The Region Vil office and eastern states, including Pennsylvania, to reduce national sulfur dioxide issued such a request to PPL Montana's Corette plant in2000 and the Colstrip emissions by 40% (about 50% inthe CAIR region) and to extend the currently plant in2003. The Region lIl office issued such arequest to PPL Generation's seasonal program for nitrogen oxide emission reductions to ayear-round Martins Creek plant in2002. PPL and its subsidiaries have responded to the program (inthe CAIR region) starting in2010. Starting in 2015, the proposed Corette and Martins Creek information requests and began responding to the rule would require further reductions insulfur dioxide and nitrogen oxide of Colstrip information request. The EPA has stayed further production of Colstrip 30% and 20%, respectively, from 2010 levels. The proposed rule would allow documents pending discussion among the Colstrip owners and the EPA. The these reductions to be achieved through cap-and-trade programs, and is EPA has taken no further action following the Martins Creek and Coretle sub-consistent with the Bush administration's proposed amendments to the Clean mittals. PPL cannot presently predict what, if any, action the EPA might take in Air Act, except that it applies to only the 29 states. In order to continue meeting this regard. Should the EPA or any state or citizens group initiate one or more existing sulfur dioxide reduction requirements of the Clean Air Act, PPL will enforcement actions against PPL or its subsidiaries, compliance with any such need to use its banked sulfur dioxide allowances and to purchase additional enforcement actions could result inadditional capital and operating expenses allowances. As of December 31, 2004, PPL has enough sulfur dioxide allow-which are not now determinable, but could be significant. ances to cover expected consumption through 2006, but will experience short-In2003, the EPA issued changes to its 'New Source' regulations that falls in some years after 2006. As a result and based on projected allowance clarify what projects are exempt from 'New Sources requirements as routine prices, PPL plans to complete the installation of sulfur dioxide scrubbers at its maintenance and repair. Under these clarifications, any project to replace exist-Montour Units 1and 2by 2008 and Brunner Island Unit 3 by 2010. PPL also 82 PPL CORPORATION 2004 ANNUAL REPORT
ing equipment with functionally equivalent equipment would be considered concerns it and when the EPA promulgates Best Available Retrofit Technology routine maintenance and excluded from 'New Source review if the cost of the requirements for nitrogen oxide emissions. The EPA isasserting that regula-replaced equipment does not exceed 20% of the replacement cost of the entire tions it promulgated in1980 triggered this requirement. PPL believes that the process unit, the basic design is not changed and no permit limit is exceeded. ACO is unfounded and is discussing the matter with the EPA. Inaddition, These clarifications would substantially reduce the uncertainties under the the Montana Department of Environmental Quality (DEO) is questioning prior New Source regulations; however, they have been stayed by the U.S. whether the permit limits for sulfur dioxide emissions from Colstrip Units 3 Court of Appeals for the District of Columbia Circuit. PPL is therefore continu- and 4are too high under provisions of the Clean Air Act that limit allowable ing to operate under the 'New Source' regulations as they existed prior to the emissions from sources built after 1978. PPL is engaged insettlement nego-EPAs 2003 clarifications. tiations on these matters with the EPA, the Montana DEO and the Northern The New Jersey DEP and some New Jersey residents raised environmental Cheyenne Tribe. concerns with respect to the Martins Creek plant, particularly with respect to Water/Waste sulfur dioxide emissions and the opacity of the plant's plume. These issues Seepages have been detected at one of the wastewater basins at the Montour were raised Inthe context of an appeal by the New Jersey DEP of the Air Quality station, and PPL Montour is working with the Pennsylvania DEP to assess Plan Approval issued by the Pennsylvania DEP to the adjacent Lower Mt. Bethel the seepage and develop an abatement plan. PPL Brunner Island is assessing facility. InOctober 2003, PPL finalized an agreement with the New Jersey DEP impacted groundwater at two closed wastewater basins to determine what and the Pennsylvania DEP pursuant to which PPL will reduce sulfur dioxide abatement actions may be needed. PPL plans to comprehensively address emissions from its Martins Creek power plant. Under the agreement, PPL issues related to wastewater basins at all of its Pennsylvania plants as part Martins Creek will shut down the plant's two coal-fired generating units by of the process to renew the residual waste permits for these basins which September 2007 and may repower them any time after shutting them down expire within the next three years. The cost of addressing seepages at PPL's so long as it follows all applicable state and federal requirements, including Pennsylvania plants is not now determinable, but could be significant. installing the best available pollution control technology. Pursuant to the PPL Montana continues to undertake certain groundwater investigation agreement, PPL Martins Creek began reducing the fuel sulfur content for the and remediation measures at its Colstrip plant to address groundwater con-coal units as well as the plant's two oil-fired units inJune 2004. Inaddition, tamination and property damage claims noted below. These measures include PPL will donate to anon-profit organization 70% of the excess emission offering to extend city water to certain residents who live near the plant. The allowances and emission reduction credits that result from shutting down or costs of these investigations and remedial measures are not now determinable, repowering the coal units. As aresult of the agreement, the New Jersey DEP but could be significant. withdrew its challenge to the Air Quality Plan Approval for the Lower Mt. Bethel InMay 2003, approximately 50 plaintiffs brought an action now pending facility. The agreement will not result inmaterial costs to PPL. The agreement at the Montana Sixteenth Judicial District Court, Rosebud County, against PPL does not address the issues raised by the New Jersey DEP regarding the vis-Montana and the other owners of the Colstrip plant alleging property damage ible opacity of emissions from the oil-fired units at the Martins Creek plant. Ifit from seepage from the freshwater and wastewater ponds at Colstrip. This is determined that actions must be taken to address the visible opacity of these action could result inPPL Montana and the other Colstrip owners being liable emissions, such actions could result incosts that are not now determinable, for damages and being required to take additional remedial measures beyond but could be significant. those noted above. The cost to PPL Montana of any such damages and reme-In addition to the opacity concerns raised by the New Jersey DEP, the dial measures is not now determinable, but could be significant. Pennsylvania DEP also has raised concerns about the opacity of emissions Brunner Island's NPDES permit contains a provision requiring further from the Martins Creek and Montour plants. PPL is discussing these concerns studies on the thermal impact of the cooling water discharge from the plant. with the Pennsylvania DER If it is determined that actions must be taken to These studies are underway and are expected to be completed in2006. The address the Pennsylvania DEP's concerns, such actions could result in costs Pennsylvania DEP has stated that it believes the studies to date show that the that are not now determinable, but could be significant. temperature of the discharge must be lowered. The Pennsylvania DEP has also InDecember 2003, PPL Montana, as operator of the Colstrip facility. stated that it believes the plant is inviolation of apermit condition prohibiting received an Administrative Compliance Order (ACO) from the EPA pursuant the discharge from changing the river temperature by more than two degrees to the Clean Air Act. The ACO alleges that Units 3 and 4of the facility have per hour. PPL isdiscussing these matters with the agency. Depending on the been inviolation of the Clean Air Act permit at Colstrip since 1980. The permit outcome of these discussions, the plant could be subject to additional capital required Colstrip to submit for review and approval by the EPA an analysis and operating costs that are not now determinable, but could be significant. and proposal for reducing emissions of nitrogen oxide to address visibility PPL CORPORATION 2004 ANNUAL REPORT 83
Notes to Consolidated Financial Statements The EPA has significantly tightened the water quality standard for arsenic. At December 31, 2004, PPL Electric and PPL Gas Utilities had accrued The revised standard becomes effective in2006. The revised standard may approximately $3million and $8million, representing the estimated amounts result in action by individual states that could require several PPL subsidiaries each will have to spend for site remediation, including those sites covered by to either further treat wastewater or take abatement action at their power plants, each company's consent orders mentioned above. Depending on the outcome or both. The cost of complying with any such requirements is not now deter- of investigations at sites where investigations have not begun or have not been minable, but could be significant. completed, the costs of remediation and other liabilities could be substantial. The EPA recently finalized requirements for new or modified water intake PPL also could face other non-remediation liabilities at sites included in the structures. These requirements affect where generating facilities are built, consent order or other contaminated sites, the costs of which are not now establish intake design standards, and could lead to requirements for cooling determinable, but could be significant. towers at new and modified power plants. Another new rule that was finalized Under the Pennsylvania Clean Streams Law, subsidiaries of PPL inJuly 2004 addresses existing structures. PPL does not believe that either of Generation are obligated to remediate acid mine drainage at former mine sites these rules will impose material costs on PPL subsidiaries. However, six north- and may be required to take additional measures to prevent potential acid mine eastern states have challenged the new rules for existing structures as being drainage at previously capped refuse piles. One PPL Generation subsidiary is inadequate. Ifthis challenge is successful, it could result inthe EPA establish- pumping and treating mine water at two mine sites. Another PPL Generation ing stricter standards for existing structures that could impose significant subsidiary is installing passive wetlands treatment at a third site, and the costs on PPL subsidiaries. Pennsylvania DEP has suggested that it may require that PPL Generation subsidiary to pump and treat the mine water at that third site. At December 31, Superfund and Other Remediation 2004, aPPL Energy Supply subsidiary had accrued $28 million to cover the In1995, PPL Electric and PPL Generation entered into aconsent order with the costs of pumping and treating groundwater at the two mine sites for 50 years Pennsylvania DEP to address anumber of sites that were not being addressed and for operating and maintaining passive wetlands treatment at the third site. under another regulatory program such as Superfund, but for which PPL Electric In 1999, the Montana Supreme Court held infavor of several citizens' or PPL Generation may be liable for remediation. This may include potential groups that the right to aclean and healthful environment is afundamental PCB contamination at certain PPL Electric substations and pole sites; potential right guaranteed by the Montana Constitution. The court's ruling could result contamination at anumber of coal gas manufacturing facilities formerly owned insignificantly more stringent environmental laws and regulations, as well or operated by PPL Electric; oil or other contamination which may exist at as an increase incitizens' suits under Montana's environmental laws. The some of PPL Electric's former generating facilities; and potential contamination effect on PPL Montana of any such changes in laws or regulations or any such at abandoned power plant sites owned by PPL Generation. As of December 31, increase in legal actions is not currently determinable, but could be significant. 2004, work has been completed for 98% of the sites included inthe consent Future cleanup or remediation work at sites currently under review, or at order. Additional sites formerly owned or operated by PPL Electric are added sites not currently identified, may result inmaterial additional operating costs to the consent order on a case-by-case basis. for PPL subsidiaries that cannot be estimated at this time. In1996, PPL Gas Utilities entered into a similar consent order with the Pennsylvania DEP to address a number of sites where subsidiaries of PPL Gas Asbestos Utilities may be liable for remediation. The sites primarily include former coal There have been increasing litigation claims throughout the U.S. based on gas manufacturing facilities. Subsidiaries of PPL Gas Utilities are also investi- exposure to asbestos against companies that manufacture or distribute asbes-gating the potential for any mercury contamination from gas meters and regu- tos products or that have these products on their premises. Certain of PPL's lators. Accordingly, PPL Gas Utilities and the Pennsylvania DEP have agreed to generation subsidiaries and certain of its energy services subsidiaries, such add 72 meter/regulation sites to the consent order. As of December 31, 2004, as those that have supplied, may have supplied or installed asbestos material PPL Gas Utilities had addressed 48% of the sites under its consent order. inconnection with the repair or installation of process piping and heating, Since the PPL Electric Consent Order expired on January 31, 2005, and ventilating and air conditioning systems, have been named as defendants in since only four sites remained, PPL has negotiated anew consent order with asbestos-related lawsuits. PPL cannot predict the outcome of these lawsuits Pennsylvania DEP that combines both PPL Electric's and PPL Gas Utilities' or whether additional claims may be asserted against its subsidiaries inthe consent orders into one single agreement. future. PPL does not expect that the resolution of the current lawsuits will have amaterial adverse effect on its results of operations. 84 PPL CORPORATION 2004 ANNUAL REPORT Il
Electric and Magnetic Fields laws and governmental regulations for the protection of the environment. Concerns have been expressed by some members of the public regarding the There are no material legal or administrative proceedings pending against potential health effects of power frequency electric and/or magnetic fields WPD with respect to environmental matters. See 'Environmental Matters - (EMFs) which are emitted by all devices carrying electricity, including electric Domestic - Electric and Magnetic Fields for adiscussion of EMFs. transmission and distribution lines and substation equipment. Government Latin America officials in the U.S. and the U.K. have reviewed this issue. The U.S. National Certain of PPLs affiliates have electric distribution operations in Latin America. Institute of Environmental Health Sciences concluded in2002 that, for most PPL believes that these affiliates have taken and continue to take measures health outcomes, there is no evidence of EMFs causing adverse effects. The to comply with the applicable laws and governmental regulations for the agency further noted that there is some epidemiological evidence of an asso-protection of the environment. There are no material legal or administrative ciation with childhood leukemia, but that this evidence is difficult to interpret proceedings pending against PPLs affiliates inLatin America with respect to without supporting laboratory evidence. The U.K. National Radiological environmental matters. Protection Board concluded in2004 that, while the research on EMFs does not provide a basis to find that EMFs cause any Illness, there is abasis to con- Other sider precautionary measures beyond existing exposure guidelines. PPL and NuclearInsurance its subsidiaries believe the current efforts to determine whether EMFs cause PPL Susquehanna isamember of certain insurance programs which provide adverse health effects should continue and are taking steps to reduce EMFs, coverage for property damage to members' nuclear generating stations. where practical, inthe design of new transmission and distribution facilities. Facilities at the Susquehanna station are insured against property damage PPL is unable to predict what effect, if any, the EMF issue might have on its losses up to $2.75 billion under these programs. PPL Susquehanna is also a operations and facilities either inthe U.S. or abroad, and the associated cost, member of an insurance program which provides insurance coverage for the or what, if any, liabilities it might incur related to the EMF issue. cost of replacement power during prolonged outages of nuclear units caused by certain specified conditions. Under the property and replacement power Lower Mt. Bethel Insurance programs, PPL Susquehanna could be assessed retroactive pre-InAugust 2002, the Northampton County Court of Common Pleas issued miums inthe event of the insurers' adverse loss experience. At December 31, adecision setting the permissible noise levels for operation of the Lower 2004, this maximum assessment was about $39 million. Mt. Bethel facility. PPL appealed the court's decision to the Commonwealth PPL Susquehanna's public liability for claims resulting from anuclear Court, and an intervenor inthe lawsuit cross-appealed the court's decision. incident at the Susquehanna station is limited to about $10.8 billion under In May 2003, the Commonwealth Court remanded the case to the Court of provisions of The Price Anderson Amendments Act of 1988. PPL Susquehanna Common Pleas for further findings of fact concerning the zoning application is protected against this liability by acombination of commercial insurance relating to the construction of the facility. InSeptember 2003, the Court of and an industry assessment program. In the event of anuclear incident at any Common Pleas ruled in PPLs favor while also reaffirming its decision on the of the reactors covered by The Price Anderson Amendments Act of 1988, PPL noise levels, and the intervenor appealed this ruling to the Commonwealth Susquehanna could be assessed up to $201 million per incident, payable at Court. InApril 2004, the Commonwealth Court affirmed the decision of the
$20 million per year.
Court of Common Pleas. The intervenor has pending before the Supreme Court of Pennsylvania a Petition for Allowance of Appeal. Guarantees and Other Assurances The certificate of occupancy for the Lower Mt. Bethel facility was issued Inthe normal course of business, PPL enters into agreements that provide by the local township zoning officer inApril 2004, and the facility was placed financial performance assurance to third parties on behalf of certain subsid-inservice inMay 2004. InMay 2004, the intervenor inthe legal proceedings iaries. Such agreements include, for example, guarantees, stand-by letters of regarding the facility's permissible noise levels filed an appeal with the township credit issued by financial institutions and surety bonds issued by insurance board regarding the issuance of the certificate of occupancy. The hearing on the companies. These agreements are entered into primarily to support or enhance appeal was held in December 2004, and the intervenor's appeal was denied. the creditworthiness attributed to asubsidiary on astand-alone basis or to facilitate the commercial activities in which these subsidiaries enter. Environmental Matters - International PPL fully and unconditionally guarantees all of the debt securities of PPL U.K Capital Funding, awholly owned financing subsidiary of PPL. WPD's distribution businesses are subject to numerous regulatory and statu-tory requirements with respect to environmental matters. PPL believes that WPD has taken and continues to take measures to comply with the applicable PPL CORPORATION 2004 ANNUAL REPORT 85
Notes to Consolidated Financial Statements PPL provides certain guarantees that are required to be disclosed in Interpretation of FASB Statements No. 5,57, and 107 and Rescission of FASB accordance with FIN 45, 'Guarantor's Accounting and Disclosure Requirements Interpretation No. 34. The table below details guarantees provided as of for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an December 31, 2004: Recorded Liability at Exposure at December 31, December 31, Expiration 2004 2003 2004(") Date Description Residual value guarantees of S1 $16 $ 90 2005 PPL Services, PPL Montana and PPL Electric lease certain equipment under master operating lease leased equipment agreements. The term for each piece of equipment leased by PPL Services and PPL Montana is one year after which time the lease may be extended from month-to-month until terminated. The term for each piece of equipment leased by PPL Electric ranges from one to three years, after which time the lease term may be extended for certain equipment either (i)from month-to-month until terminated or (ii) for up to two additional years. Under these lease arrangements. PPL Services, PPL Montana and PPL Electric provide residual value guarantees to the lessors. PPL Services, PPL Montana and PPL Electric generally could be required to pay the guaranteed residual value of the leased equipment itthe proceeds received from the sale of a piece of equipment upon termination of the lease are less than the expected residual value of the equipment. These guarantees generally ex-pire within one year. unless the lease terms are extended. The liability recorded isincluded in'Other current liabilities' on the Balance Sheet Although the expiration date noted is2005, equipment of similar value isgenerally leased and guaranteed on an on-going basis. WPD LLP guarantee of 82 2027 WPD LILP guarantees all of the obligations of SIUK Capital Trust I,an unconsolidated wholly owned obligations under SIUK Capital financing subsidiary of WPD LLPU under its trust preferred securities. The exposure at December 31. Trust I preferred securities 2004, reflects principal payments only. See Note 22 for furher discussion. Support agreements to 9 2007 PPL Generation has entered into certain partnership arrangements for the sale of coal to third guarantee partnerships obliga- parties. PPL Generation also has executed support agreements for the benefit of these third-party lions for the sale of coal purchasers pursuant to which itguarantees the partnerships' obligations inan amount up to its pro
- rata ownership interest in the partnerships.
Retroactive premiums under 39 PPL Susquehanna iscontingently obligated to pay this amount related to potential retroactive nuclear insurance programs premiums that could be assessed under its nuclear insurance programs. See 'Nuclear Insurance' for additional information. _ Nuclear claims under The 201 Under the Price Anderson Amendments Act of 1988. this isthe maximum amount PPL Susque-Price Anderson Amendments hanna could be assessed for each incident atany of the nuclear reactors covered by this Act. See Act of 1988 'Nuclear Insurance' for additional information. Contingent purchase price 11 4 55 2007 Certain agreements relating to the purchase of ownership irterests insynfuel projects contain payments to former owners provisions that require certain PPL Energy Supply subsidiaries to make contingent purchase price of syntuel projects payments to the former owners. These payments are non-recourse to PPL. PPL Energy Supply and their other subsidiaries and are based primarily upon production levels of the synfuel projects. The maximum potential amount of future payments isnot explicitly stated inthe related agreements. WPD guarantee related to a 20 2005 Guarantee of a payment (El0 million) under a contract that was assigned as part o asale of one of contract assigned as pan of a WPD's businesses. sale of one of its businesses Indemnifications for entities 293 2008 to 2012 Inconnection with the liquidation of wholly owned subsidiaries that have been deconsolidated upon in liquidation turning the entities over to the liquidators, certain affiliates of PPL Global have agreed to indemnify the liquidators, directors and/or the entities themselves for any liabilities or expenses arising during the liquidation process, including liabilities and expenses of the entities placed into liquidation. In some cases, the indemnifications are limited to a maximum amount that isbased on distributions made from the subsidiary to its parent either prior or subsequent to being placed into liquidation. In other cases, the maximum amount of the indemnifications isnot explicitly stated inthe agreements. The indemnifications generally expire two to seven years subsequent to the date of dissolution of the entities. The exposure noted isonly for those cases inwhich the agreements provide for a specific limit on the amount of the indemnification, and the expiration date was estimated based on an estimate of the date of dissolution date of the entities. _ WPD guarantee ofanunconsoli- 2 2008 The maximum potential amount of future payments isnot explicitly stated inthe related agreements. dated entitys lease obligations Written put options for 7 2005 PPL EnergyPlus enters into written put option contracts under which, inexchange for apremium commodities received. itagrees to purchase aspecified quantity of a commodity for a specified price it the counterparty exercises the option. Guarantee of a portion of an 7 2008 The exposure at December 31 2004, reflects principal payments only. unconsolidated entitys debt
"') Represents the estimated maximum potential amount of future payments that could berequired to bemade under the guarantee.
86 PPL CORPORATION 2004 ANNUAL REPORT
PPL and its subsidiaries provide other miscellaneous guarantees through make reasonable efforts to terminate the guarantees. Finally. WPD and its contracts entered into inthe normal course of business. These guarantees are affiliates remain secondarily responsible for lease payments under certain primarily inthe form of various indemnifications or warranties related to services leases that they have assigned to third parties. or equipment, and vary induration. The obligated amounts of these guarantees PPL, on behalf of itself and its subsidiaries, maintains insurance that often are not explicitly stated, and the overall maximum amount of the obligation covers liability assumed under contract for bodily injury and property damage. under such guarantees cannot be reasonably estimated. Historically, PPL and its The coverage requires a$4million deductible per occurrence and provides subsidiaries have not made any significant payments with respect to these types maximum aggregate coverage of approximately $175 million. This insurance of guarantees. As of December 31, 2004, the aggregate fair value of these indem-may be applicable to certain obligations under the contractual arrangements nifications related to arrangements entered into subsequent to December 31, discussed above. 2002, was insignificant. Among these guarantees are the following:
- PPUs and its subsidiaries' leasing arrangements, including those discussed above, contain certain indemnifications infavor of the lessors (e.g., tax and environmental matters).
- 15. Related Party Transactions
- Inconnection with their issuances of securities, PPL and its subsidiaries See Note 22 for adiscussion of PPL Capital Funding Trust I and SIUK Capital engage underwriters, purchasers and purchasing agents to whom they Trust I,and see Note 8for adiscussion of various transactions involving PPL provide indemnification for damages incurred by such parties arising from Capital Funding subordinated notes that were held by PPL Capital Funding the companies' material misstatements or omissions inthe related offering Trust I.As of December 31, 2004 and 2003. $89 million and $681 million is documents. In addition, inconnection with these securities offerings and reflected as 'Long-term Debt with Affiliate Trusts' on PPLs Balance Sheet.
other financing transactions, PPL and its subsidiaries also engage trustees or custodial, escrow or other agents to act for the benefit of the investors or to provide other agency services. PPL and its subsidiaries typically provide indemnification to these agents for any liabilities or expenses incurred by
- 16. Other Income - Net them inperforming their obligations. The breakdown of PPLs 'Other Income - net' was as follows:
- In connection with certain of their credit arrangements, such as the asset- 2004 2003 2002 backed commercial paper program inwhich PPL Electric began participating Other Income in August 2004, PPL and its subsidiaries provide the credit lenders or Interest income - IRS settlement $23 Other interest Income 16 $12 $28 arrangers with indemnification that is standard for each particular type of Sale of CEMAR (Note 9) 23 transaction. For instance, under the credit agreement for the asset-backed Equity earnings 3 2 commercial paper program, PPL Electric and its special purpose subsidiary Realized earnings on nuclear have agreed to indemnify the commercial paper conduit, the sponsoring decommissioning trust(') (7) 20 financial institution and the liquidity banks for damages incurred by such Gain by WPD on the disposition of property 3 3 6 Hyder-related activity 3 8 parties arising from, among other things, abreach by PPL Electric or the 4 Rental Income subsidiary of their various representations, warranties and covenants inthe Reduction of reserves for receivables credit agreement, PPL Electric's activities as servicer with respect to the from Enron 10 Legal claim settlements 3 pledged accounts receivable and any dispute by PPL Electric's customers Miscellaneous - domestic 7 8 5 with respect to payment of the accounts receivables. Miscellaneous - international 7 10 13
- PPL EnergyPlus is party to numerous energy trading or purchase and sale Total 78 78 54 agreements pursuant to which the parties indemnify each other for any dam-Other Deductions ages arising from events that occur while the indemnifying party has title Impairment of investment Intechnology to the electricity or natural gas. For example, inthe case of the party that is supplier (Note 9) 10 delivering the product, such party would be responsible for damages arising Asset valuation %Tite-down 3 1 from events occurring prior to delivery. Charitable contributions 2 2 2 Realized loss on available-for-sale investment 6
- Inconnection with their sales of various businesses, WPD and its affili-Non-operating taxes, other than income 2 1 3 ates have provided the purchasers with Indemnifications that are standard Hyder-relaled activity 5 for such transactions, including Indemnifications for certain pre-existing Miscellaneous - domestic 6 4 7 liabilities and environmental and tax matters. Inaddition, inconnection with Miscetlaneous - International 11 10 7 certain of these sales, WPD and its affiliates have agreed to continue their OtherIncome-net $41 $58 $29 obligations under existing third-party guarantees, either for aset period of ° 2004 Includes a5(10) million and aS(2) million adjustment to the realized earnings on time following the transactions or upon the condition that the purchasers the nuclear decommissioning trust recorded in2003. The adjustment was recorded Inthe fourth quarter of 2004, as the adjustment was not material to the financial statements for any affected periods In2003 or 2004, or as recorded inthe fourth quarter of 2004.
PPL CORPORATION 2004 ANNUAL REPORT 87
Notes to Consolidated Financial Statements PPL utilizes forward contracts, futures contracts, options, swaps and
- 17. Derivative Instruments and tolling agreements as part of its risk management strategy to minimize unan-Hedging Activities ticipated fluctuations inearnings caused by commodity price, interest rate and foreign currency volatility. All derivatives are recognized on the balance PPL adopted SFAS 133, 'Accounting for Derivative Instruments and Hedging Activities, on January 1,2001. InApril 2003, the FASB issued SFAS 149, sheet at their fair value, unless they meet SFAS 133 criteria for exclusion
'Amendment of Statement 133 on Derivative Instruments and Hedging Activities,' (see discussion in 'Accounting Designations' below).
which amended and clarified SFAS 133 to improve financial accounting and Fair Value Hedges reporting for derivative instruments and hedging activities. To ensure that PPL and its subsidiaries enter into financial or physical contracts to hedge a contracts with comparable characteristics are accounted for similarly, SFAS portion of the fair value of firm commitments of forward electricity sales. These 149 clarified the circumstances under which acontract with an initial net contracts range inmaturity through 2006. Additionally, PPL and its subsidiar-investment meets the characteristics of a derivative, clarified when a derivative ies enter into financial contracts to hedge fluctuations inmarket value of exist-contains a financing component, amended the definition of an underlying ing debt issuances. These contracts range inmaturity through 2029. and amended certain other existing pronouncements. Additionally, SFAS 149 PPL did not recognize significant gains or losses resulting from hedges of placed additional limitations on the use of the normal purchase or normal firm commitments that no longer qualified as fair value hedges for 2004, 2003 sale exception. SFAS 149 was effective for contracts entered into or modified or 2002. and for hedging relationships designated after June 30, 2003, except certain PPL also did not recognize any gains or losses resulting from the ineffec-provisions relating to forward purchases or sales of when-issued securities tive portion of fair value hedges for these years. or other securities that did not yet exist. PPL adopted SFAS 149 as of July 1, 2003. The adoption of SFAS 149 did not have asignificant impact on PPL or Cash Flow Hedges PPL and its subsidiaries enter into financial and physical contracts, including its subsidiaries. forwards, futures and swaps, to hedge the price risk associated with electric, Management of Market Risk Exposures gas and oil commodities. These contracts range in maturity through 2010. Market risk is the potential loss PPL may incur as aresult of price changes Additionally, PPL and its subsidiaries enter into financial interest rate swap associated with a particular financial or commodity instrument. PPL is exposed contracts to hedge interest expense associated with both existing and antici-to market risk from: pated debt issuances. These swaps range inmaturity through 2015. PPL and
- commodity price risk for energy and energy-related products associated its subsidiaries also enter into foreign currency forward contracts to hedge the with the sale of electricity from its generating assets and other electricity cash flows associated with foreign currency-denominated debt, the exchange marketing activities, the purchase of fuel for the generating assets and rates associated with firm commitments denominated in foreign currencies energy trading activities; and the net investment of foreign operations. These forward contracts range
- interest rate risk associated with variable-rate debt and the fair value of in maturity through 2028.
fixed-rate debt used to finance operations, as well as the fair value of debt Cash flow hedges may be discontinued if it is probable that the original securities invested in by PPL's nuclear decommissioning fund; forecasted transaction will not occur by the end of the originally specified time
- foreign currency exchange rate risk associated with investments inaffiliates period. Due to the extinguishment of aconsolidated trust's debt related to in Latin America and Europe, as well as purchases of equipment in curren- the Sundance and University Park generating facilities inJune 2004, interest cies other than U.S. dollars; and rate swaps that hedged the interest payments on the debt were terminated.
- equity securities price risk associated with the fair value of equity securities Therefore, PPL reclassified a$3million pre-tax loss ($2 million aflter-tax) invested in by PPUs nuclear decommissioning fund. from other comprehensive income to Interest Expense' on the Statement of Income for the twelve months ended December 31, 2004. Additionally, PPL PPL has a risk management policy approved by the Board of Directors and its subsidiaries discontinued certain cash flow hedges for the years ended to manage market risk and counterparty credit risk. The RMC, comprised of December 31, 2003 and 2002, which resulted inthe reclassification of net senior management and chaired by the Vice President-Risk Management, losses, after tax, from other comprehensive income (reported in 'Wholesale oversees the risk management function. Key risk control activities designed to energy marketing revenues, 'Energy purchases' and 'Interest Expense' on ensure compliance with risk policies and detailed programs include, but are the Statement of Income): $(2) million in 2004, $(7) million in2003 and not limited to, credit review and approval, validation of transactions and market prices, verification of risk and transaction limits, sensitivity analyses, and daily $(9) million in2002.
portfolio reporting, including open positions, mark-to-market valuations, and other risk measurement metrics. 88 PPL CORPORATION 2004 ANNUAL REPORT
Due to hedge ineffectiveness, PPL reclassified net gains and losses, after Any unrealized gains or losses on transactions receiving cash flow hedge tax, that were not significant, from other comprehensive income (reported treatment are recorded inother comprehensive income. These unrealized gains in Wholesale energy marketing' revenues and 'Energy purchases' on the and losses become realized when the contracts settle and are recognized in Statement of Income) for the years ended December 31, 2004 and 2003. PPL income when the hedged transactions occur. reclassified a$2million net loss, after tax, due to hedge ineffectiveness from Inaddition to energy-related transactions, PPL and Its subsidiaries enter other comprehensive income to income for the year ended December 31, 2002. into financial interest rate and foreign currency swap contracts to hedge Ineffectiveness associated with interest rate and foreign currency deriva- interest expense associated with both existing and anticipated debt issuances. tives was not significant for 2004, 2003 and 2002. PPL and its subsidiaries also enter into foreign currency swap contracts to As of December 31, 2004, the deferred net loss, after tax, on derivative hedge the fair value of firm commitments denominated inforeign currency instruments in'Accumulated other comprehensive income' expected to be and net investments inforeign operations. As with energy transactions, the reclassified into earnings during the next twelve months was $42 million. circumstances and intent existing at the time of the transaction determine a The following table shows the change inaccumulated unrealized gains or contract's accounting designation, which is subsequently verified by an inde-losses on derivatives after tax, inaccumulated other comprehensive income for pendent Internal group on adaily basis. The following is asummary of certain the following periods: guidelines that have been provided to PPLs treasury department, which is 2004 2003 responsible for contract designation: Beginning accumulated derivative gain S 36 S7
- Transactions lo lock-in an interest rate prior to a debt issuance are con-Net change associated with current period hedging sidered cash tlow hedges. Any unrealized gains or losses on transactions activities and other (211) (42) receiving cash flow hedge treatment are recorded inother comprehensive Net change associated with net investment hedges 1 (6) income and are amortized as acomponent of interest expense over the life Net change from reclassification Into earnings 105 77 of the debt.
Ending accumulated derivative gain (loss) $ (69) S36
- Transactions entered into to hedge fluctuations inthe value of existing debt are considered fair value hedges. To the extent that the change inthe fair Accounting Designations value of the derivative offsets the change inthe fair value of the existing For energy contracts that meet the definition of aderivative, the circum- debt, there is no earnings impact, as both changes are reflected ininterest stances and intent existing at the time that energy transactions are entered expense. Realized gains and losses over the life of the hedge are reflected into determine their accounting designation, which is subsequently verified ininterest expense.
by an independent internal group on a daily basis. The following summarizes
- Transactions entered into to hedge the value of anet investment of foreign the electricity guidelines that have been provided to the marketers who are operations are considered net investment hedges. To the extent that the responsible for contract designation for derivative energy contracts in accor- derivatives are highly effective at hedging the value of the net investment, dance with SFAS 149: gains and losses are recorded in other comprehensive income/loss and will
- Any wholesale and retail contracts to sell electricity and the related capacity not be recorded inearnings until the investment is disposed of.
that are expected to be delivered from PPLs generation or that do not meet
- Derivative transactions which do not qualify for hedge accounting treatment the definition of aderivative are considered 'normal.' These transactions are are marked to market through earnings.
not recorded inthe financial statements and have no earnings impact until delivery. Related Implementation Issues
- Physical electricity-only transactions can receive cash flow hedge treatment InJune 2001, the FASB issued definitive guidance on DIG Issue C15, if all of the qualifications under SFAS 133 are met. "Scope Exceptions: Normal Purchases and Normal Sales Exception for Certain
- Any physical energy sale or purchase deemed to be a'market call' are con- Option-Type Contracts and Forward Contracts inElectricity.' DIG Issue C15 sidered speculative, with unrealized gains or losses recorded immediately provides additional guidance on the classification and application of derivative through earnings. accounting rules relating to purchases and sales of electricity utilizing forward
- Financial transactions, which can be settled in cash, cannot be considered and option contracts. This guidance became effective as of July 1,2001. In
.normal' because they do not require physical delivery. These transactions December 2001, the FASB revised the guidance inDIG Issue C15, principally receive cash tlow hedge treatment if they lock inthe price PPL will receive or related to the eligibility of options for the normal purchases and normal sales pay for energy expected to be generated or purchased inthe spot market. exception. The revised guidance was effective April 1,2002. InNovember
- Physical and financial transactions for gas and oil to meet fuel and retail 2003, the FASB again revised the guidance in DIG Issue C15 lo clarify the requirements can receive cash flow hedge treatment if they lock-in the price application of derivative accounting rules for contracts that may involve capac-PPL will pay inthe spot market. ity. The guidance was effective January 1,2004, for PPL and did not have a
- Option contracts that do not meet the requirements of DIG Issue C15, significant impact on its financial statements.
'Scope Exceptions: Interpreting the Normal Purchases and Normal Sales Exception as an Election, do not receive hedge accounting treatment and are marked to market through earnings.
PPL CORPORATION 2004 ANNUAL REPORT 89
Notes to Consolidated Financial Statements InJune 2003, the FASB issued DIG Issue C20, 'Scope Exceptions: Credit ConcentratIon Interpretation of the Meaning of Not Clearly and Closely Related in Paragraph PPL and its subsidiaries enter into contracts with many entities for the pur-10(b) Regarding Contracts with aPrice Adjustment Feature,' which became chase and sale of energy. Many of these contracts are considered anormal effective October 1,2003. DIG Issue C20 addresses arequirement inSFAS part of doing business and, as such, the mark-to-market value of these 133 that contracts that qualify for normal treatment must feature pricing that contracts is not reflected inthe financial statements. However, the mark-to-isclearly and closely related to the asset being sold. Diversity in practice had market value of these contracts is considered when committing to new developed among companies. DIG Issue C20 permits normal treatment if a business from acredit perspective. price adjustment factor, such as abroad market index (e.g., Consumer Price PPL and its subsidiaries have credit exposures to energy trading partners. Index), is not extraneous to both the cost and the fair value of the asset being The majority of these exposures are the mark-to-market value of multi-year sold and is not significantly disproportionate interms of the magnitude and contracts for energy sales and purchases. Therefore, if these counterparties direction when compared with the asset being sold. However, DIG Issue C20 fail to perform their obligations under such contracts, PPL and its subsidiar-also stated that prior guidance did not permit the use of abroad market index ies would not experience an immediate financial loss, but would experience to serve as a proxy for an ingredient or direct factor. Thus, DIG Issue C20 lower revenues or higher costs infuture years to the extent that replacement required that contracts that had been accounted for as normal, but were not sales or purchases could not be made at the same prices as those under the eligible for normal treatment under prior guidance be reflected on the balance defaulted contracts. sheet at their fair value, with an offsetting amount reflected in income as of the At December 31, 2004, PPL had acredit exposure of $296 million to energy date of adoption. These contracts could then be evaluated under the provisions trading partners. Ten counterparties accounted for 69% of this exposure. No of DIG Issue C20 to determine whether they could qualify for normal treatment other individual counterparty accounted for more than 3%of the exposure. prospectively. PPL recorded apre-tax charge to income of $2million inthe Eight of the ten counterparties had an investment grade credit rating from fourth quarter of 2003 to comply with the provisions of DIG Issue C20. Standard & Poor's Ratings Services (S&P). Two non-investment grade counter-PPL and its subsidiaries adopted the final provisions of EITF 02-3, Issues parties have remained current on obligations under their respective contracts. Involved inAccounting for Derivative Contracts Held for Trading Purposes and PPL and its subsidiaries have the right to request collateral from each Contracts Involved in Energy Trading and Risk Management Activities,' during of these counterparties, except for one government agency, in the event their the fourth quarter of 2002. As such, PPL reflects its net realized and unreal- credit ratings fall below investment grade. Itis also the policy of PPL and its ized gains and losses associated with all derivatives that are held for trading subsidiaries to enter into netting agreements with all of their counterparties purposes in the 'Net energy trading margins' line on the Statement of Income. to minimize credit exposure. Non-derivative contracts that met the definition of energy trading activities as Enron Bankruptcy defined by EITF 98-10, 'Accounting for Energy Trading and Risk Management Inconnection with the December 2001 bankruptcy filings by Enron Corporation Activities' are reflected inthe financial statements using the accrual method and its affiliates (collectively, Enron), two PPL subsidiaries terminated certain of accounting. Under the accrual method of accounting, unrealized gains and electricity, gas and other trading agreements with Enron. InOctober 2002, the losses are not reflected in the financial statements. Prior periods were reclassi-PPL subsidiaries filed proofs of claim in Enron's bankruptcy proceedings inthe tied. No cumulative effect adjustment was required upon adoption. aggregate of approximately $50 million, which reflected the fair value of the PPL and its subsidiaries adopted the final provisions of EITF 03-11, forward contracts at the time of termination, as well as any net unpaid receiv-
'Reporting Realized Gains and Losses on Derivative Instruments That Are ables from completed transactions. These claims were against Enron North Subject to FASB Statement No. 133 and Not Held for Trading Purposes' as America and Enron Power Marketing (the Enron Subsidiaries), and against Defined inIssue No. 02-3,- prospectively as of October 1,2003. As a result Enron Corporation, which had guaranteed the Enron Subsidiaries' performance of this adoption, non-trading bilateral sales of electricity at major market (the Enron Corporation Guarantees). PPL established areserve for uncollect-delivery points are netted with purchases that offset the sales at those same ible accounts for the total amount of the claim.
delivery points. Amajor market delivery point is any delivery point with liquid pricing available. The impact of adopting EITF 03-11 was areduction inboth Wholesale energy marketing' revenues and 'Energy purchases by $277 mil-lion on the Statement of Income for the year ended December 31, 2004, and a reduction of $105 million for the year ended December 31, 2003. 90 PPL CORPORATION 2004 ANNUAL REPORT
During 2003, PPL and Enron engaged indiscussions regarding the amount of claims that would be allowed against the Enron Subsidiaries. Although no 19. Goodwill and Other Intangible Assets formal agreement on such amounts was reached, PPL believed that its claims Acquired Intangible Assets against the Enron Subsidiaries would eventually be allowed inthe bankruptcy The carrying amount and the accumulated amortization of acquired intangible at approximately $46 million. Accordingly, PPL reduced its receivables from assets were as follows: Enron, and the associated reserve for uncollectible accounts, by $4million. December 31, 2004 December 31, 2003 PPL also determined that it isprobable that its subsidiaries will recover Carrying Accumulated Carrying Accumulated approximately $10 million of these receivables from the Enron Subsidiaries, Amount Amortization Amount Amortization and may collect additional amounts under the Enron Corporation Guarantees. Land and transmission rights $275 $ 98 $269 $94 Therefore, PPL determined that it was appropriate to reduce its reserve by Emission allowances 78 49 an additional $10 million. Licensesandother 71 11 51 4 InSeptember 2004, the PPL subsidiaries entered into an agreement with $424 $109 $369 $98 the Enron Subsidiaries pursuant to which the parties agreed that the PPL claims Current intangible assets are included in Current Assets - Other,' and would be allowed inthe bankruptcy at approximately $46 million. InJanuary long-term intangible assets are included in 'Other intangibles' on the Balance 2005, the bankruptcy court inthe Enron case approved this agreement. Sheet. Enron Corporation has filed suits against the PPL subsidiaries asserting Amortization expense for 2004,2003 and 2002 was approximately $6mil-that the Enron Corporation Guarantees should be voided as fraudulent trans- lion each year. Amortization expense isestimated at $7million per year for fers. If Enron Corporation were successful inthese suits, the claims against 2005 through 2009. Enron Corporation under the Enron Corporation Guarantees would not be allowed inthe bankruptcy proceeding. Goodwill The changes inthe carrying amounts of goodwill by segment were as follows: Supply International Delivery Total
- 18. Restricted Cash BalanceasofDecember31,2002 $85 $334 $ 55 S 474 Effect of foreign currency The following table details the components of restricted cash by type, as of exchange rates 92 92 December 31: Purchase accounting adjustments ') 8 500 508 Discontinued operations (6)(' (6) 2004 2003 Balance as of December 31. 2003 93 920 55 1,068 Current: Effect of foreign currency Collateral for letters of credit() $ 42 exchange rates 93 93 Miscellaneous 8 $10 Purchase accounting adjustments 1 (35)(CI (34)
Restricted cash - current 50 10 BalanceasofDecember31,2004 $94 $978 $ 55 $1,127 Noncurrent: (")See Note 9for additional information on international Goodwill adjustments. Insurance subsidiary required reserves(b) 37 19 (b) InDecember 2003, the PPL Global Board of Managers authorized the sale of its Investment PPL Transition Bond Company Indenture reserves W 22 29 inaLatin American telecommunications company. As aresult of this decision, PPL Global Restricted cash - noncurrent 59 48 wrote off $6million of goodwill. SeeNote 9for additional information. Total restricted cash $109 $58 "' Consists primarily of adjustments pursuant to EITF Issue 97-3, Uncertainties Related to Income Taxes InaPurchase Business Combination.- "' Adeposit with afinancial institution of funds from the asset-backed commercial paper pro-gram to fully collateratize $42 million of letters of credit. See Note 8for further discussion on the asset-backed commercial paper program. (bi Funds that WPDs Insurance subsidiary isrequired to keep on deposit "' Credit enhancement for PPL Transition Bond Companys $2.4 billion Series 1999-1 Bonds to protect against losses or delays inscheduled payments. I PPL CORPORATION 2004 ANNUAL REPORT 91
. .I U Notes to Consolidated Financial Statements Inaccordance with SFAS 142, 'Goodwill and Other Intangible Assets,' Amounts collected from PPL Electric's customers for decommissioning, which PPL and its subsidiaries adopted on January 1,2002, the reporting less applicable taxes, are deposited in external trust funds for investment units of the Supply, Delivery and International segments completed the transi- and can only be used for future decommissioning costs. The fair value of the tion impairment test inthe first quarter of 2002. A transition goodwill impair- nuclear decommissioning trust fund was $409 million and $357 million as ment loss of $150 million was recognized in the Latin American reporting unit of December 31,2004 and 2003.
within the International segment, and is reported in 'Cumulative Effects of The changes in the carrying amounts of asset retirement obligations Changes inAccounting Principles' on the Statement of Income. The fair value were as follows: of the reporting unit was estimated using the expected present value of future Asset retirement obligation atJanuary 1,2003 S229 cash flows. Add: Accretion expense 18 Less: Settlement 5 Asset retirement obligation atDecember 31, 2003 242
- 20. Workforce Reduction Add: Accretion expense 19 Less: Settlement 4 Inan effort to improve operational efficiency and reduce costs, PPL and its Asset retIrement obligation at December 31, 2004 $257 subsidiaries commenced aworkforce reduction assessment inJune 2002. The program was broad-based and impacted all employee groups, except certain positions that are key to providing high-quality service to PPL's electricity delivery customers.
PPL recorded charges of $9million and $75 million in2003 and 2002.
- 22. Variable Interest Entities These charges included employee terminations associated with implementa- InJanuary 2003, the FASB issued Interpretation No. 46, 'Consolidation of tion of the Automated Meter Reading project. There was no impact to Variable Interest Entities, an Interpretation of ARB No. 51.' FIN 46 clarified that earnings in 2004. variable interest entities, as defined therein, that do not disperse risks among As of December 31,2004,587 employees of PPL subsidiaries were the parties involved should be consolidated by the entity that is determined terminated and four have committed to retire in early 2005, completing the to be the primary beneficiary. InDecember 2003, the FASB revised FIN 46 workforce reduction plan. The program provided primarily for enhanced early by issuing Interpretation No. 46 (revised December 2003), 'Consolidation of retirement benefits and/or one-time special pension separation allowances Variable Interest Entities, an Interpretation of ARB No. 51,' which is known as based on an employee's age and years of service. These features of the pro- FIN 46(R) and replaces FIN 46. FIN 46(R) does not change the general con-gram are paid from the PPL Retirement Plan pension trust and increased PPL's solidation concepts of FIN 46. Among other things, FIN 46(R) clarifies certain pension liabilities in 2002 and 2003 when recorded. Substantially all of the provisions of FIN 46 and provides additional scope exceptions for certain types accrued non-pension benefits have been paid. of businesses. FIN 46 applied immediately to variable interest entities created after January 31,2003, and to variable interest entities inwhich an enterprise obtained an interest after January 31, 2003. FIN 46(R) provides that apublic
- 21. Asset Retirement Obligations entity that is not asmall business issuer (i) should apply FIN 46 or FIN 46(R) to entities that are considered to be SPEs no later than the end of the first PPL adopted SFAS 143, 'Accounting for Asset Retirement Obligations,' reporting period that ends after December 15, 2003 and (ii) should apply the effective January 1,2003. Inconnection with the adoption of SFAS 143, provisions of FIN 46(R) to all entities no later than the end of the first reporting PPL recorded acumulative effect of adoption that increased net income period that ends after March 15, 2004.
by $63 million (net ct tax of $44 million), or $0.36 per share. As permitted by FIN 46(R), PPL and its subsidiaries adopted FIN 46 effec-PPL identified various legal obligations to retire long-lived assets, the tive December 31, 2003, for entities created before February 1,2003, that largest of which relates to the decommissioning of the Susquehanna sta- are considered to be SPEs. This adoption resulted inthe consolidation of the tion. PPL identified and recorded other asset retirement obligations related lessors under the operating leases for the Sundance, University Park and Lower to significant interim retirements at the Susquehanna station, and various Mt. Bethel generation facilities, as well as the deconsolidation of two wholly environmental requirements for coal piles, ash basins and other waste basin owned trusts. See below for further discussion. Also, as permitted by FIN 46(R), retirements. PPL and its subsidiaries deferred the application of FIN 46 for other entities and PPL also identified legal retirement obligations that were not measurable adopted FIN 46(R) for all entities on March 31, 2004. The adoption of FIN 46(R) at this time. These items included the retirement of certain transmission did not have amaterial impact on the results of PPL and its subsidiaries. assets and areservoir. These retirement obligations were not measurable due to indeterminable dates of retirement. 92 PPL CORPORATION 2004 ANNUAL REPORT
Additional Entities Consolidated guaranteed the payment of principal and interest on the subordinated notes In May 2001, asubsidiary of PPL entered Into alease arrangement, as lessee, issued to the trust by PPL Capital Funding. PPL also fully and unconditionally for the development, construction and operation of commercial power genera- guaranteed all of the trust's obligations under the trust preferred securities. tion facilities. The lessor was created for the sole purpose of owning the facili- All of the preferred securities of PPL Capital Funding Trust I were cancelled in ties and incurring the related financing costs. The $660 million operating lease 2004, and the trust was terminated InJune 2004. See Note 8 for adiscussion arrangement covered the 450 MW gas-tired Sundance project near Coolidge, of the cancellation of the trust preferred securities. Arizona and the 540 MW gas-fired University Park project near University SIUK Capital Trust I issued $82 million of 8.23% preferred securities Park, Illinois. These facilities were substantially complete inJuly 2002, at maturing inFebruary 2027 and invested the proceeds in 8.23% subordinated which time the initial lease term commenced. InJune 2004, PPL subsidiaries debentures maturing in February 2027 issued by SIUK Limited. Thus, the purchased the Sundance and University Park generation assets from the les- preferred securities are supported by a corresponding amount of subordinated sor. See Note 8for further discussion of the purchase. debentures. SIUK Limited owned all of the common securities of SIUK Capital In December 2001, another subsidiary of PPL entered into a $455 million Trust I and guaranteed all of SIUK Capital Trust l's obligations under the operating lease arrangement, as lessee, for the development, construction and preferred securities. InJanuary 2003, SIUK Limited transferred its assets and operation of a582 MW gas-tired combined-cycle generation facility located liabilities, including the common securities of SIUK Capital Trust I and the inLower Mt. Bethel Township, Northampton County, Pennsylvania. The les- obligations under the subordinated debentures, to WPD LLP. Therefore, WPD sor was created for the sole purpose of owning the facilities and incurring LLP currently guarantees all of SIUK Capital Trust l's obligations under the the related financing costs. The initial lease term commenced on the date of preferred securities. SIUK Capital Trust I may. at the discretion of WPD LLP, commercial operation, which occurred in May 2004, and ends inDecember redeem the preferred securities, inwhole or in part, at 104.115% of par begin-2013. The lease financing, which is included in 'Long-term Debt,' is secured ning February 2007 and thereafter at an annually declining premium over par by, among other things, the generation facility. As of December 31, 2004, the through January 2017, after which time they are redeemable at par. facility had acarrying value of $470 million, net of accumulated deprecia-lion and amortization of $10 million, and was Included in 'Property, Plant and Equipment - net and 'Other intangibles' on the Balance Sheet. As of 23. New Accounting Standards December 31,2003, the facility had acarrying value of $442 million, which SFAS 123(R) was included in Construction work inprogress and 'Other intangibles' on InDecember 2004, the FASB issued SFAS 123 (revised 2004), 'Share-the Balance Sheet. Based Payment: which is known as SFAS 123(R) and replaces SFAS 123, PPL was required to consolidate the financial statements of the lessors
'Accounting for Stock-Based Compensation: as amended by SFAS 148, under the operating leases for the Sundance, University Park and Lower Accounting for Stock-Based Compensation-Transition and Disclosure.
Mt. Bethel generation facilities effective December 31,2003, since it was the Among other things, SFAS 123(R) eliminates the alternative to use the intrinsic primary beneficiary of these entities. Upon initial consolidation, PPL recog-value method of accounting for stock-based compensation. SFAS 123(R) nized acharge of $27 million (net of tax of $18 million) as acumulative effect requires public entities to recognize compensation expense for awards of of achange inaccounting principle. equity instruments to employees based on the grant-date fair value of the Entities Deconsolidated awards. SFAS 123(R) is effective for public entities that do not file as small Effective December 31,2003, PPL deconsolidated PPL Capital Funding Trust business issuers as of the beginning of the first interim or annual period that I and SIUK Capital Trust I. These trusts were deconsolidated because PPL was begins after June 15, 2005. not the primary beneficiaries of the trusts under interpretations of FIN 46. The SFAS 123(R) requires public entities to apply the modified prospective deconsolidation of the trusts did not impact the earnings of PPL. See below for application transition method of adoption. Under this application, entities a discussion of PPLs interest inthe trusts. See Note 15 for adiscussion of the must recognize compensation expense based on the grant-date fair value presentation of the related party debt. for new awards granted or modified after the effective date and for unvested In May 2001, PPL and PPL Capital Funding Trust 1,awholly owned financ- awards outstanding on the effective date. Additionally, public entities may ing subsidiary of PPL, issued $575 million of 7.75% PEPS Units. Each PEPS choose to apply modified retrospective application to periods before the effec-Unit consisted of (i) acontract to purchase shares of PPL common stock on tive date of SFAS 123(R). This application may be applied either to all prior or prior to May 2004 and (ii) atrust preferred security of PPL Capital Funding years for which SFAS 123 was effective or only to prior interim periods inthe Trust I with amaturity date of May 2006. The trust's sole source of funds for year of initial adoption of SFAS 123(R). Under modified retrospective applica-distributions were from payments of interest on 7.29% subordinated notes of tion, prior periods would be adjusted to recognize compensation expense as PPL Capital Funding, due May 18, 2006, that were issued to the trust. PPL though stock-based awards granted, modified or settled incash in fiscal years beginning after December 15, 1994, had been accounted for under SFAS 123. PPL CORPORATION 2004 ANNUAL REPORT 93
Notes to Consolidated Financial Statements PPL and its subsidiaries must adopt SFAS 123(R) no later than July 1, $29 million that have been inacontinuous unrealized loss position for 2005. PPL and its subsidiaries do not plan to apply modified retrospective 12 months or longer. This minor decline Invalue is primarily due to interest application to any periods prior to the date of adoption. Inaddition, PPL and rate changes on government securities. Currently, PPL Energy Supply believes its subsidiaries adopted the fair-value method of accounting for stock-based it is reasonable to expect these securities to recover from this temporary compensation under SFAS 123 effective January 1,2003. Therefore, the decline invalue. adoption of SFAS 123(R) is not expected to have a material impact on PPL EITF Issue 03-6 and its subsidiaries. See Note 1for adiscussion of the change in accounting InMarch 2004, the FASB ratified EITF Issue 03-6, 'Participating Securities for stock-based compensation as of January 1,2003. and the Two-Class Method under FASB Statement No. 128, 'Earnings per FIN 46(R) Share'.' EITF Issue 03-6 addresses anumber of issues regarding the calcula-See Note 22 for adiscussion of FIN 46(R) 'Consolidation of Variable Interest tion of basic EPS by companies that have issued securities other than common Entities, an Interpretation of ARB No. 51,' and the impact of its adoption. stock that participate in dividends and earnings, which are known as participat-ing securities. EITF Issue 03-6 requires participating securities to be included EITF Issue 03-1 inthe calculation of basic EPS using the two-class method and provides InMarch 2004, the FASB ratified certain consensuses inEITF Issue 03-1, guidance in applying the two-class method. EITF Issue 03-6 is effective for
'The Meaning of Other-Than-Temporary Impairment and Its Application to reporting periods beginning after March 31, 2004, and it requires restatement Certain Investments.' EITF Issue 03-1 provides guidance for determining when of prior periods. PPL adopted EITF Issue 03-6 during the second quarter of an investment incertain debt and equity securities is considered impaired, 2004. The initial adoption did not have an impact on PPL.
whether that impairment is other than temporary and the measurement of an impairment loss. EITF Issue 03-1 also contains disclosure requirements related EITF Issue 03-16 to information about impairments that have not been recognized as other than InMarch 2004, the FASB ratified EITF Issue 03-16, 'Accounting for temporary as well as disclosure requirements for investments accounted for Investments in Limited Liability Companies.' EITF Issue 03-16 provides that an under the cost method. The recognition and measurement provisions of EITF investment ina limited liability company (LLC) that maintains aspecific owner-Issue 03-1 were originally required to be applied to other-than-temporary ship account for each investor should be viewed similarly to an investment in impairment evaluations as of the balance sheet date inreporting periods begin- a limited partnership for purposes of determining whether anoncontrolling ning after June 15, 2004. However, in September 2004 the FASB issued FSP interest inthe LLC should be accounted for using the cost or equity method. EITF Issue 03-1-1, 'Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, EITF Issue 03-16 is effective for reporting periods beginning after June 15,
'The Meaning of Other-Than-Temporary Impairment and Its Application to 2004, and is required to be applied as achange inaccounting principle with a Certain Investments',' which temporarily delayed the effective date for applying cumulative effect adjustment reflected inthe period of adoption. PPL and its the recognition and measurement provisions. The disclosure provisions related subsidiaries adopted EITF Issue 03-16 effective July 1,2004. The adoption did to cost method investments are effective for annual financial statements for not have amaterial impact on the results of PPL and its subsidiaries.
fiscal years ending after June 15, 2004, while all other disclosure provisions EITF Issue 04-8 were effective for annual financial statements for fiscal years ending after InOctober 2004, the FASB ratified the consensuses in EITF Issue 04-8, December 15, 2003.
'The Effect of Contingently Convertible Instruments on Diluted Earnings per The EITF is currently considering issuing additional guidance on assessing Share.' EITF Issue 04-8 requires contingently convertible instruments to be other-than-temporary impairments under EITF Issue 03-1. The potential impact included indiluted EPS, if dilutive, regardless of whether the market price of adopting the recognition and measurement provisions of EITF Issue 03-1 is trigger for conversion has been met. EITF Issue 04-8 is effective for reporting not yet determinable, but could be material.
periods ending after December 15, 2004, and it requires restatement of prior As of December 31, 2004, PPL Energy Supply's nuclear decommissioning periods incertain circumstances. PPL adopted EITF Issue 04-8 effective trust fund contained investments with an aggregate unrealized loss position of December 31, 2004. Since PPL modified the terms of PPL Energy Supply's approximately $3million, of which $1million was attributable to investments 2.625% Convertible Senior Notes due 2023 inNovember 2004, the adoption with an aggregate fair value of approximately $56 million that have been ina did not have amaterial impact on PPLs diluted EPS for 2004 and did not result continuous unrealized loss position for less than 12 months and $2million inany changes to diluted EPS for prior periods. See Note 4for adiscussion of was attributable to investments with an aggregate fair value of approximately the modification of the terms of the Convertible Senior Notes. See Note 8for a discussion of the consent solicitation that effected the modifications. 94 PPL CORPORATION 2004 ANNUAL REPORT
FSP FAS 106-1 and FSP FAS 106-2 isclaimed on the tax return. FSP FAS 109-2 provides an exception to the See Note 12 for a discussion of FSP FAS 106-1 and FSP FAS 106-2, SFAS 109 requirement to reflect inthe period of enactment the effect of anew 'Accounting and Disclosure Requirements Related to the Medicare Prescription tax law. Under FSP FAS 109-2, acompany isallowed time beyond the financial Drug, Improvement and Modernization Act of 2003. reporting period in which enactment occurred in order to evaluate the effect of the American Jobs Creation Act on its plan for reinvestment or repatriation of FSP FAS 109-1 and FSP FAS 109-2 foreign earnings for purposes of applying SFAS 109. FSP FAS 109-2 provides In December 2004, the FASB issued FSP FAS 109-1. 'Application of FASB that a company that is evaluating the repatriation provision of the American Statement No. 109, 'Accounting for Income Taxes,' to the Tax Deduction on Jobs Creation Act shall apply the provisions of SFAS 109 as it decides on a Qualified Production Activities Provided by the American Jobs Creation Act plan for reinvestment or repatriation of its unremitted foreign earnings. Both of 2004- and FSP FAS 109-2, 'Accounting and Disclosure Guidance for the FSP FAS 109-1 and FSP FAS 109-2 are effective December 21 2004. Foreign Earnings Repatriation Provision within the American Jobs Creation Act FSP FAS 109-1 and FSP FAS 109-2 did not impact PPL and its subsidiaries' of 2004.- FSP FAS 109-1 requires companies to account for the tax deduction financial results for 2004. PPL and its subsidiaries are inthe process of evaluat-for qualified domestic production activities provided by the American Jobs ing the impact on future years, and such impact could be material. See Note Creation Act as a special deduction inaccordance with SFAS 109. Thus, the 5for discussion of the American Jobs Creation Act and disclosures regarding impact of the deduction will be reported inthe period inwhich the deduction potential future repatriation of earnings. PPL CORPORATION 2004 ANNUAL REPORT 95
I Reconciliation of Financial Measures (Unaudited) Millions ofdollars, except per share data
'Net Income' is afinancial measure determined inaccordance with generally 'Earnings from Ongoing Operations' excludes the impact of unusual items.
accepted accounting principles (GAAP). 'Earnings from Ongoing Operations' Earnings from ongoing operations should not be considered as an alternative as referenced inthis Annual Report, is anon-GAAP financial measure. to net income, which is an indicator of operating performance determined in However, PPLs management believes that it provides useful information accordance with GAAP. PPL believes that earnings from ongoing operations, to investors, as asupplement to the comparable GAAP financial measure. although anon-GAAP measure, is also useful and meaningful to investors Following is additional information on this non-GAAP financial measure, because it provides them with PPLs underlying earnings performance as including a reconciliation to Net Income. another criterion inmaking their investment decisions. PPLs management also uses earnings from ongoing operations in measuring certain corporate performance goals. Other companies may use different measures to present financial performance. Reconciliation of Earnings from Ongoing Operations and Net Income' (Millions of Dollars) (Per Share - Diluted) 2004 2003 2004 2003 Earnings from Ongoing Operations $690 $642 $ 3.72 S3.71 Unusual Items (net of tax): Impairment of investment intechnology supplier (6) (0.03) Sale of CGE (7) (0.04) Sale of CEMAR 23 0.13 Discontinued operations (2) (0.01) Asset retirement obligation 63 0.36 Consolidation of ott-balance sheet projects (27) (0.16) Discontinued operations (20) (0.1) CEMAR-related net tax benefit 81 0.47 Worklorce reduction (5) (0.03) Total Unusual Items 8 92 0.05 0.53 Net Income $698 $734 $ 3.77 $4.24 Reconciliation of Business Segment Earnings from Ongoing Operations and Net Income* For the year ended December31, 2004 Supply International Delivery Total Earnings from Ongoing Operations $427 $183 $80 $690 Unusual items (6) 14 8 Net Income $421 $197 $80 $698
'See page 24 inManagements Discussion and Analysis for financial statement note references for each of these unusual items for 2004 and 2003.
96 PPL CORPORATION 2004 ANNUAL REPORT
Glossary of Terms and Abbreviations £ - British pounds sterling. Derivative - a financial instrument or other contract with all three of the following characteristics: 1945 First Mortgage Bond Indenture - PPL Electric's a. It has (1) one or more underlyings and (2) one or more Mortgage and Deed of Trust, dated as of October 1, 1945, notional amounts or payment provisions or both. Those terms to Deutsche Bank Trust Company Americas, as trustee, determine the amount of the settlement or settlements, and, as supplemented. in some cases, whether or not a settlement is required.
- b. It requires no initial net investment or an initial net 2001 Senior Secured Bond Indenture - PPL Electric's investment that is smaller than would be required for other Indenture, dated as of August 1, 2001, to JPMorgan Chase types of contracts that would be expected to have a similar Bank, as trustee, as supplemented. response to changes in market factors.
- c. Its terms require or permit net settlement, it can readily be AFUDC (Allowance for Funds Used During Construction) - settled net by a means outside the contract, or it provides for the cost of equity and debt funds used to finance construction delivery of an asset that puts the recipient in a position not projects of regulated businesses, which is capitalized as part substantially different from net settlement.
of construction cost. DIG - Derivatives Implementation Group. ANEEL - National Electric Energy Agency, Brazil's agency that regulates the transmission and distribution of electricity. DRIP - Dividend Reinvestment Plan. APA - Asset Purchase Agreement. EC - Electricidad de Centroamerica, S.A. de C.V., an El Salvadoran holding company and the majority owner APB - Accounting Principles Board. of DelSur. EC was also the majority owner of El Salvador Telecom, S.A. de C.V. until the sale of this company in June ARB - Accounting Research Bulletin. 2004. PPL Global has 100% ownership of EC. ARO - asset retirement obligation. EITF - Emerging Issues Task Force, an organization that assists the FASB in improving financial reporting through Bangor Hydro - Bangor Hydro-Electric Company. the identification, discussion and resolution of financial accounting issues within the framework of existing Bct - billion cubic feet. authoritative literature. CEMAR - Companhia Energetica do Maranhao, a Brazilian Elfec - Empresa de Luz y Fuerza Electrica Cochabamba S.A., electric distribution company in which PPL Global had a a Bolivian electric distribution company in which PPL Global majority ownership interest until the transfer of this interest has a majority ownership interest. in April 2004. Emel - Empresas Emel S.A., a Chilean electric distribution CGE - Compailia General de Electricidad, S.A., a distributor holding company in which PPL Global has a majority of electricity and natural gas with other industrial segments in ownership interest. Chile and Argentina in which PPL Global had an 8.7% direct and indirect minority ownership interest until the sale of this EMF - electric and magnetic fields. interest in March 2004. Enrichment - the concentration of fissionable isotopes to Clean Air Act - federal legislation enacted to address certain produce a fuel suitable for use in a nuclear reactor. environmental issues related to air emissions including acid rain, ozone and toxic air emissions. EPA - Environmental Protection Agency, a U.S. government agency. CTC - competitive transition charge on customer bills to recover allowable transition costs under the Customer EPS - earnings per share. Choice Act. ESOP - Employee Stock Ownership Plan. Customer Choice Act - the Pennsylvania Electricity Generation Customer Choice and Competition Act, legislation FASB - Financial Accounting Standards Board, a rulemaking enacted to restructure the state's electric utility industry to organization that establishes financial accounting and create retail access to a competitive market for generation of reporting standards. electricity. FERC - Federal Energy Regulatory Commission, the federal DelSur - Distribuidora de Electricidad Del Sur, S.A. de C.V., agency that regulates interstate transmission and wholesale an electric distribution company in El Salvador, a majority sales of electricity and related matters. of which is owned by EC. FIN - FASB Interpretation. DEP - Department of Environmental Protection, a state government agency. FSP - FASB Staff Position. PPL CORPORATION 2004 ANNUAL REPORT 97
. .11 GAAP - generally accepted accounting principles. NUGs (Non-Utility Generators) - generating plants not owned by public utilities, whose electrical output must be purchased Griffith - a 600 MW gas-fired station in Kingman, Arizona, by utilities under the PURPA if the plant meets certain criteria.
that is jointly owned by indirect subsidiaries of PPL Generation and Duke Energy Corporation. Ofgem - Office of Gas and Electricity Markets, the British agency that regulates transmission, distribution and wholesale GWh - gigawatt-hour, one million kilowatt-hours. sales of electricity and related matters. Hyder - Hyder Limited, a subsidiary of WPDL that was the PCB - polychlorinated biphenyl, an additive to oil used in previous owner of South Wales Electricity plc. In March 2001, certain electrical equipment up to the late-1970s. It is now South Wales Electricity plc was acquired by WPDH Limited classified as a hazardous chemical. and renamed WPD (South Wales). PEPS Units (Premium Equity Participating Security Units, ICP - Incentive Compensation Plan. or PEPSsm Units) - securities issued by PPL and PPL Capital Funding Trust I that consisted of a Preferred Security and a ICPKE - Incentive Compensation Plan for Key Employees. forward contract to purchase PPL common stock. Integra - Empresa de Ingenieria y Servicios Integrales PEPS Units, Series B (Premium Equity Participating Security Cochabamba S.A., a Bolivian construction and engineering Units, or PEPSsm Units, Series B) - securities issued by PPL services company, in which PPL Global has a majority and PPL Capital Funding that consisted of an undivided ownership interest. interest in a debt security issued by PPL Capital Funding and guaranteed by PPL, and a forward contract to purchase IRS - Internal Revenue Service, a U.S. government agency. PPL common stock. ISO - Independent System Operator. PJM (PJM Interconnection, L.L.C.) - operator of the electric transmission network and electric energy market in all or parts ITC - intangible transition charge on customer bills to recover of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, intangible transition costs associated with securitizing New Jersey, Ohio, Pennsylvania, Tennessee, Virginia, West stranded costs under the Customer Choice Act. Virginia and the District of Columbia. kWh - kilowatt-hour, basic unit of electrical energy. PLR (Provider of Last Resort) .- the role of PPL Electric in providing electricity to retail customers within its delivery LIBOR - London Interbank Offered Rate. territory who have not chosen to select an alternative electricity supplier under the Customer Choice Act. MicDos -XMinicentrales Dos, S.A., a Spanish company which owns several small hydroelectric generating facilities in PP&E - property, plant and equipment. Spain. PPL Global sold its ownership interest in MicDos in June 2004. PPL - PPL Corporation, the parent holding company of PPL Electric, PPL Energy Funding and other subsidiaries. Mirant - Mirant Corporation, a diversified energy company based in Atlanta. PPL Global and Mirant jointly owned PPL Capital Funding - PPL Capital Funding, Inc., a PPL WPD from 1996 until September 6, 2002. financing subsidiary. Montana Power-The Montana Power Company, a PPL Capital Funding Trust I - a Delaware statutory business ,Montana-based company that sold its generating assets to trust created to issue the Preferred Security component of the PPL Montana in December 1999. Through a series of PEPS Units. This trust was terminated in June 2004. transactions consummated during the first quarter of 2002, Montana Power sold its electricity delivery business to PPL Development Company - PP'L Development Company, NorthWestern. LLC, a subsidiary of PPL Services that has responsibility for all of PPL's acquisition, divestiture and development activities. MW - megawatt, one thousand kilowatts. PPL Electric - PPL Electric Utilities Corporation, a regulated MWh - megawatt-hour, one thousand kilowatt-hours. utility subsidiary of PPL that transmits and distributes electricity in its service territory and provides electric supply NorthWestern - NorthWestern Energy Division, a Delaware to retail customers in this territory as a PLR. corporation and a division of NorthWestern Corporation and successor in interest to Montana Power's electricity delivery PPL Energy Funding - PPL Energy Funding Corporation, business, including Montana Power's rights and obligations a subsidiary of PPL and the parent company of PPL Energy under contracts with PPL Montana. Supply. NPDES - National Pollutant Discharge Elimination System. PPL EnergyPlus - PPL EnergyPlus, LLC, a subsidiary of PPL Energy Supply that markets wholesale and retail electricity, NRC - Nuclear Regulatory Commission, the federal agency and supplies energy and energy services in deregulated that regulates the operation of nuclear power facilities. markets. 98 PPL CORPORATION 2004 ANNUAL REPORT
PPL Energy Supply - PPL Energy Supply, LLC, a subsidiary SCR - selective catalytic reduction, a pollution control of PPL Energy Funding and the parent company of PPL process. Generation, PPL EnergyPlus, PPL Global and other subsidiaries. SEC - Securities and Exchange Commission, a U.S. government agency whose primary mission is to protect PPL Gas Utilities - PPL Gas Utilities Corporation, a investors and maintain the integrity of the securities markets. regulated utility subsidiary of PPL that specializes in natural gas distribution, transmission and storage services, and the SFAS - Statement of Financial Accounting Standards, the competitive sale of propane. accounting'and financial reporting rules issued by the FASB. PPL Generation - PPL Generation, LLC, a subsidiary of SIUK Capital Trust I - a business trust created to issue PPL Energy Supply that owns and operates U.S. generating preferred securities and whose common securities are held facilities through various subsidiaries. by WPD LLP. PPL Global - PPL Global, LLC, a subsidiary of PPL Energy SIUK Limited - was an intermediate holding company within Supply that owns and operates international energy business es the WPDH Limited group. In January 2003, SIUK Limited that are focused on the distribution of electricity. transferred its assets and liabilities to WPD LLP. PPL Maine - PPL Maine,-LLC, a subsidiary of PPL Generati on SPE - special purpose entity. that owns generating operations in Maine. Superfund - federal environmental legislation that addresses PPL Martins Creek - PPL Martins Creek, LLC, a generating remediation of contaminated sites; states also have similar subsidiary of PPL Generation that owns generating operatioi is statutes. in Pennsylvania. Synfuel projects - production facilities that manufacture PPL Montana - PPL Montana, LLC, an indirect subsidiary synthetic fuel from coal or coal byproducts. Favorable federal of PPL Generation that generates electricity for wholesale tax credits are available on qualified synthetic fuel products. sales in Montana and the Pacific Northwest. Tolling agreement - agreement whereby the owner of an PPL Services - PPL Services Corporation, a subsidiary of electric generating facility agrees to use that facility to convert PPL that provides shared services for PPL and its subsidiarie: s. fuel provided by a third party into electric energy for delivery back to the third party. PPL Susquehanna - PPL Susquehanna, LLC, the nuclear generating subsidiary of PPL Generation. VEBA - Voluntary Employee Benefit Association Trust, trust accounts for health and welfare plans for future benefit PPL Transition Bond Company - PPL Transition Bond payments for employees, retirees or their' beneficiaries. Company, LLC,a 'subsidiary of PPL Electric that was formei to issue transition bonds under the Customer Choice Act.. WPD - refers collectively to WPDH Limited and WPDL. PPL Global purchased Mirant's 49% ownership interest in Preferred Securities - company-obligated mandatorily these entities on September 6, 2002, thereby achieving 100% -redeemable preferred securities issued by PPL Capital Fundii ig ownership and operational control. Trust I, which solely held debentures of PPL Capital Fundint and by SIUK Capital Trust I, which solely holds debentures WPD LLP -Western Power Distribution LLP, a wholly owned of WPD LLP. subsidiary of WPDH Limited, which owns WPD (South West) and WPD (South Wales). PUC - Pennsylvania Public Utility Commission, the state agency that regulates certain ratemaking, services, accountiung WPD (South Wales) - Western Power Distribution (South and operations of Pennsylvania utilities. Wales) plc, a British regional electric utility company. PUC Final Order - final order issued by the PUC on August: 27, WPD (South West) - Western Power Distribution (South West) 1998, approving the settlement of PPL Electric's restructurir ig plc, a British regional electric utility company. proceeding. WPDH Limited -Western Power Distribution Holdings PURPA - Public Utility Regulatory Policies Act of 1978, Limited, an indirect, wholly owned subsidiary of PPL Global. legislation passed by the U.S. Congress to encourage energy WPDH Limited owns WPD LLP. conservation, efficient use of resources and equitable rates. WPDL - WPD Investment Holdings Limited, an indirect PURTA - the Pennsylvania Public Utility Realty Tax Act. wholly owned subsidiary of PPL Global. WPDL owns 100% of the common shares of Hyder. RMC - Risk Management Committee. Sarbanes-Oxley 404 - Section 404 of the Sarbanes-Oxley A of 2002, which sets requirements for management assessmei of internal controls for financial reporting. It also requires a independent auditor to attest to and report on management' assessment. PPL CORPORATION 2004 ANNUAL REPORT 99
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Management and Officers - Corporate Leadership Council Officers 1/2 William F. Hecht Chairman,President and CEO James E. Abel VP-Finance and Treasurer Britt T. McKinney VP-Nuclear Site Operations I PPL Corporation PPL Corporation PPL Susquehanna A John R. Biggar Robert W. Burke Jr. Dennis J. Murphy Executive VP and CFO VP and Chief Counsel VP and COO-EasternFossiland Hydro PPL Corporation PPL Global PPL Generation James H. Miller John F. Cotter Edward T. Novak Executive VP and COO VP-Energy Marketing VP- CorporateInformation Officer PPL Corporation : ;PPLEnergyPlus PPL Services Robert J. Grey Paul A. Farr Joanne H. Raphael Senior VP, General Counsel VP and Controller VP-External Affairs andSecretary PPL Corporation PPL Services PPL Corporation ) Robert M. Geneczko Robert A. Saccone VP-Customer Services VP-Nuclear Operations Major Subsidiary Presidents PPL Electric Utilities PPL Susquehanna I President
- Paul T. Champagne Ronald Schwarz PPL Gas Utilities PPL EnergyPlus VP-Human Resources George T. Jones PPL Services Rick L. Klingensmith VP-Special Projects PPL Global PPL Susquehanna James M. Self I VP-CorporateRelations Roger L. Petersen David H. Kelley PPL Services PPL Development Company President Vijay Singh PPL Telcom Bryce L. Shriver VP-Risk Management PPL Generation Michael E. Kroboth PPL Services VP-Energy Services John F. Sipics Bradley E.. Spencer PPL EnergyPlus PPL Electric Utilities VP and COO-Western Fossiland Hydro PPL Generation 4-II:.
A? 102 PPL CORPORATION 2004 ANNuAL REPORT
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