PLA-6079, Transmittal of Susquehanna Annual Financial Reports for 2005

Transmittal of Susquehanna Annual Financial Reports for 2005

ML062010437
Person / Time
Site:	Susquehanna
Issue date:	07/10/2006
From:	Mckinney B Susquehanna
To:	Document Control Desk, Office of Nuclear Reactor Regulation
References
PLA-6079
Download: ML062010437 (149)

Text

Brltt T. McKInney PPL Susquehanna, LLC Sr. Vice President & Chief Nuclear Officer 769 Salem Boulevard Berwick, PA 18603 P pi Tel. 570.542.3149 Fax 570.542.1504 btmckinney@pplweb.com JUL 1 0 2006 U. S. Nuclear Regulatory Commission Attn: Document Control Desk Mail Sop OP1-17 Washington, DC 20555 SUSQUEHANNA STEAM ELECTRIC STATION ANNUAL FINANCIAL REPORT Docket Nos. 50-387 PLA-6079 and 50-388 In accordance with 10 CFR 50.71(b), enclosed is the 2005 Annual Report for PPL Corporation, the parent company of PPL Susquehanna, LLC, and the 2005Annual Report for Allegheny Electric Cooperative, Inc.

Please contact Rocco R. Sgarro, Manager, Nuclear Regulatory Affairs at (610) 774-7552, if you have any questions concerning the reports.

Sincerely, B. T. McKinney - PPL Corporation 2005 Annual Report - Allegheny Electric Cooperative Inc., 2005 Annual Report cc: NRC Region I Mr. A. J. Blarney, NRC Sr. Resident Inspector Mr. R. V. Guzman, NRC Project Manager Mr. R. Janati, DEP/BRP 11/4ocQ

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1. Cost-effective, reliable operations

2. Highest-quality customer service'

3. Quantitative risk management

4. Anticipation of opportunities and change

5. Constructive public policy relationships' PPL CO

We are continuing to improve our operations, reducing costs, improving the availability of our power plants and the reliability of our delivery businesses. In all cases, we measure our safety performance against the best in all industries.

Bryce L. Shriver, President-PPL Generation, in a meeting at the Montour powerplant.

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PPL CORPORATION 2005 ANNUAL REPORT 9 An external focus is absolutely essential. Employees not only are experts in their particular function, they also are responsible for taking a step back to anticipate changes in our business.

James H. Miller, PPL Corporation President and COO, at the Corette powerplantin Montana.

PPL CORPORATION 2005 ANNUAL REPORT 11 Al 12 PPL CORPORATION 2005 ANNUAL REPORT

PPL CORPORATION 2005 ANNUAL REPORT 13 14 PPL CORPORATION 2005 ANNUAL REPORT William E Hecht-chairman and Chief Executive OfficEer

Dear Shareowners,

In 2005, as much as in any year during the decade-long transformation of your company, the benefits of our efforts came into focus.

In late summer, we announced that we were doubling our long-term earnings growth forecast, splitting our stock and increasing our dividend. Early this"year, we increased -the dividend again - for the third time in 13 'months- and signifi-cantly increased our long-term forecast once again.

Our annualized dividend is now $1.10 Pper share, more than double its level of just five years ago.

PPL CORPORATION 2005 ANNUAL REPORT 15

Earnings per Share Growth Projection $4.00 93.-O

$3.00 c,j 3n**

$2.00

$1.00

$0.00-

• Compound Annual Growth Rate forecast, based on 2005 earnings of $2.08 Target per share from ongoing operations. See page 98 for the definition of earnings from ongoing operations, a reconciliation of reported earnings from ongoing operations and key assumptions in this forecast.

• • Midpoint of $2.15to $2.25 forecast.

As I write to you today, I am very pleased to tell tell the story of PPL's focus, of the principles of execu-you that we now project an 11 percent compound annual tion that underpin our success in the very competitive growth in earnings per share through 2010. This fore- electricity business.

cast is based on very visible growth prospects, driven These discussions also underscore another strength primarily by our supply operation, which includes our of PPL -the experience, insight and enthusiasm of our generation and marketing functions. employees. Through our long-standing commitment to We are able to make these exceptionally strong attracting and developing the best talent available, we growth forecasts because we have in place a business have assembled a superb employee team- one that is model that provides us with opportunities to succeed in extraordinarily well-prepared to continue to grow a wide variety of market and economic conditions. value for you.

In 2005, for instance, we were able to improve our Heading the team is Jim Miller, our current president, earnings from ongoing operations by 11 percent despite who will replace me as chairman and chief executive very tight margins in wholesale electricity markets and officer of your company when I retire later this year.

some unexpected outages at our power plants. This was I have had the pleasure of working daily with Jim over largely due to the strong performance of our electricity the past five years, and I know that I speak for the entire delivery operations in Pennsylvania and internation- board of directors in expressing our confidence that ally, which contributed nearly half of our earnings from Jim has the insight, intelligence and management talent ongoing operations, up from about 40 percent in 2004. to meet the challenges of tomorrow, capitalizing on As you know, however, any business model is only as the right opportunities for you. Jim brought decades good as an organization's ability to execute- to ensure of executive experience to PPL when he came here and each day that it is getting the most out of the resources has been instrumental in fashioning the business model entrusted to it. PPUs continued attention to its business that permits us to forecast double-digit annual earnings fundamentals has been a major contributor as we growth through the remainder of this decade.

have built the company into a successful electricity Jim also shares my conviction that our prospects for delivery, generation and marketing company. future success are only as good as our ability to execute In this year's annual report, some of our executives the strategies we have in place.

16 PPL CORPORATION 2005 ANNUAL REPORT

Comparison of 5-year Cumulative Total Return* $175

$154.55

$150

$136.91

$125 m PPL Corporation $100 $102.75 Edison Electric Institute Index of Investor-owned $75 Electric Utilities S&P 5001 Index

$50 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05

• Assumes investing $100 on Dec. 31,2000, and reinvesting dividends in PPL common stock, S&P500* Index and EElIndex of Investor-owned Electric Utilities.

That's why we've worked tirelessly to ensure that PPL earnings to $3.50 per share in 2010, an increase of people, at all levels of our organization, are committed more than 65 percent from 2005 earnings from ongoing to achieving the challenging objectives that we have operations. Our focus also has enabled us to significantly laid out for ourselves. Objectives like industry-leading outperform the Standard & Poor's 500 Index* and the performance of our power plants, customer service Edison Electric Institute Index of Investor-Owned ratings that are unsurpassed in the countries in which Electric Utilities over both the past five years and we do business and superior safety performance. Our the past 10 years.

employees understand that achievement of best-in-the- As we look to the future, I am confident that the people sector performance is our objective in everything of PPL will continue to identify- and take advantage we do. of- opportunities to grow your company in a sustainable Inherent in our high expectations is an understanding way. PPL will continue to be a major electricity supplier that we are prepared to cope with unexpected challenges in key markets. We also will continue to provide the best and capitalize on unexpected opportunities; that we are in electricity delivery services to more than 5 million adept at calculating our risk and at developing contin- customers on three continents.

gency plans in advance of the potential need. While it is Speaking on behalf of the 12,000 employees of your a truism that no one can hope to predict the future, we company, I thank you for the confidence you have can - and do - anticipate a range of outcomes, meaning placed in us. I pledge our continued hard work- and a we are ready to act when the need arises. steadfast focus on the principles that continue to grow Thus, in 2005, we were able to respond affirmatively value for you.

and comprehensively to a range of events, from an uncharacteristic environmental problem at our Martins Creek power plant to providing crews to help Gulf Coast utilities restore service following severe hurricanes to avoiding unexpected cost pressures when fuel prices rose.

Uk M~AckH William F. Hecht Our persistent focus on fundamentals permits us to Chairman and Chief Executive Officer confidently forecast growth that would improve our March 20, 2006 PPL CORPORATION 2005 ANNUAL REPORT 17

dor 1.4 million 2,200 John F. Sipics Ability to deliver award-winning customer service while minimizing costs I I I

18 PPL CORPORATION 2005 ANNUAL REPORT

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PPL CORPORATION 2005 ANNUAL REPORT 19

A ~Byioh7..Bggar, nviab'le position which provides the oundation plants. hee nestments demon-to econtin t grow for11PLs overal financial strength. staethopaysonon his decadlewhile bl)out$. b linver~the balance, nd provide the~company witha ning its ba an-ceý eet othdeca e-about400 million tronger comptiv poition t 0.VTow ou rdividend a, ear after paying dividendS, drive earnings growth hrough the future, we expect, equity to total capitalizaion trough diture pro gram through acombina-iirate oourdcividendsý 2010.T simprovement in our ion of inena neratedfunds ew years will continue balanie shet is direct result of the and issuance of modest amounts of

)rowth rate in our treg of our cas' flows an debt and prefrre EI:securities, his

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SELECTED FINANCIAL AND OPERATING DATA PPL Corporation(a) 2005 2004 2003 2002 2001 Income Items - millions Operating revenues(b) $ 6,219 $ 5,794 $ 5,585 $ 5,490 $ 5,147 Operating income 1,346 1,400 1,366 1,254 850 Income from continuing operations 737 713 733 366 169 Net income 678 698 734 208 179 Balance Sheet Items - millions(c)

Property, plant and equipment-,net(b 10,916 11,149 10,593 9,733 5,947 Recoverable transition costs 1,165 1,431 1,687 1,946 2,172 Total assets 17,926 17,733 17,123 15,552 12,562 Long-term debt 7,081 7,658 7,859 6,267 5,579 Long-term debt with affiliate trusts(d) 89 89 681 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures(d) 661 825 Preferred stock 51 51 51 82 82 Common equity . 4,418 4,239 3,259 2,224 1,857 Short-term debt 214 42 56 943 118 Total capital provided by investors 11,853 12,079 11,906 10,177 8,461 Capital lease obligations 11 11 12 Financial Ratios Return on average common equity- % 15.65 .18.14 26.55 10.27 8.41 Embedded cost rates(c)

Long-term debt - % 6.60 6.67 6.56 7.04 6.84 Preferred stock - % 5.14 . 5.14 5.14 5.81 5.81 Preferred securities - %(d 8.02 8.13 Times interest earned before income taxes 2.68 2.79 2.98 2.25 2.15 Ratio of earnings to fixed charges -total enterprise basiste) 2.6 2.7 2.6 1.9 1.7 Common Stock Data(i)

Number of shares outstanding - thousands Year-end 380,145 378,143 354,723 331,472 293,161 Average 379,132 368,456 345,589 304,984 291,948 Number of shareowners of record(c) 79,198 81,175 83,783 85,002 87,796 Income from continuing operations- Basic EPS $ 1.94 $ 1.93 $ 2.12 $ 1.20 $ 0.58 Income from continuing operations - Diluted EPS $ 1.92 $ 1.93 $ 2.12 $ 1.20 $ 0.58 Net income - Basic EPS $ 1.79 $ 1.89 $ 2.13 $ 0.68 $ 0.61 Net income - Diluted EPS $ 1.77 $ 1.89 $ 2.12 $ 0.68 $ 0.61 Dividends declared per share $ 0.96 $ 0.82 $ 0.77 $ 0.72 $ 0.53 Book value per sharemc) $ 11.62 $ 11.21 $ 9.19 $ 6.71 $ .6.33 Market price per sharemc) $ 29.40 $ 26.64 $ 21.88 $ 17.34 $ 17.43 Dividend payout rate - V) 54 44 36 106 87 Dividend yield - %(g) 3.27 3.08 3.52 4.15 3.04 Price earnings ratiomf)la) 16.61 14.10 10.32 25.50 28.57 Sales Data - millions of kWh Domestic - Electric energy supplied - retail 39,413 37,673 36,774 36,746 37,395 Domestic - Electric energy supplied - wholesale 33,768 37,394 37,841 36,849 27,683 Domestic - Electric energy delivered 37,358 35,906 36,083 ..- 35,712 35,534 International - Electric energy delivered(h) 33,146 32,846 31,952 33,313 5,919 (a)The earnings each year were affected by items management considers unusual, which affected net income. See "Earnings" inManagements Discussion and Analysis for a description of unusual items in2005, 2004 and 2003.

(b) Data for certain years are reclassified to conform to the current presentation.

(W) At 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, 2005, 2004 and 2003, no amounts were included In'Long-term Debt' for these securities because PPL Capital Funding Trust Iand SIUK Capital Trust Iwere deconsolidated effective December 31, 2003, in connection 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 trusts are reflected in"Long-term Debt with Attiliate Trusts' as of December 31, 2005, 2004 and 2003, to the extent they were outstanding. See Notes 8 and 22 to the Financial Statements for additional information.

(1)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, the estimated Interest component of other rentals and preferred dividends.

M)Based on diluted EPS.

(o)Based on year-end market prices.

(h)Deliveries for 2002 include the electricity deliveries of WPD for the full year and of CEMAR prior to deconsolidation.

(1)Share and pei share information inprior periods has been adjusted to reflect PPL's 2-for-1 common stock split completed inAugust 2005.

22 PPL CORPORATION 200S ANNUAL REPORT "

MANAGEM*EN'S DISCUSSION AND) ANAIYSIS Terms and abbreviations are explained inthe glossary. Dollars are inmillions, except per share data, unless otherwise noted.

Forward-looking Information Any such forward-looking statements should be considered inlight of such important factors and inconjunction with PPL's Form 10-K and other reports Statements contained inthis report concerning expectations, beliefs, plans, on tile with the SEC.

objectives, goals, strategies, future events or performance and underlying New factors that could cause actual results to differ materially from those assumptions and other statements which are other than statements of histori- described inforward-looking statements emerge from time to time, and it is cal facts are "forward-looking statements" within the meaning of the federal not possible for PPL to predict all of such factors, or the extent to which any securities laws. Although PPL believes that the expectations and assumptions such factor or combination of factors may cause actual results to differ from reflected inthese statements are reasonable, there can be no assurance that those contained inany forward-looking statement. Any forward-looking state-these expectations will prove to be correct. These forward-looking statements ment speaks only as of the date on which such statement is made, and PPL involve a number of risks and uncertainties, and actual results may differ undertakes no obligations to update the information contained insuch state-materially from the results discussed in the forward-looking statements. In ment to reflect subsequent developments or information.

addition to the specific factors discussed in the Management's Discussion and Analysis, the following are among the important factors that could cause actual results to differ materially from the forward-looking statements:

O ,ervi cw

• market demand and prices for energy, capacity and fuel; PPL isan energy and utility holding company with headquarters inAllentown,

" market prices for crude oil and the potential impact on synthetic fuel tax PA. PPL's reportable segments are Supply, International Delivery and credits and synthetic fuel operations; Pennsylvania Delivery. Through its subsidiaries, PPL is primarily engaged in

• weather conditions affecting generation production, customer energy the generation and marketing of electricity intwo key markets - the northeast-usage and operating costs; ern and western U.S. - and inthe delivery of electricity in Pennsylvania, the

" competition inretail and wholesale power markets; U.K. and Latin America. PPL's overall strategy is to achieve disciplined growth

" liquidity of wholesale power markets; inenergy supply margins while limiting volatility inboth cash flows and earn-

" the effect of any business or industry restructuring; ings and to achieve stable, long-term growth in regulated delivery businesses

" the profitability and liquidity, including access to capital markets and through efficient operations and strong customer and regulatory relations.

credit facilities, of PPL and its subsidiaries; More specifically, PPL's strategy for its electricity generation and marketing

• new accounting requirements or new interpretations or applications of exist- business is to match energy supply with load, or customer demand, under ing requirements; contracts of varying lengths with creditworthy counterparties to capture profits

• operation and availability of existing generation facilities and operating costs; while effectively managing exposure to movements inenergy and fuel prices

" transmission and distribution system conditions and operating costs; and counterparly credit risk. PPL's strategy for its electricity delivery busi-

" current and future environmental conditions and requirements and the nesses is to own and operate these businesses at the most efficient cost while related costs of compliance, including environmental capital expenditures maintaining the highest level of customer service and reliability.

and emission allowance and other expenses; PPL faces several risks inits generation business. The principal risks

" development of new projects, markets and technologies; are electricity wholesale price risk, fuel supply and price risk, power plant

• performance of new ventures; performance and counterparty credit risk. PPL attempts to manage these risks

" asset acquisitions and dispositions; through various means. For instance, PPL operates a portfolio of generation

" political, regulatory or economic conditions instates, regions or countries assets that is diversified as to geography, fuel source, cost structure and oper-where PPL or its subsidiaries conduct business; ating characteristics. PPL is focused on the operating efficiency of these power

" any impact of 2005's hurricanes on PPL and its subsidiaries, including any plants and maintaining their availability. Inaddition, PPL has inplace and impact on fuel prices; continues to pursue contracts of varying lengths for energy sales and fuel supply,

" receipt of necessary governmental permits, approvals and rate relief; and other means, to mitigate the risks associated with adverse changes inthe

" new state, federal or foreign legislation, including new tax legislation; difference, or margin, between the cost to produce electricity and the price at

" state, federal and foreign regulatory developments; which PPL sells it.Whether PPL decides to, or is able to, continue to enter into

• impact of state, federal or foreign investigations applicable to PPL and its long-term or intermediate-term power sales and fuel purchase agreements subsidiaries and the energy industry; or renew its existing agreements and the market conditions at that time will

" capital market conditions, including changes in interest rates, and decisions affect its future profitability. Currently, PPL's commitments for energy sales are regarding capital structure; substantially satisfied through its own generation assets - i.e., PPL primarily

" stock price performance; markets and trades around its physical portfolio of generating assets through

" the market prices of equity securities and the impact on pension costs and integrated generation, marketing and trading functions. PPL has inplace risk resultant cash funding requirements for defined benefit pension plans; management programs that, among other things, are designed to monitor and

" securities and credit ratings; manage its exposure to volatility of earnings and cash flows related to changes

" foreign currency exchange rates; inenergy and fuel prices, interest rates, foreign currency exchange rates, coun-

" the outcome of litigation against PPL and its subsidiaries;

" potential effects of threatened or actual terrorism or war or other hostilities; and terparty credit quality and the operational performance of its generating units.

" the commitments and liabilities of PPL and its subsidiaries.

PPL CORPORATION 2005 ANNUAL REPORT 23

MANAGEMENT'S DISCUSSION AND ANALYSIS PPL's electricity delivery businesses are rate-regulated. Accordingly, Results of Operations these businesses are subject to regulatory risk interms of the costs that they may recover and the investment returns that they may collect incustomer Earnings rates. The principal challenge that PPL faces inits electricity delivery busi- Net income and the related EPS were:

nesses is to maintain high standards of customer service and reliability ina 2005 2004 2003 cost-effective manner. Net income $ 678 $698 $734 PPL faces additional financial risks inconducting international operations, EPS- basic $1.79 $1.89 $2.13 EPS-diluted $1.77 $1.89 $2.12 such as fluctuations incurrency exchange rates. PPL attempts to manage Ihese financial risks through its risk management programs. The changes innet income from year to year were, in part, attributable Akey challenge for PPL's business as a whole is to maintain a strong credit to several significant items that management considers unusual. Details of profile. Investors, analysts and rating agencies that follow companies inthe these unusual items are provided within the review of each segment's earnings.

energy industry continue to be focused on the credit quality and liquidity position The year-to-year changes inearnings components, including domestic of these companies. PPL continually focuses on strengthening its balance gross energy margins by region and significant income statement line items, sheet and improving its liquidity position, thereby improving its credit profile. are explained inthe *Statement of Income Analysis."

The purpose of Management's Discussion and Analysis isto provide infor- PPL's earnings beyond 2005 are subject to various risks and uncertainties.

mation concerning PPLs past and expected future performance inimplementing See the rest of Management's Discussion and Analysis and Note 14 to the the strategies and managing the risks and challenges mentioned above. Financial Statements for a discussion of the risks, uncertainties and faclors Specifically: that may impact PPI~s future earnings.

e "Results of Operations" provides an overview of PPL's operating results in 2005, 2004 and 2003, including a review of earnings, with details of results Segment Results by reportable segment. Italso provides a brief outlook for 2006. Net income by segment was:

@"Financial Condition - Liquidity and Capital Resources" provides an analysis 2005 2004 2003 of PPL's liquidity position and credit profile, including its sources of cash Supply $311 $421 $502 (including bank credit facilities and sources of operating cash flow) and uses International Delivery 215 197 196 of cash (including contractual commitments and capital expenditure require- Pennsylvania Delivery 152 80 36 ments) and the key risks and uncertainties that impact PPL's past and future Total $678 $698 $734 liquidity position and financial condition. This subsection also includes a listing and discussion of PPL's current credit ratings. Supply Segment

• "Financial Condition - Risk Management - Energy Marketing &Trading The Supply segment primarily consists of the domestic energy marketing, and Other" provides an explanation of PPL's risk management programs domestic generation and domestic development operations of PPL Energy relating to market risk and credit risk. Supply.

e "Application of Critical Accounting Policies" provides an overview of the The Supply segment results in2005, 2004 and 2003 reflect the reclassifi-accounting policies that are particularly important to the results of opera- cation of the Sundance plant operating losses from certain income statement tions and financial condition of PPL and that require its management to line items to "Loss from Discontinued Operations." See Note 9 to the Financial make significant estimates, assumptions and other judgments. Although Statements for further discussion.

PPL's management believes that these estimates, assumptions and other judgments are appropriate, they relate to matters that are inherently uncer-tain. Accordingly, changes inthe estimates, assumptions and other judg-ments applied to these accounting policies could have a significant impact on PPL's results of operations and financial condition as reflected inPPL's Financial Statements.

The information provided inManagement's Discussion and Analysis should be read inconjunction with PPL's Financial Statements and the accompanying Notes, 24 PPL CORPORATION 2005 ANNUAL REPORT

Supply segment net income was: " InMay 2005, a subsidiary of PPL Generation completed the sale of its 2005 2004 2003 450 MW Sundance power plant located inPinal County, Arizona, to Arizona Energy revenues Public Service Company for approximately $190 million incash. Proceeds External $1,264 $1,360 $1,371 of the sale were used to reduce PPL's outstanding debt and improve liquidity.

Intersegment 1,590 1,500 1,444 Energy-related businesses 550 463 417 InMay 2005, PPL recognized a non-cash after-tax loss on the sale of Total operating revenues 3,404 3,323 3,232 $47 million (or $0.12 per share).

" InAugust 2005, a leak from a disposal basin containing fly ash and water Fuel and energy purchases External 1,205 1,141 1,154 at the coal-fired Martins Creek generating station caused the discharge Intersegment 152 156 161 of approximately 100 million gallons of water containing ash from the basin Other operation and maintenance 737 634 608 onto adjacent roadways and fields and into a nearby creek and the Delaware Depreciation 144 144 120 River. In2005, PPL recognized a charge of $31 million after tax (or $0.08 per Taxes, other than income 36 41 44 share), inconnection with the current expected on-site costs ($27 million Energy-related businesses 620 523 447 after tax) and off-site costs ($4 million alter tax) relating to the leak. PPL Total operating expenses 2,894 2,639 2,534 cannot predict the final costs to be incurred as a result of this matter.

Other Income - net (2) (7) 28 " InSeptember 2005, PPL and NorthWestern reached a final agreement to Interest Expense 116 114 38 settle litigation. Inthe first quarter of 2005, PPL recognized a charge of Income Taxes 20 127 186 Minority Interest 2 2 $6 million after tax (or $0.02 per share) related to the settlement agreement.

Distributions on Preferred Securities 21

• See "Domestic Gross Energy Margins" for an explanation of non-trading Loss from Discontinued Operations 51 13 14 margins by geographic region and for an explanation of net energy trading Cumulative Effects of Changes inAccounting margins.

Principles (8) 35

" Higher operation and maintenance expenses in2005 compared with 2004 Total $ 311 $ 421 $ 502 were primarily due to more planned power plant outages in2005. Higher The after-tax change innet income was due to the following factors, operation and maintenance expenses in2004 compared with 2003 were including discontinued operations. primarily due to gains in2003 on the settlement of various property and 2005 vs. 2004 2004 vs. 2003 environmental insurance claims and the higher cost of forced outages in2004 Eastern U.S. non-trading margins $ (45) $35 at the Montour facility. These increases were partially offset by a decrease in Southwestern U.S. non-trading margins (5) (5) lease expense due to the consolidation of the Sundance and University Park Net energy trading margins 8 7 gederation facilities inaccordance with FIN 46, "Consolidation of Variable Operation and maintenance expenses (26) (7) Interest Entities, an Interpretation of ARB No. 51,"

Earnings from synfuel projects 25 11 " Depreciation expense increased in2004 compared with 2003 primarily due Depreciation 3 (19) to the consolidation of the Sundance and University Park generation facilities Interest expense (2) (14)

Interest income on 2004 IRS tax settlement (9) 9 inaccordance with FIN 46 and depreciation on the Lower Mt. Bethel plant, Energy-related businesses 6 (9) which began commercial operation inMay 2004.

Realized earnings on nuclear decommissioning " Interest expense increased in2004 compared with 2003 primarily due to trust (Note 16) 7 (16) consolidation of the lessors of the Sundance, University Park and Lower Contribution of property (10)

Income tax reserve adjustments (Note 5) 21 Mt. Bethel generation facilities, inaccordance with FIN 46.

Intersegment interest income 3 (26) " The improved earnings contribution from synfuel projects for both periods Other (11) 5 resulted primarily from higher synthetic fuel tax credits due to higher output Unusual items (85) (42) at the Tyrone facility, which went into commercial operation inAugust 2004.

$0110) $(81) Also contributing to the 2005 synthetic fuel earnings increase were unreal-ized gains on options purchased to hedge the risk associated with synthetic The following items, that management considers unusual, had a significant fuel tax credits for 2006 and 2007.

impact on the Supply segment earnings.

2005 2004 2003 Off-site remediation of ash basin leak (Note 14) $(27)

Sale of the Sundance plant (Note 9) (47)

Acceleration of stock-based compensation expense for periods prior to 2005 (Note 1) (3)

Settlement of NorthWestern litigation (Note 14) (6)

Impairment ol investment intechnology supplier (Note 9) $(6)

Recording of AROs (Note 21) (8) $63 Consolidation of variable interest entities (Note 22) (27)

Total $(91) $(6) $36 PPL CORPORATION 2005 ANNUAL REPORT 25

MANAGEMENT'S DISCUSSION AND ANALYSIS 2006 Outlook The following items, that management considers unusual, had a significant Based on current forward energy prices, PPL is projecting higher energy impact on the International Delivery segment earnings.

margins for its Supply segment in2006 compared with 2005, primarily driven 2005 2004 2003 by the 8.4% increase inthe generation prices under the PLR contracts. Higher Sale of CGE (Note 9) $ (7) generation output, higher-priced wholesale energy contracts that replace expir- Sate of CEMAR (Note 9) 23 ing contracts, and lower purchased power costs also are expected to improve Sale of Latin American telecommunications company (Note 9) (2) $(20) energy margins. These benefits are expected to be partially offset by increased CEMAR-related net tax benefit (Note 5) 81 fuel and fuel transportation expenses, higher operation and maintenance Total $14 $61 expenses and reduced earnings from synfuel projects.

• The U.K.'s 2005 earnings were positively affected by higher delivery InternationalDelivery Segment margins, partially due to favorable customer mix and an incentive revenue The International Delivery segment includes operations of the international award from the regulator for outstanding customer service.

energy businesses of PPL Global that are primarily focused on the distribution

" Higher operation and maintenance expenses in2005 compared with 2004 of electricity. Virtually all of PPL Global's international businesses are located were primarily due to increased pension costs in the U.K.

inthe U.K., Chile, El Salvador and Bolivia.

• Changes inforeign exchange rates increased WPD's portion of revenue International Delivery segment net income was:

and expense line items by about 1%in2005 compared with 2004, and by 2005 2004 2003 about 12% in2004 compared with 2003.

Utility revenues $1,130 $1,032 $ 934 " U.S. income taxes decreased in2005 compared with 2004 inpart due Energy-related businesses 76 70 79 to greater utilization of foreign tax credits. U.S. income taxes increased in Total operating revenues 1,206 1,102 1,013 2004 compared with 2003 due to lower domestic spending in2004 and a Fuel and energy purchases 266 215 199 favorable income tax return adjustment in2003, primarily related to 2002 Other operation and maintenance 250 208 184 Depreciation 157 146 147 foreign earnings.

Taxes, other than income 58 56 47 2006 Outlook Energy-related businesses 28 41 41 PPL projects that the International Delivery segment will experience increased Total operating expenses 759 666 618 operation and maintenance expenses in2006 compared with 2005, primarily Other Income - net 10 31 21 due to higher pension costs at PPLs electricity distribution companies in the Interest Expense 203 203 218 U.K., higher U.S. income taxes and a potential unfavorable change inforeign Income Taxes 34 59 (30)

Minority Interest 5 6 7 currency exchange rates in2006.

Distributions on Preferred Securities 5 Pennsylvania DeliverySegment Loss from Discontinued Operations 2 20 The Pennsylvania Delivery segment includes the regulated electric and gas Total $ 215 $ 197 $ 196 delivery operations of PPL Electric and PPL Gas Utilities.

The after-tax change in net income was due to the following factors, Pennsylvania Delivery segment net income was:

including discontinued operations. 2005 2004 2003 2005 vs. 2004 2004 vs, 2003 Operating revenues U.K. External $3,199 $2,869 $2,784 Delivery margins $23 $ 5 Infersegment 152 156 161 Operation and maintenance expenses (36) 7 Total operating revenues 3,351 3,025 2.945 Impact of changes inforeign currency exchange Fuel and energy purchases rates 2 22 External 385 325 298 Other 5 (2)

Infersegment 1,590 1,500 1,444 Latin America 1 3 Other operation and maintenance 414 395 385 U.S. income taxes 36 (22)

Amortization of recoverable transition costs 268 257 260 Interest expense 6 Depreciation 119 114 109 Intersegment interest expense (3) 26 Taxes, other than income 185 152 165 Other 4 3 Energy-related businesses 1 2 2 Unusual items (14) (47)

Workforce reduction 9

$18 $ 1 Total operating expenses 2,962 2,745 2,672 Other Income - net 21 15 6 Interest Expense 189 196 217 Income Taxes 67 17 23 Distributions on Preferred Securities 2 2 3 Total $ 152 $ 80 $ 36 26 PPL CORPORATION 2005 ANNUAL REPORT

The after-tax change innet income was due to the following factors. cannot be certain that itwill recover the storm costs, nor can it predict 2005 vs. 2004 2004 vs. 2003 whether future incidents of severe weather will cause significant facility Delivery revenues (net of CTC/ITC damage and service disruptions that would also result insignificant costs.

amortization, interest expense on " PPL Electric recognized an after-tax charge of $27 million (or $0.07 per transition bonds and ancillary charges) $123 $5 share) inthe first quarter of 2005 for a loss contingency related to the PJM Operation and maintenance expenses (9) (5)

Interest expense 5 4 billing dispute. See Note 14 for information concerning the proposed settle-Taxes, other than income ment agreement reached by PPL Electric and Exelon Corporation, which is (excluding gross receipts lax) (8) subject to approval by the FERC. PPL cannot be certain of the outcome Depreciation (3) of this matter or the impact on PPL and its subsidiaries.

Change intax reserves associated with stranded costs securitization (Note 5) (15) 22 " Operation and maintenance expense increased in2005 compared with Interest income on 2004 IRS tax settlement (5) 5 2004, primarily due to increased system reliability work and tree trimming Interest income on loans to affiliates 6 costs. Operation and maintenance expenses increased in2004 compared Income tax reserve adjustments 3 with 2003, primarily due to the write-off of certain Hurricane Isabel costs Other 4 (1) not approved for recovery by the PUC, and higher pension costs.

Unusual items (29) 5

$ 72 $44 2006 Outlook t PPL projects the Pennsylvania Delivery segment will have flat delivery The following items, that management considers unusual, had a significan revenues in2006 compared with 2005 due to projected modest load growth impact on the Pennsylvania Delivery segment earnings.

in2006 and because of higher sales in 2005 as a result of unusually warm 2005 2004 2003 weather. This segment is expected to experience increased operation and PJM billing dispute (Note 14) $(27) maintenance expenses in2006.

Acceleration of stock-based compensation expense for periods prior 1o2005 (Note 1) (2) Statement of Income Analysis -

Workforce reduction (Note 20) $(5)

Domestic Gross Energy Margins Total $(29) $(5) The following table provides pre-tax changes inthe income statement line

" InDecember 2004, the PUC approved an increase in PPL Electric's distribu- items that comprise domestic gross energy margins.

tion rates of approximately $137 million (based on a return on equity of 2005 vs. 2004 2004vs.2003 10.7%), and approved PPL Electric's proposed mechanism for collecting an Utility $429 $183 additional $57 million in transmission-related charges, for a total annual Unregulated retail electric and gas (13) (34)

Wholesale energy marketing (96) 10 increase of approximately $194 million, effective January 1,2005.

Net energy trading margins 13 13

• Delivery revenues also increased in2005 compared with 2004 due to a Other revenue adjustments (a) (309) (115) 4.3% increase inelectricity delivery sales volumes.

Total revenues 24 57

" InJanuary 2005, severe ice storms hit PPL Electric's service territory. As a Fuel 162 122 result, PPL Electric had to restore service to approximately 238,000 customers. Energy purchases 13 (92)

The lotal cost of restoring service, excluding capitalized costs and regular Other cost adjustments (a) (78) (34) payroll expenses, was approximately $16 million (or $0.02 per share). Total cost ofsales 97 (4)

On February 11, 2005, PPL Electric filed a petition with the PUG for Domestic gross energy margins $ (73) $ 61 authority to defer and amortize for regulatory accounting and reporting pur-tat Adjusted to exclude the impact ofany revenues and costs not associated with domestic poses these storm costs. On August 26, 2005, the PUC issued an order gross energy margins, inparticular, revenues and energy costs related to the international granting PPL Electric's petition subject to certain conditions, including: (i) operations of PPL Global, the domestic delivery operations of PPL Electric and PPL Gas Utilities and an accrual for the loss contingency related to the PJM billing dispute in2005 the PUC's authorization of deferred accounting is not an assurance of future (see Note 14 to the Financial Statements for additional information). Also adjusted to include rate recovery of the storm costs, (ii)PPL Electric must request recovery of the margins of PPL's Sundance plant, which are included in"Loss from Discontinued Opera-tions," and gains or losses on sales of emission allowances, which are included in"Other the deferred storm costs in its next distribution base rate case, and (iii) PPL operation and maintenance" expenses, on the Statement of Income. Also, 2003 includes a Electric must begin immediately to expense the deferred storm costs on a reduction of the reserve for Enron receivables.

ten-year amortization schedule for regulatory accounting and reporting pur-poses. As a result of the PUG Order and inaccordance with SFAS 71, "Accounting for the Effects of Certain Types of Regulation," in the third quar-ter of 2005, PPL Electric deferred approximately $12 million (or $0.02 per share) of its previously expensed storm costs. The deferral was based on its assessment of the timing and likelihood of recovering the deferred costs in PPL Electric's next distribution base rate case. At this time, PPL Electric PPL CORPORATION 2005 ANNUAL REPORT 27

MANAGEMENT'S DISCUSSION AND ANALYSIS Changes in Domestic Gross Energy Margins By Region Net Energy Trading Domestic gross energy margins are generated through PPL's normal hedging PPL enters into certain energy contracts that meet the criteria of trading (non-trading) activities, as well as trading activities. PPL manages its non- derivatives as defined by EITF Issue 02-3, "Issues Involved inAccounting for trading energy business on a geographic basis that is aligned with its generation Derivative Contracts Held for Trading Purposes and Contracts Involved in assets. In the second quarter of 2005, PPL also began participating in the Energy Trading and Risk Management Activities." These physical and financial Midwest ISO (MISO), an independent transmission system operator that contracts cover trading activity associated with electricity, gas and oil.

serves the electric transmission needs of much of the Midwest. PPL records Net energy trading margins increased by $13 million in2005 compared its business activities within MISO consistent with its accounting for activities with 2004, primarily due to the inclusion of FTRs. As of July 1,2005, FTRs in other RTOs. were deemed to meet the definition of a derivative and were accounted for as 2005 vs. 2004 2004 vs. 2003 such prospectively. Therefore, the forward and realized value for FTRs entered Eastern U.S. $(77) * $58 into for speculative purposes is accounted for as part of "Net energy trading Northwestern U.S. (1) (2) margins" on the Statement of Income. From July 1 through December 31, Southwestern U.S. (8) (8) 2005, gains on speculative FTRs totaled $10 million.

Net energy trading 13 13 The $13 million increase innet energy trading margins in2004 compared Domestic gross energy margins $(73) $61 with 2003 was due to a $6million increase inelectricity positions and a $6million increase ingas and oil positions.

Eastern U.S. The physical volumes for electricity and gas associated with energy trading Eastern U.S. non-trading margins were lower in2005 compared with 2004, were 5,800 GWh and 13.4 Bcf in2005; 5,700 GWh and 11.7 Bcf in2004; and primarily due to higher fuel costs. Average coal prices increased by 12% over 5,200 GWh and 12.6 Bef in 2003. The amount of energy trading margins from last year, while average gas and oil prices increased by 24%. Despite record unrealized mark-to-market transactions was a $5million loss in2005, a$13 mil-high generation in2005, the increased use of higher-cost oil and gas units to lion gain in2004 and not significant in2003.

cover retail volumes, which were up 5%over 2004, and generation output lost Utility Revenues during coal and nuclear plant outages contributed to lower margins. Due to The increases in utility revenues were attributable to:

market price increases and changes infuel mix, average fuel prices increased 22% over 2004. Partially offsetting the effects of higher supply costs was a 2% 2005 vs. 2004 2004 vs. 2003 increase in retail energy prices, inaccordance with the schedule established Domestic:

by the PUC Final Order. Retail electric revenue (PPL Electric)

PLR electric generation supply $122 $ 94 Eastern U.S. non-trading margins were higher in2004 compared with Electric delivery 201 (7) 2003, primarily due to 3%higher generation, as well as higher prices and Wholesale electric revenue (PPL Electric) (2) (23) slightly higher sales volumes. In PJM, where the majority of PPL's Eastern Gas revenue (PPL Gas Utilities) 9 22 wholesale activity occurs, average spot prices rose 15% in2004 over 2003. Other 1 (1)

PPL also benefited from favorable transmission congestion positions. Inaddition, International:

Retail electric delivery (PPL Global) retail energy prices increased by approximately 1%in2004 inaccordance U.K. 34 70 with the schedule established by the PUG. The higher sales volumes reflect Chile 52 27 the return of customers who had previously shopped for electricity, as well ElSalvador 10 as new load obligations in Connecticut and New Jersey, partially offset by Bolivia 2 1 lower wholesale sales. Partially offsetting these improvements were increased $429 $183 supply costs driven by increased fossil fuel and purchased power prices.

The increase in utility revenues for 2005 compared with 2004 was Southwestern U.S. attributable to:

Southwestern U.S. non-trading margins were lower in2005 compared with " higher domestic delivery revenues resulting from higher transmission 2004, primarily due to the sale of PPLs Sundance plant in May 2005 and the and distribution customer rates effective January 1,2005, and a 4.3% increase cost to terminate a tolling arrangement on the Griffith plant during the second involume; quarter of 2005. " higher PLR revenues due to higher energy and capacity rates and a 6%increase Southwestern U.S. non-trading margins were lower in2004 compared involume, inpart due to the return of customers previously served by alter-with 2003, primarily due to a 17% decrease inwholesale volumes. Also con- nate suppliers; tributing to the decrease in margins was a $3 million positive impact to 2003 " higher revenues inChile, primarily due to a 7%increase insales volumes, margins related to a partial reversal of a reserve against Enron receivables. higher average prices overall and a favorable change inforeign currency exchange rates; 28 PPL CORPORATION 2005 ANNUAL REPORT

" higher U.K. revenues, primarily due to favorable customer mix, an incentive Other Operation and Maintenance revenue award for outstanding customer service and a favorable change in The increases inother operation and maintenance expenses were due to:

foreign currency exchange rates; and 2005 vs. 2004 2004 vs. 2003

" higher revenues in El Salvador, primarily due to a 6%increase insales Martins Creek ash basin remediation (Note 14) $ 48 volumes and higher average prices overall. Costs associated with severe ice storms inJanuary 2005 16 Subsequent deferral of a portion of costs associated with The increase inutility revenues for 2004 compared with 2003 was January 2005 ice storms (Note 1) (12) attributable to: Accelerated amortization of stock-based compensation (Note 1) 18

" higher PLR revenues due to higher energy and capacity rates and a 3.6%

NorthWestern litigation payment (Note 14) 9 increase involume, in part due to the return of customers previously served Outage costs at Eastern U.S. fossil/hydro stations 14 $ 1 by alternate suppliers; Outage costs at Susquehanna nuclear station 6 2

" higher gas revenues, primarily due to sales of storage gas inthe fourth quarter Outage costs at Western U.S. fossil/hydro stations 4 of 2004, and the increase innatural gas prices, which are a pass-through Change inforeign currency exchange rates 1 15 Reduction inWPD costs that are a pass-through to to customer rates, partially offset by a decrease involume; customers (7) (10)

• higher U.K. revenues, primarily due to a favorable change inforeign currency Property damage and environmental insurance settlements exchange rates; which were recorded in2003 27

" higher revenues in Chile, due to higher energy prices, which are a pass- Increase indomestic system reliability work and tree trimming 10 through to customer rates, a favorable change inforeign currency exchange Increase in domestic and international pension costs 49 18 rates, and a 7%increase insales volumes; partially offset by Additional expenses of new generating facilities 5

" lower electric delivery revenues, due to a decrease in ITC and CTC revenue Increase inWPD tree trimming costs 8 as a result of lower ITC rates, and several rate groups reaching their rate Decrease in the Clean Air Act contingency relating to generating facilities recorded in2005 and 2003 (3) 8 cap; and Consulting and independent auditor costs to meet the

" lower wholesale electric revenues, due to the expiration of all PPL Electric requirements of Sarbanes-Oxley 404 (2) 6 municipal purchase power agreements at the end of January 2004. Write-off of Hurricane Isabel costs not approved for recovery by the PUC 4 Energy-related Businesses Decrease inlease expense due to consolidation of the lessor of the University Park generation facility (13)

Energy-related businesses contributed $9 million more to operating income 4 WPD capitalization (13) in2005, compared with 2004. The increase was attributable to: Decrease inother postretirement benefit expense (5) (12)

• a $15 million pre-tax loss in 2004, related to the sale of CGE (see Note 9 Other 14 14 to the Financial Statements); $164 $60

" an aggregate increase of $4 million from various international subsidiary businesses; and The increase innet pension costs for both periods was primarily attributable

" a $6 million increase from PPL Telcom due to an increase intransport-related to reductions inthe discount rate assumption for PPL's domestic and interna-sales, as well as reduced spending on a product line; partially offset by tional pension plans at December 31, 2004 and 2003. Increased WPD pension

" additional pre-tax losses in2005 of $16 million on synfuel projects. This obligations as a result of the most recent actuarial valuation as of March 31, reflects $26 million of additional expenses due to higher production levels, 2004, also served to increase the 2005 and ongoing net pension costs.

offset by a $10 million net unrealized gain on options purchased to hedge a Although financial markets have improved and equity returns for PPL's porlion of the risk associated with the phase-out of the synthetic fuel tax domestic and international plans have been strong, interest rates on longer-credits for 2006 and 2007. duration, fixed-income obligations have continued to fall, requiring further reductions to the discount rates at December 31, 2005. Inaddition, PPL Energy-related businesses contributed $39 million less to operating adopted the most current mortality tables and other demographic assumptions income in2004 compared with 2003. The decrease was primarily attributable to: for its pension plans as of December 31, 2005. These assumptions are expected

" a $17 million higher pre-tax operating loss from synfuel projects; to increase PPL's pension costs for 2006 by approximately $20 million. See

" a $15 million pre-tax loss on the sale of CGE in 2004; Note 12 to the financial statements for details on the funded status of PPL's

" an aggregate decrease of $3 million from various domestic subsidiary pension plans.

businesses; and

" a $3 million pre-tax decrease from Latin American subsidiaries due primarily to lower dividends received and lower construction sales.

PPL CORPORATION 2005 ANNUAL REPORT 29

MANAGEMENT'S DISCUSSION AND ANALYSIS Depreciation Financing Costs Increases indepreciation expense were due to: The increase (decrease) in interest expense, which includes *Interest Expense" 2005 vs. 2004 2004 vs. 2003 and "Distributions on Preferred Securities," was due to:

Lower Mt. Bethel generation facility, which began 2005 vs. 2004 2004 vs. 2003 commercial operation inMay 2004 $ 6 $10 Interest expense related to the Lower Mt. Bethel Other additions to PP&E 14 18 generation facility, which began commercial University Park generation facility - FIN 46 (a) 9 operation inMay 2004 (a) $14 $23 Reduction of useful lives of certain assets (Note 1) 7 Increase (decrease) ininterest expense related to Foreign currency exchange rates 1 13 the University Park generation facility (b) (13) 13 2003 purchase accounting adjustments related to Interest accrued for PJM billing dispute 8 the 2002 acquisition of WPD assets (22) Write-off of financing costs associated with PPL Energy Extension of useful lives of certain generation Supplys 2.625% Convertible Senior Notes (Note 8) 6 assets (Note 1) (12) Increase inforeign currency exchange rates 1 15

$16 $28 Increase (decrease) ininterest expense due to hedging activities accounted for under SFAS 133,

) The lessor of this facility was consolidated under FIN46, "Consolidation of Variable Interest "Accounting for Derivative Instruments and Entities, an Interpretation of ARB No. 51," effective December 31, 2003. InJune 2004, a Hedging Activities" 26 (11) subsidiary of PPL Energy Supply purchased the University Park generation facility from Increase (decrease) inamortization expense 9 (6) the lessor that was consolidated by PPL Energy Supply under FIN46. See Note 22 to the Increase (decrease) inshort-term debt interest expense 4 (10)

Financial Statements for additional information. (1)

Decrease inlong-term debf interest expense (55)

(Increase) decrease incapitalized interest (3)

Taxes, Other Than Income Write-off of unamortized swap costs on WPD debt In2004, PPL Electric reversed a $14 million accrued liability for 1998 and restructuring in2003 (11) 1999 PURTA taxes that had been accrued based on potential exposure inthe Other (2) proceedings regarding the Susquehanna nuclear station tax assessment. The $(5) $13 rights of third-party intervenors to further appeal expired in 2004. The reversal tat Prior to commercial operation, interest related to the Lower Mt. Bethel financing was and a $19 million increase in domestic gross receipts tax expense, offset by an capitalized as part of the cost of the facility.

tbt InJune 2004, asubsidiary of PPL Energy Supply purchased the University Park generation

$8 million decrease indomestic capital stock expense in2005, are the primary facility from the lessor that was consolidated by PPL Energy Supply under FIN46 (revised reasons for the $30 million increase intaxes, other than income, compared December 2003), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."

with 2004. Inconnection with the purchase, the related financing was repaid and the deferred financing costs were written off.See Note 22 to the Financial Statements for further information.

Taxes, other than income, decreased by $7million in2004 compared with 2003. The decrease was primarily due to the reversal of the PURTA tax liability Income Taxes and a $5 million decrease indomestic capital stock expense, partially offset Income tax expense decreased by $82 million in2005 compared with 2004.

by an $8 million increase inWPD's property tax, primarily from the impact of This decrease was primarily attributable to:

changes inforeign currency exchange rates, adjustments recorded in2003 " a $22 million reduction in income taxes related to lower pre-tax book and an increase inproperty tax rates. income; Workforce Reduction " a $33 million tax benefit recognized in2005 related to additional noncon-ventional fuel tax credits in excess of credits recognized in2004; See Note 20 to the Financial Statements for information on the $9million charge recorded in 2003. " a $19 million decrease in tax expense on foreign earnings in2005;

" a $12 million reduction inincome tax expense related to the filing of PPL's Other Income - net income tax returns; offset by See Note 16 to the Financial Statements for details of other income and " a $3 million reduction in fax benefits in 2005 related to federal and state deductions. income tax reserves that included a $15 million decrease intax benefits associated with stranded costs securitization, offset by a $12 million increase in fax benefits associated with other income tax reserves, predicated upon managements reassessment of its best estimate of probable tax exposure relative to 2004.

30 PPL CORPORATION 2005 ANNUAL REPORT

Income tax expense increased by $24 million in2004 compared with 2003. associated with the retirement of long-lived assets to be recognized as a This increase was primarily attributable to: liability inthe financial statements. Application of the new rules resulted in

" an $84 million tax benefit recognized in2003 related to foreign investment cumulative effects of changes inaccounting principles that increased net losses not recurring in2004; and income by $63 million in2003 and decreased net income by $8million in

" a $9 million tax benefit recognized in 2003 related to a charitable 2005. See Note 21 to the Financial Statements for additional information.

contribution of property not recurring in2004; offset by

" a $22 million tax benefit recognized in2004 related to a reduction intax Financial Condition reserves associated with stranded costs securitization predicated upon man- Liquidity and Capital Resources agement's reassessment of its best estimate of probable tax exposure rela- PPL is focused on maintaining an appropriate liquidity position and strength-tive to 2003; ening its balance sheet, thereby continuing to improve its credit profile. PPL

• a $25 million decrease in tax expense on foreign earnings in 2004; and believes that its cash on hand, short-term investments, operating cash flows,

• a $22 million tax benefit recognized in2004 related to additional noncon- access to debt and equity capital markets and borrowing capacity, taken as ventional fuel tax credits inexcess of credits recognized in2003. a whole, provide sufficient resources to fund its ongoing operating require-ments, future security maturities and estimated future capital expenditures.

Annual tax provisions include amounts considered sufficient to pay PPL currently expects cash, cash equivalents and short-term investments at assessments that may result from examination of prior year tax returns by the end of 2006 to be approximately $400 million, while maintaining approxi-taxing authorities. However, the amount ultimately paid upon resolution mately $3.3 billion incredit facilities. However, PPL's cash flows from opera-of any issues raised by such authorities may differ materially from the amount tions and its access to cost effective bank and capital markets are subject accrued. In evaluating the exposure associated with various filing positions, to risks and uncertainties, including but not limited to:

PPL accounts for changes inprobable exposures based on management's best

" changes inmarket prices for electricity; estimate of the amount that should be recognized. An allowance is maintained

" changes in commodity prices that may increase the cost of producing for the tax contingencies, the balance of which management believes to be power or decrease the amount PPL receives from selling power; adequate. During 2004, PPL reached partial settlement with the IRS with respect to the tax years 1991 through 1995 and received a cash refund inthe " price and credit risks associated with selling and marketing products in the wholesale power markets; amount of $52 million. As a result of this settlement, the net tax impact

" significant switching by customers to or from alternative suppliers that recorded in2004 was not significant.

would impact the level of sales under the PLR contracts; See Note 5 to the Financial Statements for details on effective income tax

" ineffectiveness of the trading, marketing and risk management policy and rates and for information on the American Jobs Creation Act of 2004.

programs used to mitigate PPL's risk exposure to adverse energy and fuel Discontinued Operations prices, interest rates, foreign currency exchange rates and counterparty credit; In 2003, PPL reported a loss of $20 million inconnection with the approval of " unusual or extreme weather that may damage PPL's transmission and a plan of sale of PPL Global's investment in a Latin American telecommunica- distribution facilities or affect energy sales to customers; tions company. In2005, PPL recorded a $47 million loss, net of a tax benefit " reliance on transmission and distribution facilities that PPL does not own of $26 million, on the sale of its Sundance power plant. or control to deliver its electricity and natural gas; See Note 9 to the Financial Statements for information on the sales, along " unavailability of generating units (due to unscheduled or longer-than-with information regarding operating losses recorded in2003, 2004 and 2005 anticipated generation outages) and the resulting loss of revenues and for the Sundance plant prior to the sale and for operating losses recorded in additional costs of replacement electricity; 2004 related to the sale of PPL Global's investment in the Latin American tele- " ability to recover and the timeliness and adequacy of recovery of costs communications company. associated with regulated utility businesses;

" costs of compliance with existing and new environmental laws and with Cumulative Effects of Changes In Accounting Principles In 2003, PPL recorded a charge of $27 million, after-tax, as a cumulative effect new safety requirements for nuclear facilities;

" any adverse outcome of legal proceedings and investigations currently of a change in accounting principle in connection with the adoption of FIN 46,

'Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," being conducted with respect to PPL's current and past business activities;

" a phase-out of the significant lax credits that PPL receives based on the for certain entities. See Note 22 to the Financial Statements for additional sale of synthetic fuel; and information.

PPL adopted SFAS 143, "Accounting for Asset Retirement Obligations,"

• a downgrade in PPL's or its subsidiaries' credit ratings that could negatively in 2003 and adopted FIN 47, "Accounting for Conditional Asset Retirement affect their ability to access capital and increase the cost of maintaining credit facilities and any new debt.

Obligations, an Interpretation of FASB Statement No. 143," in2005. Both pronouncements address the accounting for obligations associated with the retirement of tangible long-lived assets. They require legal obligations PPL CORPORATION 2005 ANNUAL REPORT 31

MIANAGEMENT'S DISCUSSION AND ANALYSIS At December 31, 2005, PPL had $618 million of cash, cash equivalents prices increased by 10%, PPL estimates that, based on its December 31, 2005 and short-term investments and $214 million of short-term debt, compared positions, itwould have had to post additional collateral of approximately with $682 million incash, cash equivalents and short-term investments and $611 million, compared with $280 mitlion at December 31, 2004. PPL has in

$42 million of short-term debt at December 31, 2004, and $476 million in place risk management programs that are designed to monitor and manage its cash, cash equivalents and short-term investments and $56 million of short- exposure to volatility of cash flows related to changes inenergy prices, interest term debt at December 31, 2003. The changes inPP~s cash and cash equiva- rates, foreign currency exchange rates, counterparty credit quality and the lents position resulted from: operational performance of its generating units.

2005 2004 0a) 2003(a1 Investing Activities Net Cash Provided byOperating Activities $1,388 $1,497 $1,355 Although net cash used ininvesting activities remained stable in2005 Net Cash Used inInvesting Activities (779) (778) (754) compared with 2004, and in2004 compared with 2003, there were significant Net Cash Used inFinancing Activities (676) (578) (387) changes incertain components. PPL received $190 million inproceeds from Effect of Exchange Rates on Cash and Cash Equivalents 6 9 7 the sale of the Sundance power plant in2005, compared with $123 million of Net Increase (Decrease) inCash and Cash proceeds from the sale of PPL's minority interest inCGE in2004. For 2005 Equivalents $ (61) $ 150 $ 221 compared with 2004, there was an increase of $58 million innet proceeds (a) See Note 1ito the Financial Statements lor an explanation of prior year reclassitications. from the sales of auction rate securities, an increase of $77 million incapital expenditures and an increase of $63 million innet purchases of emission Operating Activities allowances, inanticipation of future generation. For 2004 compared with 2003, Net cash from operating activities decreased by 7%, or $109 million, in2005 PPL received $123 million of proceeds from the sate of PPL's minority interest compared with 2004, primarily as a result of increased income tax payments inCGE in2004, which was partially offset by a net increase of $60 million in and fuel expenditures, partially offset by favorable margin impacts attributable restricted cash, an increase of $46 million innet purchases of auction rate to the 7.1% increase indistribution rates and transmission cost recoveries securities and an increase of $46 million innet purchases of emission allow-effective January 1,2005. Income tax payments increased primarily due to ances. The primary use of cash ininvesting activities iscapital expenditures.

favorable impacts of tax credits and refunds realized in2004. Fuel expendi- See 'Forecasted Uses of Cash" for detail regarding capital expenditures in tures increased $115 million due to increased prices and inventory build-up in 2005 and projected expenditures for the years 2006 through 2010.

anticipation of price increases in2006. Net cash from operating activities increased by 10%, or $142 million, in2004 compared with 2003, reflecting Financing Activities higher energy margins and other improvements incash-adjusted net income. Net cash used infinancing activities was $676 million in2005, compared PPL expects to continue to maintain stable cash provided by operating with $578 million in2004 and $387 million in2003. The increase from 2004 activities as a result of its long-term and intermediate-term power sales com- to 2005 primarity reflects the continued retirement of long-term debt and mitments from whotesale and retail customers and long-term fuel purchase increased dividends to shareowners. In2005, cash used infinancing activities contracts. PPL estimates that, on average, approximately 84% of its expected primarily consisted of net debt retirements of $340 million and common and annual generation output for the period 2006 through 2009 iscommitted preferred distributions paid of $349 million, partially offset by common stock under long-term and intermediate-term power sales contracts. PPL currently sale proceeds of $37 million.

estimates that approximately 5%of its expected generation output for 2010 is In2004, cash used infinancing activities primarily consisted of net debt committed under power sales contracts, due to the expiration of the PLR con- retirements of $863 million and common and preferred distributions paid of tracts at the end of 2009. Consistent with its business strategy, PPL expects $299 million, partially offset by common stock sale proceeds of $596 million, that the capacity and energy currently committed to long-term power sales of which $575 million related to the settlement of the common stock purchase contracts will be contracted inthe wholesale markets during the next few years. contracts that were a component of the PEPS Units and the PEPS Units, Based on the way inwhich the wholesale markets have developed to this point, Series B.

new contracts may be of ashorter duration than the PLR supply contracts with In2003, cash used infinancing activities primarily consisted of net debt PPL Electric, which at inception had terms of approximately nine years. retirements of $460 million, preferred stock retirements of $31 million and PPL's contracts for the sate and purchase of electricity and fuel often common and preferred distributions paid of $287 million, partially offset by require cash collateral or other credit enhancement, or reductions or termina- common stock sate proceeds of approximately $426 million. See 'Forecasted tions of aportion of the entire contract through cash settlement, inthe event of Sources of Cash" for a discussion of PP~s plans to issue debt and equity adowngrade of PPL's or its subsidiaries' credit ratings or adverse changes in securities, as well as a discussion of credit facility capacity available to PPL.

market prices. For example, inaddition to limiting its trading ability, ifPP~s or Also see 'Forecasted Uses of Cash" for adiscussion of PPl's plans to pay divi-its subsidiaries' ratings were lowered to below 'investment grade" and energy dends on its common and preferred securities and repurchase common stock inthe future, as well as maturities of PPL's long-term debt.

32 PPL CORPORATION 2005 ANNUAL REPORT

PP~s debt financing activity in2005 was: Debt issued during 2005 had stated interest rates ranging from 2.25% to Issuances Retirements 9.0% and maturities from 2005 through 2035. See Note 8 to the Financial PPL Energy Supply Senior Unsecured Notes (a) $313 Statements for more detailed information regarding PPL's financing activities.

PPL Capital Funding Medium-Term Notes $(350)

ForecastedSources of Cash PPL Transition Bond Company Transition Bonds (266)

PPL Electric First Mortgage Bonds (69) PPL expects to continue to have significant sources of cash available inthe PPL Electric First Mortgage Pollution Control Bonds 224 (224) near term, including various credit facilities, commercial paper programs, an PPL Electric Senior Secured Bonds 200 asset-backed commercial paper program and operating leases. PPL also PPL Capital Funding Subordinated Notes (142) expects to continue to have access to debt and equity capital markets, as WPD Unsecured Bonds (b) (208) necessary, for its long-term financing needs.

WPD short-term debt (net change) 84 PPL Energy Supply Commercial Paper (net change) 100 Latin American companies long-term debt (2)

Total $921 $(1,261)

Net reduction $(340) ta) Includes a premium of approximately $13 million associated with the remarketing feature of the 5.70% REset Put Securities due 2035.

t*) Repayment includes $30 million that was used to settle a related cross-currency swap.

Credit Facilities At December 31, 2005, PPLs total committed borrowing capacity under credit facilities and the use of this borrowing capacity were:

Letters of Credit Issued and Committed Commercial Paper Available Capacity Borrowed Backstop(d) Capacity PPL Electric Credit Facilities(at $ 300 $ 300 PPL Energy Supply Credit Facilities (b) 2,400 $757 1,643 WPD (South West) Bank Facilities lW 697 $55 2 640 Total $3,397 $55 $759 $2,583 (a)Borrowings under PPL Electric's credit facilities bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating. PPL Electric also has the capability to cause the lenders to issue up to$300 million of letters of credit under these facilities, which issuances reduce available borrowing capacity.

The credit facilities contain a financial covenant requiring debt to total capitalization to not exceed 70%. AtDecember 31, 2005 and 2004, PPL Electric's consolidated debt to total capitalization percentages, as calculated inaccordance with its credit tacilities, were 55% and 54%. The credit lacilities also contain standard representations and warranties that must be made for PPL Electric to borrow under them.

(WIBorrowings under PPL Energy Supply's credit facilities bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating. PPL Energy Supply also has the capability to cause the lenders to issue up to $2.4 billion onletters of credit under these facilities, which issuances reduce available borrowing capacity.

These credit facilities contain a financial covenant requiring debt to total capitalization to not exceed 65%. AtDecember 31,2005 and 2004, PPL Energy Supply's consolidated debt to total capitalization percentages, as calculated inaccordance with its credit facilities were 35% and 34%. The credit facilities also contain standard representations and warranties that must be made for PPL Energy Supply to borrow under them.

(l) Borrowings under WPD (South West)'s credit facilities bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating. WPD (South West) also has the capabil-ity to cause the lenders to issue up to approximately $4million of letters of credit under one of its facilities, which can only be used for letters of credit.

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 a regulatory asset base (RAB) at £150 million greater than total gross debt, ineach case as calculated inaccordance with the credit facilities. AtDecember 31,2005 and 2004, WPD (South West)'s interest coverage ratios, as calculated inaccordance with its credit lines, were 6.0 and 6.8. AtDecember 31, 2005 and 2004, WPD (South West)s RAB, as calculated inaccordance with the credit facilities, exceeded its total gross debt by £407 million and £534 million.

(d)The Borrower under each of these facilities has a reimbursement obligation to the extent any letters of credit are drawn upon. The letters of credit issued as of December 31, 2005, expire as follows:

$641 million in2006 and $18 million in2007.

As of December 31, 2005, $100 million of PPL Energy Supply's credit facility capacity served as commercial paper backstop.

PPL CORPORATION 2005 ANNUAL REPORT 33

MANAGEMENT'S DISCUSSION AND ANALYSIS Inaddition to the financial covenants noted inthe table above, these credit Operating Leases agreements contain various other covenants. Failure to meet the covenants PPL and its subsidiaries also have available funding sources that are provided beyond applicable grace periods could result inacceleration of due dates of through operating leases. PPLs subsidiaries lease vehicles, office space, land, borrowings and/or termination of the agreements. PPL monitors the covenants buildings, personal computers and other equipment. These leasing structures on a regular basis. At December 31, 2005, PPL was inmaterial compliance with provide PPL with additional operating and linancing flexibility. The operating those covenants. At this time, PPL believes that these covenants and other bor- leases contain covenants that are typical for these agreements, such as main-rowing conditions will not limit access to these funding sources. PPL intends to taining insurance, maintaining corporate existence and timely payment of rent renew and extend $2.5 billion of its credit facility capacity in2006. See Note 8 and other fees. Failure to meet these covenants could limit or restrict access to to the Financial Statements for further discussion of PPLs credit facilities. these funds or require early payment of obligations. At this time, PPL believes that these covenants will not limit access to these funding sources or cause Commercial Paper acceleration or termination of the leases.

PPL Energy Supply and PPL Electric maintain commercial paper programs for PPL, through its subsidiary PPL Montana, leases a 50% interest in up to $500 million for PPL Energy Supply and for up to $200 million for PPL Colstrip Units 1 and 2 and a 30% interest inUnit 3, under four 36-year, non-Electric to provide them each with an additional financing source to fund their cancelable operating leases. These operating leases are not recorded on PPL's short-term liquidity needs, itand when necessary. Commercial paper issuances Balance Sheet, which is inaccordance with applicable accounting guidance.

are supported by certain credit agreements of each company. PPL Energy Supply The leases place certain restrictions on PPL Montana's ability to incur additional had $100 million of commercial paper outstanding at December 31, 2005, and debt, sell assets and declare dividends. At this time, PPL believes that these no commercial paper outstanding at December 31, 2004. PPL Electric had no restrictions will not limit access to these funding sources or cause acceleration commercial paper outstanding at December 31, 2005 and 2004. During 2006, or termination of the leases. See Note 8 to the Financial Statements for a PPL Energy Supply and PPL Electric may issue commercial paper from time-discussion of other dividend restrictions related to PPL subsidiaries.

to-time to facilitate short-term cash flow needs.

See Note 10 to the Financial Statements for lurther discussion of the Asset-Backed Commercial Paper Program operating leases.

PPL Electric participates inan asset-backed commercial paper program Long-Term Debt and Equity Securities through which PPL Electric obtains financing by selling and contributing its Subject to market conditions in2006, PPL and its subsidiaries currently plan eligible accounts receivable and unbilled revenue to a special purpose, wholly to issue approximately $1.1 billion in long-term debt securities and $250 mil-owned subsidiary on an ongoing basis. The subsidiary pledges these assets to lion inpreferred securities. PPL expects to use the proceeds primarily to fund secure loans of up to an aggregate of $150 million from a commercial paper capital expenditures, to fund maturities of existing debt and for general corpo-conduit sponsored by a financial institution. PPL Electric uses the proceeds rate purposes. PPL currently does not plan to issue any significant amounts from the program for general corporate purposes and to cash collateralize of common stock in2006.

letters of credit. At December 31, 2005 and 2004, the loan balance outstanding was $42 million, all of which was being used to cash collateralize letters of ForecastedUses of Cash credit. See Note 8 to the Financial Statements for further discussion of the Inaddition to expenditures required for normal operating activities, such as asset-backed commercial paper program. purchased power, payroll, fuel and taxes, PPL currently expects to incur future cash outflows for capital expenditures, various contractual obligations, payment of dividends on its common and preferred securities and possibly the repur-chase of a portion of its common stock, beginning in 2009.

Capital Expenditures The lable below shows PPL's actual spending for the year 2005 and current capital expenditure projections for the years 2006 through 2010.

Actual Projected 2005 2006 2007 2008 2009 2010 Construction expenditures (a)(b)

Generating facilities $180 $256 $216 $167 $200 $174 Transmission and distribution facilities 460 511 526 511 552 615 Environmental 48 370 567 296 64 67 Other 59 82 76 37 29 29 Total Construction Expenditures 747 1,219 1,385 1,011 845 - 885 Nuclear fuel 64 81 92 97 97 99 Total Capital Expenditures $811 $1,300 $1,477 $1,108 $942 $984

13) Construction expenditures include AFUDC and capitalized interest, which are expected to be approximately $151 million for the 2006-2010 period.

(b)This information excludes any potential investments by PPL Global and PPL Development Company for new projects.

34 PPL CORPORATION 2005 ANNUAL REPORT

PPL's capital expenditure projections for the years 2006-2010 total approx- dioxide scrubbers and other pollution control equipment, which comprise most imately $5.8 billion. Capital expenditure plans are revised periodically to reflect of the 'Environmental" expenditures noted above.

changes inmarket and regulatory conditions. See Note 14 to the Financial PPL plans to fund all of its capital expenditures in2006 with cash on hand, Statements for additional information regarding the installation costs of sulfur cash from operations, and, when necessary, the issuance of debt securities.

Contractual Obligations PPL has assumed various financial obligations and commitments inthe ordinary course ot conducting its business. At December 31,2005, the estimated contractual cash obligations of PPL were:

Contractual Cash Obligations Total Less Than 1Year 1-3 Years 4-5 Years After 5 Years Long-term Debt(a) $ 7,189 $1,126 $1,647 $ 702 $3,714 Capital Lease Obligations 17 1 2 2 12 Operating Leases 758 77 134 124 423 Purchase 0bligations tb) 4,224 1,414 1,786 429 595 Other Long-term Liabilities Reflected on the Balance Sheet under GAAP(c) 65 27 38 Total Contractual Cash Obligations $12,253 $2,645 $3,607 $1,257 $4,744 (a)Reflects principal maturities only, including maturities o1consolidated lease debt. See Note 4to the Financial Statements for a discussion otconversion triggers related to PPL Energy Supply's 2.625% Convertible Senior Notes. Also, see Note 8 for adiscussion of the remarketing feature related to PPL Energy Supply's 5.70% REset Put Securities.

(b)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 the contracts.

Purchase orders made inthe ordinary course of business are excluded trom the amounts presented. Includes obligations related to nuclear fuel and the installation of the scrubbers, which are also reflected inthe Capital Expenditures table presented above.

(c)The amounts reflected represent estimated deficit pension funding requirements arising from an actuarial valuation performed inMarch 2004 and do not include pension funding requirements for future service.

Dividends In December 2004, PPL's Board of Directors adopted a dividend policy that Common Stock Repurchase Given the continued improvement inits credit profile, PPL expects to be ina provides for growing the common stock dividend inthe future at a rate exceed-position to repurchase a portion of its common stock beginning in2009.

ing the projected rate of growth inearnings per share from ongoing operations until the dividend payout ratio reaches the 50 percent level, which PPL expects CreditRatings to occur in2006. Earnings from ongoing operations exclude items that man- Moody's, S&P and Fitch periodically review the credit ratings on the debt and agement considers unusual. In February 2006, PPL announced its expectation preferred securities of PPL and its subsidiaries. Based on their respective that the growth rate of its dividends over the next few years will continue to reviews, the rating agencies may make certain ratings revisions.

exceed the growth rate inthe company's earnings per share and, therefore, Acredit rating reflects an assessment by the rating agency of the credit result ina dividend payout ratio above 50 percent after 2006. Any future divi- worthiness associated with particular securities issued by PPL and its subsid-dends are subject to the Board of Directors' quarterly dividend declarations, iaries based on information provided by PPL and other sources. The ratings of based on the company's financial position and other relevant considerations Moody's, S&P and Fitch are not a recommendation to buy, sell or hold any at the time. securities of PPL or its subsidiaries. Such ratings may be subject to revisions PPL Electric expects to continue to pay quarterly dividends on its out- or withdrawal by the agencies at any time and should be evaluated independently standing preferred stock, and to pay quarterly dividends on the preferred of each other and any other rating that may be assigned to their securities. A securities expected to be issued in2006, ineach case ifand as declared downgrade inPPL's or PPL's subsidiaries' credit ratings could result inhigher by its Board of Directors. borrowing costs and reduced access to capital markets.

PPL CORPORATION 2005 ANNUAL REPORT 35

MANAGEMENT'S DISCUSSION AND ANALYSIS The following table summarizes the credit ratings of PPL and its key sub- The rating agencies took the following actions on the debt and preferred sidiaries at December 31, 2005. securities of PPL and its subsidiaries in 2005 and through February 2006:

Moody's S&P Fitch(b)

PPL Moody's Issuer Rating BBB BBB InJune 2005, Moody's revised its outlooks to stable from negative on the Senior Unsecured Debt Baa3 BBB- BBB senior unsecured debt and issuer ratings of WPDH Limited, the senior unse-Outlook STABLE STABLE STABLE cured debt ratings of WPD LLP and the subordinated unsecured debt ratings of PPL Energy Supply WPD LLP's unconsolidated subsidiary SIUK Capital Trust I. Moody's indicated Issuer Rating BBB BBB that this positive change to the financial profiles resulted from a reduction in Senior Unsecured Notes Baa2 BBB BBB+

Commercial Paper P-2 A-2 F2 consolidated adjusted leverage at the WPD companies as a result of the rede-Outlook STABLE STABLE STABLE ployment to WPD of surplus cash from Latin American subsidiaries of PPL and PPL Capital Funding from PPLs commitment to suspend its dividend from WPDH Limited in 2005.

Issuer Rating BBB At the same time, Moody's affirmed the WPD companies' long-term and short-Senior Unsecured Debt Baa3 BBB- BBB term credit rating. The outlook on the debt ratings of WPD (South Wales) and Subordinated Debt Bal BBB- BBB-Medium-Term Notes Baa3 BBB- BBB WPD (South West) was already stable.

STABIE 'qTAnI I: *Tani r Outlook

.... .. E S&P PPL Electric Senior Unsecured/Issuer Rating Baa2 A- BBB InJanuary 2005, S&P affirmed PPL Electric's A-/A-2 corporate credit ratings First Mortgage Bonds Baal A- A- and favorably revised its outlook on the company to stable from negative follow-Pollution Control Bonds(a) Aaa MA ing the authorization of a $194 million rate increase by the PUC. S&P indicated Senior Secured Bonds Baal A- A- that the outlook revision reflects its expectations that the rate increase, effective P-2 A-2 F2 Commercial Paper BaP EBB BBB+ January 1,2005, will allow for material improvement in PPL Electric's financial Preferred Stock Outlook STABLE STABLE STABLE profile, which had lagged S&P's expectations inrecent years. S&P indicated PPL Transition Bond Company that the stable outlook reflects its expectations that PPL Electric "will rapidly Transition Bonds Aaa AA AA improve and then maintain financial metrics more consistent with its ratings."

PPL Montana S&P indicated that it expects PPL Electric's operations to remain stable Pass-Through Certificates Baa3 BBB- BBB through the expiration of the PLR agreement.

Outlook ST TABLE STABLE Additionally, inJanuary 2005, S&P revised its outlooks on the WPD com-WPDH Limited Issuer Rating Baa3 BBB- panies to stable from negative. S&P attributed this positive change to financial Senior Unsecured Debt Baa3 BB- BBI- profile improvements resulting from the final regulatory outcome published by Short-term Debt A-3 Ofgem inNovember 2004. At the same time, S&P affirmed the WPD companies' Outlook ST *ABLE STABLE STABLE long-term and short-term credit ratings.

WPD LLP Issuer Rating BBB- InOctober 2005, S&P affirmed its BBB corporate credit rating of PPL and Senior Unsecured Debt Baa2 BB- BBB also affirmed its ratings of PPL Energy Supply, PPL Electric and PPL Montana.

Short-term Debt A-3 The ratings affirmation is the result of S&P's annual review of PPL, including Preferred Stock Baa3 BB BBB- its business and financial risk profiles.

Outlook STABLE STABLE STABLE WPD (South Wales) Fitch Issuer Rating BBB+ InJanuary 2005, Fitch announced that it downgraded the WPD companies' Senior Unsecured Debt Baal BBB+ BBB+ senior unsecured credit ratings by one notch:

Short-term Debt A-2 F2

• WPDH Limited to BBB- from BBB; Outlook STABLE STABLE STABLE WPD (South West) " WPD LLP to BBB from BBB+; and Issuer Rating Baal BBB+

• WPD (South Wales) and WPD (South West) to BBB+/F2 from A-/Fl.

Senior Unsecured Debt Baal BBB+ BBB+

Short-term Debt P-2 A-2 F2 Fitch stated that its downgrade was prompted by the high level of pension-Outlook STABLE STABLE STABLE adjusted leverage at WPD. Fitch acknowledged that WPD's funding plan should (a)Insured as to payment of principal and interest. reduce its pension deficit over time, and itexpects WPD to proceed with its Mb)AllIssuer Ratings for Fitch are "Issuer Default Ratings." de-leveraging program. However, Fitch indicated that itis not certain enough, due to the unpredictability infuture pension valuations, that pension-adjusted leverage will support a BBB rating at WPDH Limited. Fitch indicated that WPD (South Wales) and WPD (South West) have been downgraded to maintain atwo-notch differential with WPDH Limited because Fitch does not believe that WPD's financial ring-fencing is restrictive enough to support a three-notch differential.

36 PPL CORPORATION 2005 ANNUAL REPORT

InDecember 2005, Fitch affirmed PPL Montana's amortizing Pass-Through Risk Management - Energy Marketing &Trading and Other Certificates, the last of which are due 2020, at BBB. Fitch Indicated that the rating Market Risk reflects PPL Montana's credit quality on a stand-alone basis. Background InDecember 2005, Fitch assigned issuer default ratings (IDRs) for its Market risk isthe potential loss PPL may incur as a result of price changes North American global power portfolio of issuers with ratings of 8B- or higher. associated with a particular financial or commodity instrument. PPL is exposed The IDR reflects Fitch's assessment of an issuer's ability to meet all of its to market risk from:

financial commitments on a timely basis, effectively becoming its benchmark " commodity price risk associated with the sale and purchase of energy and probability of default. Fitch rates securities inan issuer's capital structure energy-related products, and the purchase of fuel for the generating assets higher, lower or the same as the IDR based on Fitch's assessment of a particu- and energy trading activities; lar security's relative recovery prospects. There were no changes inFitch's " interest rate risk associated with variable-rate debt and the fair value of securities ratings at PPL, PPL Capital Funding, PPL Energy Supply or PPL fixed-rate debt used to finance operations, as well as the fair value of debt Electric as a result of Fitch's assignment of an IDR. securities invested inby PPL's nuclear decommissioning trust funds; InFebruary 2006, Fitch's Europe, Middle East and Africa group imple- " foreign currency exchange rate risk associated with investments inaffiliates mented IDRs based on its new IDR methodology. This implementation led to in Latin America and Europe, as well as purchases of equipment incurren-Fitch's assignment of the following IDRs and Fitch's revision of its ratings on cies other than U.S. dollars; and the following securities currently outstanding at WPD and its affiliates. " equity securities price risk associated with the fair value of equity securities

• WPDH Limited IDR of BBB- and senior unsecured rating to BBB from BBB-; invested inby PPL's nuclear decommissioning trust funds.

• WPD LLP IDR of BBB, senior unsecured rating to BBB+ from BBB and PPL has a risk management policy approved by its Board of Directors to preferred stock rating to BBB from BBB-; and manage market risk and counterparty credit risk. (Credit risk is discussed

" WPD (South Wales) and WPD (South West) IDR of BBB+ and senior below.) The RMC, comprised of senior management and chaired by the Vice unsecured debt rating to A-from BBB+.

President-Risk Management, oversees the risk management function. Key Fitch's outlook for WPD and its affiliates remains stable. risk control activities designed to monitor compliance with the risk policy and detailed programs include, but are not limited to, credit review and approval, Ratings Triggers validation of transactions and market prices, verification of risk and transaction PPL Energy Supply's $400 million of 2.625% Convertible Senior Notes due 2023 limits, sensitivity analyses, daily portfolio reporting, including open positions, are convertible upon the occurrence of certain events, including ifthe long-term mark-to-market valuations and other risk measurement metrics.

credit ratings assigned to the notes by Moody's and S&P are lower than BB The forward-looking information presented below provides estimates of and Ba2, or either Moody's or S&P no longer rates the notes. The terms of the what may occur inthe future, assuming certain adverse market conditions, due notes require cash settlement of the principal amount upon conversion of the to reliance on model assumptions. Actual future results may differ materially notes. See Note 4 to the Financial Statements for more information concerning from those presented. These disclosures are not precise indicators of expected the Convertible Senior Notes.

future losses, but only indicators of reasonably possible losses.

PPL and its subsidiaries do not have additional material liquidity exposures caused by a ratings downgrade below "investment grade" that would accelerate Contract Valuation the due dates of borrowings. However, ifPPL's and PPL Energy Supply's debt PPL utilizes forward contracts, futures contracts, options, swaps and tolling ratings had been below investment grade at December 31, 2005, PPL and PPL agreements as part of its risk management strategy to minimize unanticipated Energy Supply would have had to post an additional $128 million of collateral fluctuations inearnings caused by commodity price, interest rate and foreign to counterparties. currency volatility. When available, quoted market prices are used to determine the fair value of a commodity or financial instrument. This may include Off-Balance Sheet Arrangements exchange prices, the average mid-point bid/ask spreads obtained from brokers, PPL provides guarantees for certain consolidated affiliate financing arrange-or an independent valuation by an external source, such as a bank. However, ments that enable certain transactions. Some of the guarantees contain financial market prices for energy or energy-related contracts may not be readily determin-and other covenants that, if not met, would limit or restrict the consolidated able because of market illiquidity. Ifno active trading market exists, contracts are affiliates' access to funds under these financing arrangements, require early valued using internally developed models, which are then reviewed by an maturity of such arrangements or limit the consolidated affiliates' ability to enter independent, internal group. Although PPL believes that its valuation methods into certain transactions. At this time, PPL believes that these covenants will are reasonable, changes inthe underlying assumptions could result in signifi-not limit access to the relevant funding sources.

cantly different values and realization infuture periods.

PPL has entered into certain guarantee agreements that are within the scope of FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5,57, and 107 and Rescission of FASB Interpretation No. 34.,

See Note 14 to the Financial Statements for a discussion on guarantees.

PPL CORPORATION 2005 ANNUAL REPORT 37

MANAGEMENT'S DISCUSSION AND ANALYSIS To record energy derivatives at their fair value, PPL discounts the forward and Risk Management Activities" are reflected inthe financial statements using values using the U.S. Utility BBB+ Curve. Additionally, PPL adjusts derivative the accrual method of accounting. Under the accrual method of accounting, carrying values to recognize differences incounterparty credit quality and unrealized gains and losses are not reflected in the financial statements.

potential illiquidity inthe market: PPL adopted the final provisions of EITF 03-11 prospectively as of

" The credit adjustment takes into account the probability of default, as calculated October 1,2003. As a result of this adoption, non-trading bilateral sales of by an independent service, for each counterparty that has an out-of-the money electricity at major market delivery points are netted with purchases that position with PPL. offset the sales at those same delivery points. Amajor market delivery point is

• The liquidity adjustment fakes into account the fact that it may not be appro- any delivery point with liquid pricing available. See Note 17 to the Financial priate to value contracts at the midpoint of the bid/ask spread. PPL might Statements for the impact of the adoption of EITF 03-11.

have to accept the "bid" price it PPL wants to close an open sales position PPL's short-term derivative contracts are recorded as "Price risk manage-or PPL might have to accept the "ask" price ifPPL wants to close an open ment assets" and "Price risk management liabilities" on the Balance Sheet.

purchase position. Long-term derivative contracts are included in "Regulatory and Other

" The modeling adjustment takes into account market value for certain contracts Noncurrent Assets - Other" and "Deferred Credits and Other Noncurrent when there is no external market to value the contract or when PPL isunable to Liabilities - Other."

find independent confirmation of the true market value of the contract.

Accounting Designation Accounting and Reporting Energy contracts that do not qualify as derivatives receive accrual accounting To account for and report on contracts entered into to manage market risk, PPL treatment. For energy contracts that meet the definition of a derivative, the follows the provisions of SFAS 133, "Accounting for Derivative Instruments and circumstances and intent existing at the time that energy transactions are Hedging Activities," as amended by SFAS 138, "Accounting for Certain Derivative entered into determine their accounting designation. Inaddition to energy-Instruments and Certain Hedging Activities," and SFAS 149, "Amendment of related transactions, PPL enters into financial interest rate and foreign currency Statement 133 on Derivative Instruments and Hedging Activities," and inter- swap contracts to hedge interest expense associated with both existing and preted by DIG issues (together, "SFAS 133"), EITF 02-3, "Issues Involved in anticipated debt issuances. PPL also enters into foreign currency swap contracts Accounting for Derivative Contracts Held for Trading Purposes and Contracts to hedge the fair value of firm commitments denominated inforeign currency Involved inEnergy Trading and Risk Management Activities," and EITF 03-11, and net investments inforeign operations. As with energy transactions, the cir-

"Reporting Realized Gains and Losses on Derivative Instruments That Are cumstances and intent existing at the time of the transaction determine a con-Subject to FASB Statement No. 133 and Not 'Held for Trading Purposes' as tract's accounting designation. These designations are verified by a separate Defined inIssue No. 02-3." SFAS 133 requires that all derivative instruments internal group on a daily basis. See Note 17 to the Financial Statements for a be recorded at fair value on the balance sheet as an asset or liability (unless summary of the guidelines that have been provided to the traders who are they meet SFAS 133's criteria for exclusion) and that changes inthe derivative's responsible for the designation of derivative energy contracts.

fair value be recognized currently inearnings unless specific hedge accounting Commodity Price Risk (Non-trading) criteria are met.

Commodity price risk is one of PPL's most significant risks due to the level InApril 2003, the FASB issued SFAS 149, which amends and clarifies of investment that PPL maintains in its generation assets, coupled with the SFAS 133 to improve financial accounting and reporting for derivative instruments volatility of prices for energy and energy-related products. Several factors and hedging activities. To ensure that contracts with comparable characteristics influence price levels and volatilities. These factors include, but are not limited to, are accounted for similarly, SFAS 149 clarified the circumstances under which a seasonal changes indemand, weather conditions, available generating assets contract with an initial net investment meets the characteristics of a derivative, within regions, transportation availability and reliability within and between clarified when a derivative contains a financing component, amended the defini-regions, market liquidity, and the nature and extent of current and potential tion of an "underlying" and amended certain other existing pronouncements.

federal and state regulations. To hedge the impact of market price fluctuations Additionally, SFAS 149 placed additional limitations on the use of the normal on PPL's energy-related assets, liabilities and other contractual arrangements, purchase or normal sale exception. SFAS 149 was effective for contracts entered PPL EnergyPlus sells and purchases physical energy at the wholesale level into or modified and for hedging relationships designated after June 30, 2003, under FERC market-based tariffs throughout the U.S. and enters into financial except certain provisions relating to forward purchases or sales of when-issued exchange-traded and over-the-counter contracts. Because PPL owns or controls securities or other securities that did not yet exist. PPL adopted SFAS 149 as of generating assets, the majority of PPLs energy transactions qualify for accrual July 1,2003. The adoption of SFAS 149 did not have a significant impact on PPL.

or hedge accounting. Additionally, the non-trading portfolio includes the fair Inaccordance with EITF 02-3, PPL reflects its net realized and unrealized value of options that are economic hedges of PPL's synthetic fuel tax credits.

gains and losses associated with all derivatives that are held for trading purposes Although they do not receive hedge accounting treatment, these options inthe "Net energy trading margins" line on the Statement of Income. Non-are considered non-trading.

derivative contracts that met the definition of energy trading activities as defined by EITF 98-10, "Accounting for Contracts Involved inEnergy Trading 38 PPL CORPORATION 2005 ANNUAL REPORT

Within PPL's non-trading portfolio, the decision to enter into energy best fits the usage patterns inorder to minimize earnings volatility. On a forward contracts hinges on the expected value ot PPL's generation. To address this basis, PPL reserves ablock amount of generation for full requirements energy risk, PPL takes aconservative approach indetermining the number ot MWhs contracts that isexpected to be the best match with their anticipated usage pat-that are avaitable to be sold forward. Inthis regard, PPL reduces the maximum terns and energy peaks. Anticipated usage patterns and energy peaks are affected potential output that aplant may produce by three factors - planned mainte- by expected toad changes, regional economic drivers and seasonality.

nance, unplanned outages and economic conditions. The potential outpuf of a PPL's non-trading commodity derivative contracts mature at various limes plant isfirst reduced by the amount ot unavailable generation due to planned through 2010. The following chart sets forth PPL~s net fair market value of maintenance on aparticular unit. Another reduction, representing the these contracts as of December 31.

unplanned outage rate, isthe amount of M[Whs that historically isnot produced Gains (Losses) by a plant due to such factors as equipment breakage. Finally, the potential 2005 2004 output of certain plants (such as peaking units) isreduced because their higher Fair value ofcontracts outstanding atthe beginning cost of production will not allow them to economically run during all hours. of the period $ (11) $86 PP~s non-trading portfolio also includes full requirements energy contracts. Contracts realized or otherwise settled during the period (21) (66)

Fair value ofnew contracts atinception 27 The net obligation to serve these contracts changes minute by minute. PPL Other changes infair values (279) (31) analyzes historical on-peak and ott-peak usage patterns, as well as spot prices Fair value of contracts outstanding at the end of the period $(284) $f1 1) and weather patterns, to determine amonthly level of ablock of electricity that The following chart segregates estimated fair values of PPL's non-trading commodity derivative contracts at December 31, 2005, 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 4-5 Years Excess of15 Years Total Fair Value Source of Fair Value Prices actively quoted $21 $ 7 $3 $ 31 Prices provided by other external sources (82) (235) (36) (353)

Prices based on models and other valuation methods 21 17 38 Fair value of contracts outstanding atthe end of the period $(40) $(211) $1331 $(284)

The 'Prices actively quoted" category includes the fair value of exchange- power plant outages, transmission disruptions, non-performance by counter-traded natural gas futures contracts quoted on the NYMEX, which has currently parties (or their own counterparties) with which it has energy contracts and quoted prices through 2011. other factors could affect PP~s ability to meet its obligations, or cause signifi-The 'Prices provided by other external sources" category includes PP~s cant increases inthe market price of replacement energy. Although PPL forward positions and options innatural gas and power and natural gas basis attempts to mitigate these risks, there can be no assurance that itwill be able swaps at points for which over-the-counter (OTC) broker quotes are available. to fully meet its firm obligations, that itwill not be required to pay damages for The fair value of electricity positions recorded above use the midpoint of the failure to perform, or that itwill not experience counterparty non-performance bid/ask spreads obtained through OTC brokers. On average, OTC quotes for inthe future.

forwards and swaps of natural gas and power extend one and two years into As of December 31, 2005, PPL estimated that a10% adverse movement the future. inmarket prices across all geographic areas and time periods would have The 'Prices based on models and other valuation methods" category decreased the value of the commodity contracts inits non-trading portfolio includes the value of transactions for which an internally developed price by approximately $275 million, compared with adecrease of $165 million at curve was constructed as aresult of the long-dated nature of the transaction December 31, 2004. For purposes of this calculation, an increase inthe or the illiquidity of the market point, or the value of options not quoted by an market price for electricity isconsidered an adverse movement because PPL's exchange or OTC broker. etectricity portfolio isgenerally inanet sales position, and the decrease in Because of PP~s efforts to hedge the value of the energy from its genera- the market price for fuel isconsidered an adverse movement because PPL's tion assets, PPL sells electricity and buys fuel on aforward basis, resulting in commodity fuels portfolio isgenerally inanet purchase position. PPL enters open contractual positions. ItPPL were unable to deliver firm capacity and into those commodity contracts to reduce the market risk inherent inthe energy or to accept the delivery of fuel under its agreements, under certain generation of electricity.

circumstances itcould be required to pay damages. These damages would Inaccordance with its marketing strategy, PPL does not completely hedge be based on the difference between the market price and the contract price of its generation output or fuel requirements. PPL estimates that for its entire the commodity. Depending on price volatility inthe wholesale energy markets, portfolio, including all generation, emissions and physical and financial energy such damages could be significant. Extreme weather conditions, unplanned positions, a 10% adverse change inpower prices across all geographic zones PPL CORPORATION 2005 ANNUAL REPORT 39

MANAGEMENT'S DISCUSSION AND ANALYSIS and time periods would decrease expected 2006 gross margins by $18 million. PPL's trading contracts mature at various times through 2009. The following Similarly, a 10% adverse movement inall fossil fuel prices would decrease chart sets forth PPL's net fair market value of trading contracts as of December 31.

2006 gross margins by $10 million. Gains (Losses) 2005 2004 Commodity Price Risk (Trading)

PPL also executes energy contracts to take advantage of market opportunities. Fair value of contracts outstanding at the beginning of the period $10 $3 As a result, PPL may at times create a net open position inits portfolio that Contracts realized or otherwise settled during the period (30) (12) could result insignificant losses ifprices do not move inthe manner or direc- Fair value of new contracts at inception 3 1 tion anticipated. The margins from these trading activities are shown inthe Other changes in fair values 22 18 Statement of Income as "Net energy trading margins. Fair value of contracts outstanding at the end of the period $5 $10 PPL will reverse approximately $1 million of the $5million unrealized trad-ing gains over the first three months of 2006 as the transactions are realized.

The following chart segregates estimated fair values of PPL's trading portfolio at December 31, 2005, 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 4-5 Years Excess of 5 Years Total Fair Value Source of Fair Value Prices actively quoted $8 $(2) $6 Prices provided by other external sources (1) $2 1 Prices based on models and other valuation methods (1) (1) (2)

Fair value of contracts outstanding at the end of the period $6 $(3) $2 $5 See 'Commodity Price Risk (Non-trading)" for information on the various rate debt and for future anticipated financing. While PPL is exposed to changes sources of fair value. inthe fair value of these instruments, any changes inthe fair value of these As of December 31, 2005, PPL estimated that a 10% adverse movement in instruments are recorded inequity and then reclassified into earnings in the market prices across all geographic areas and time periods would have same period during which the item being hedged affects earnings. At decreased the value of the commodity contracts inits trading portfolio by $23 December 31, 2005, the market value of these instruments, representing the million, compared with a decrease of $5 million at December 31, 2004. amount PPL would receive upon their termination, was approximately $6 mil-lion. At December 31, 2005, PPL estimated that its potential exposure to a Interest Rate Risk change inthe fair value of these instruments, through a 10% adverse move-PPL and its subsidiaries have issued debt to finance their operations. PPL uti-ment inthe hedged exposure, was approximately $7 million, compared with lizes various financial derivative products to adjust the mix of fixed and floating a $2 million exposure at December 31, 2004.

interest rates in its debt portfolio, adjust the duration of its debt portfolio and PPL also utilizes various risk management instruments to adjust the mix lock inU.S. Treasury rates (and interest rate spreads over treasuries) inantici-of fixed and floating interest rates inits debt portfolio. While PPL is exposed pation of future financing, when appropriate. Risk limits under the risk manage-to changes inthe fair value of these instruments, any change inmarket value ment program are designed to balance risk exposure to volatility ininterest is recorded with an equal and offsetting change inthe value of the debt being expense and changes in the fair value of PPL's debt portfolio due to changes in hedged. At December 31, 2005, PPL estimated that its potential exposure to the absolute level of interest rates.

a change inthe fair value of these instruments, through a 10% adverse move-At December 31, 2005, PPUs potential annual exposure to increased inter-ment ininterest rates, was approximately $12 million, compared with a $19 est expense, based on a 10% increase ininterest rates, was estimated at $7 million exposure at December 31, 2004.

million, compared with a $4 million exposure at December 31, 2004.

PPL isalso exposed to changes inthe fair value of its domestic and inter- Foreign Currency Risk national debt portfolios. At December 31, 2005, PPL estimated that its poten- PPL is exposed to foreign currency risk, primarily through investments in tial exposure to a change inthe fair value of its debt portfolio, through a 10% affiliates inthe U.K. and Latin America. Inaddition, PPL may make purchases adverse movement in interest rates, was approximately $200 million, compared of equipment incurrencies other than U.S. dollars.

with $216 million at December 31, 2004. PPL has adopted a foreign currency risk management program designed PPL utilizes various risk management instruments to reduce its exposure to hedge certain foreign currency exposures, including firm commitments, to the expected future cash flow variability of its debt instruments. These risks recognized assets or liabilities and net investments. Inaddition, PPL enters include exposure to adverse interest rate movements for outstanding variable into financial instruments to protect against foreign currency translation risk.

40 PPL CORPORATION 2005 ANNUAL REPORT

To protect expected income inChilean pesos, PPL entered into an average PPL implemented a risk management objective to hedge a portion of the rate forward for 8 billion Chilean pesos. The settlement date of this forward is variability of cash flows associated with its 2006 and 2007 synthetic fuel tax November 2006. At December 31, 2005, the market value of this position, rep- credits by hedging the risk that the 2006 and 2007 annual average wellhead resenting the amount PPL would pay upon its termination, was insignificant. price for domestic crude oil will be within the phase-out range.

PPL estimated that its potential exposure to a change inthe market value of PPL purchased options in2005 to mitigate some of the reductions in syn-these instruments, through a 10% adverse movement inforeign exchange thetic fuel tax credits ifthe annual average wellhead price for 2006 and 2007 rates, was insignificant at December 31, 2005. falls within the applicable phase-out range. These positions did not qualify for WPDH Limited holds a net position incross-currency swaps totaling $1.1 hedge accounting treatment. The mark-to-market value of these positions as billion to hedge the interest payments and value of its U.S. dollar-denominated of December 31, 2005, was a gain of $10 million, and is reflected in*Energy-bonds with maturity dates ranging from December 2006 to December 2028. related businesses" revenues on the Statement of Income.

The estimated value of this position at December 31, 2005, being the amount As of December 31, 2005, PPL estimated that a 10% adverse movement PPL would pay to terminate it, including accrued interest, was approximately in market prices of crude oil would have decreased the value of the synthetic

$164 million. PPL estimated that its potential exposure to a change in the mar- fuel hedges by $24 million. For purposes of this calculation, a decrease inthe ket value of these instruments, through a 10% adverse movement inforeign market price for crude oil is considered an adverse movement.

exchange rates, was approximately $140 million at December 31, 2005.

On the Statement of Income, gains and losses associated with hedges of Credit Risk Credit risk relates to the risk of loss that PPL would incur as a result of non-interest payments denominated inforeign currencies are reflected in"Interest Expense." Gains and losses associated with the purchase of equipment are performance by counterparties of their contractual obligations. PPL maintains reflected in"Depreciation." Gains and losses associated with net investment credit policies and procedures with respect to counterparties (including requirements that counterparties maintain certain credit ratings criteria) and hedges remain in *Accumulated other comprehensive loss" on the Balance requires other assurances inthe form of credit support or collateral incertain Sheet until the investment is disposed.

circumstances inorder to limit counterparty credit risk. However, PPL has Nuclear Decommissioning Trust Funds - Securities Price Risk concentrations of suppliers and customers among electric utilities, natural gas Inconnection with certain NRC requirements, PPL Susquehanna maintains distribution companies and other energy marketing and trading companies.

trust funds to fund certain costs of decommissioning the Susquehanna sta- These concentrations of counterparties may impact PPL's overall exposure tion. As of December 31, 2005, these funds were invested primarily in domes- to credit risk, either positively or negatively, inthat counterparties may be tic equity securities and fixed-rate, fixed-income securities and are reflected similarly affected by changes in economic, regulatory or other conditions. As at fair value on PPL's Balance Sheet. The mix of securities is designed to pro- discussed above in "Contract Valuation," PPL records certain non-performance vide returns to be used to fund Susquehanna's decommissioning and to com- reserves to reflect the probability that a counterparty with contracts that are pensate for inflationary increases indecommissioning costs. However, the out of the money (from the counterparty's standpoint) will default in its perfor-equity securities included inthe trusts are exposed to price fluctuation in equity mance. Inthis case, PPL would have to sell into a lower-priced market or pur-markets, and the values of fixed-rate, fixed-income securities are exposed to chase from a higher-priced market. These reserves are reflected inthe fair changes in interest rates. PPL Susquehanna actively monitors the investment value of assets recorded in 'Price risk management assets" on the Balance performance and periodically reviews asset allocation inaccordance with its Sheet. PPL also records reserves to reflect the probability that a counterparty nuclear decommissioning trust policy statement. At December 31, 2005, a will not make payments for deliveries PPL has made but not yet billed. These hypothetical 10% increase ininterest rates and a 10% decrease inequity prices reserves are reflected in "Unbilled revenues" on the Balance Sheet. PPL also would have resulted in an estimated $33 million reduction inthe fair value has established a reserve with respect to certain sales to the California ISO for of the trust assets, compared with a $30 million reduction at December 31, which PPL has not yet been paid, as well as a reserve related to PPL's exposure 2004. See Note 21 to the Financial Statements for more information regarding as a result of the Enron bankruptcy, which are reflected in "Accounts receiv-the nuclear decommissioning trust funds. able" on the Balance Sheet. See Notes 1 and 14 to the Financial Statements.

Synthetic Fuel Tax Credit Risk Related Party Transactions Recent increases inand the volatility of crude oil prices threaten to reduce PPL isnot aware of any material ownership interests or operating responsibil-the amount of synthetic fuel tax credits that PPL expects to receive through ity by senior management of PPL in outside partnerships, including leasing its synthetic fuel production. The tax credits are reduced ifthe annual average transactions with variable interest entities, or other entities doing business wellhead price of domestic crude oil falls within a phase-out range. The tax with PPL.

credits are eliminated ifthis reference price exceeds the phase-out range. For additional information on related party transactions, see Note 15 to the See "Regulatory Issues - IRS Synthetic Fuels Tax Credits" in Note 14 to the Financial Statements.

Financial Statements for more information regarding the phase-out of the tax credits.

PPL CORPORATION 2005 ANNUAL REPORT 41

MANAGEI\ENT'S DISCUSSION ANi) ANALYSIS Acquisitions, Development and Divestitures 2) Pension and Other Postretirement Benefits From time to time, PPL and its subsidiaries are involved innegotiations with PPL follows the guidance of SFAS 87, "Employers' Accounting for Pensions,"

third parties regarding acquisitions and dispositions of businesses and assets, and SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than joint ventures and development projects, which may or may not result indefini- Pensions," when accounting for these pension and other postretirement bene-tive agreements. Any such transactions may impact future financial results. fits. Under these accounting standards, assumptions are made regarding the See Note 9 to the Financial Statements for information regarding recent acqui- valuation of benefit obligations and the performance of plan assets. Delayed sitions and development activities. recognition of differences between actual results and expected or estimated At December 31, 2005, PPL Global had investments inforeign facilities, results isa guiding principle of these standards. This delayed recognition of including consolidated investments inWPD, Emel, EC and others. See Note 3 actual results allows for a smoothed recognition of changes inbenefit obliga-to the Financial Statements for information on unconsolidated investments tions and plan performance over the working lives of the employees who accounted for under the equity method. benefit under the plans. The primary assumptions are:

Inconnection with the ongoing review of its non-core international minor- " Discount Rate - The discount rate is used incalculating the present value ity ownership investments, PPL Global sold certain minority interests in2005 of benefits, which is based on projections of benefit payments to be made and 2004. See Note 9 to the Financial Statements for additional information. inthe future. The objective inselecting the discount rate isto measure the PPL is currently planning incremental capacity increases of 258 MW at single amount that, ifinvested at the measurement date ina portfolio of several existing domestic generating facilities. high-quality debt instruments, would provide the necessary future cash PPL is continuously reexamining development projects based on market flows to pay the accumulated benefits when due.

conditions and other factors to determine whether to proceed with these proj- " Expected Return on Plan Assets - Management projects the future return ects, sell them, cancel them, expand them, execute tolling agreements or pur- on plan assets considering prior performance, but primarily based upon the sue other opportunities. plans' mix of assets and expectations for the long-term returns on those asset classes. These projected returns reduce the net benefit costs PPL Environmental Matters records currently.

See Note 14 to the Financial Statements for a discussion of environmental " Rate of Compensation Increase - Management projects employees' annual matters.

pay increases, which are used to project employees' pension benefits at retirement.

New Accounting Standards " Health Care Cost Trend Rate - Management projects the expected increases See Note 23 to the Financial Statements for a discussion of new accounting inthe cost of health care.

standards recently adopted or pending adoption. In selecting a discount rate for its domestic pension and other postretire-ment plans, PPL starts with an analysis of the expected benefit payment stream Application of Critical for its plans. This information is first matched against a spot rate yield curve.

Accounting Policies Aportfolio of nearly 600 Moody's Aa-graded non-callable corporate bonds, with a total outstanding Iloat in excess of $300 billion, serves as the base from PPL's financial condition and results of operations are impacted by the meth-which those with the lowest and highest yields are eliminated to develop the ods, assumptions and estimates used inthe application of critical accounting ultimate yield curve. The results of this analysis are considered inconjunction policies. The following accounting policies are particularly important to the with other economic data and consideration of movements inthe Moody's Aa financial condition or results of operations of PPL, and require estimates or bond index to determine the discount rate assumption. At December 31, 2005, other judgments of matters inherently uncertain. Changes inthe estimates or PPL decreased the discount rate for its domestic plans from 5.75% to 5.70%

other judgments included within these accounting policies could result ina as a result of this assessment.

significant change to the information presented inthe financial statements.

The selection of a discount rate for the international pension plans of (These accounting policies are also discussed inNote 1 to the Financial WPD again starts with an analysis of the expected benefit payment streams.

Statements.) PPLs senior management has reviewed these critical accounting This information is analyzed against yields on long-term high-quality corpo-policies, and the estimates and assumptions regarding them, with its Audit rate bonds within the iBoxx index. Due to the flatness of U.K. yield curves, the Committee. Inaddition, PPL's senior management has reviewed the following duration-weighted discount rate isapproximately the same. At December 31, disclosures regarding the application of these critical accounting policies with 2005, PPL decreased the discount rate for its international pension plans from the Audit Committee.

5.50% to 4.75% as a result of this assessment.

1) Price Risk Management Inselecting an expected return on plan assets, PPL considers tax implica-See "Risk Management - Energy Marketing &Trading and Other" inFinancial tions, past performance and economic forecasts for the types of investments Condition. held by the plans. At December 31, 2005, PPL's expected return on plan assets was decreased from 8.75% to 8.50% for its domestic pension plans and increased to 8.00% from 7.90% for its other postretirement benefit plans. For 42 PPL CORPORATION 2005 ANNUAL REPORT

its international plans, PPL's expected return on plan assets was reduced from Inselecting health care cost trend rates, PPL considers past performance 8.30% to 8.09% at December 31, 2005. Both PPL's domestic and international and forecasts of health care costs. At December 31, 2005, PPL's health care pension plans have significantly exceeded the expected return on plan assets cost trend rates were 10.0% for 2006, gradually declining to 5.5% for 2011.

for 2004 and 2005. However, the expected return on plan assets assumption Avariance inthe assumptions listed above could have a significant impact was decreased to reflect a long-term view of equity markets and an expected on projected benefit obligations, accrued pension and other postretirement increase in long-term bond yields. benefit liabilities, reported annual net periodic pension and other postretire-Inselecting a rate of compensation increase, PPL considers past experi- ment benefit cost and other comprehensive income (OCt). The following chart ence in light of movements in inflation rates. At December 31, 2005, PPL's rate reflects the sensitivities inthe 2005 financial statements associated with a of compensation increase was changed to 4.75% from 4.00% for its domestic change incertain assumptions. While the chart below reflects either an plans. For its international plans, PPL's rate of compensation increase increase or decrease in each assumption, the inverse of this change would remained at 3.75% at December 31, 2005. impact the projected benefit obligation, accrued pension and other postretire-ment benefit liabilities, reported annual net periodic pension and other postre-tirement benefit cost and OCt by a similar amount inthe opposite direction.

Each sensitivity below reflects an evaluation of the change based solely on a change inthat assumption.

Increase (Decrease)

Change in Impact on Impact on Actuarial Assumption Assumption Obligation Liabilities(a) Impact on Cost Impact on oCI Discount Rate (0.25)% $165 $2 $2 $80 Expected Return on Plan Assets (0.25)% N/A 11 11 (6)

Rate of Compensation Increase 0.25% 28 3 3 (1)

Health Care Cost Trend RateMb) 1.0% 13 1 1 N/A (a) Excludes the impact of additional minimum liability.

(b) Only impacts other postretirement benefits.

PPL's total net pension and other postretirement benefit obligation as $368 million at December 31, 2004 to $349 million at December 31, 2005.

of December 31, 2005, was $853 million. PPL recognized an aggregate net The charges to OCt will reverse infuture periods if the fair value of trust assets accrued pension and other postretirement benefit liability of $429 million on exceeds the accumulated benefit obligation.

its Balance Sheet as of December 31, 2005. The total obligation is not fully Refer to Note 12 to the Financial Statements for additional information reflected inthe current financial statements due to the delayed recognition regarding pension and other postretirement benefits.

criteria of the accounting standards for these obligations.

3) Asset Impairment In 2005, PPL recognized net periodic pension and other postretirement PPL performs impairment analyses for long-lived assets, including intangibles, costs charged to operating expenses of $51 million. This amount represents a that are subject to depreciation or amortization inaccordance with SFAS 144,

$44 million increase from 2004. This increase inexpense was primarily attrib-

'Accounting for the Impairment or Disposal of Long-Lived Assets." PPL tests utable to PPL's international plans and was the result of the decrease in the for impairment whenever events or changes in circumstances indicate that a discount rate at December 31, 2004 and recognition of prior losses.

long-lived asset's carrying value may not be recoverable. Examples of such The pension plans of WPD have accumulated deferred losses of events or changes incircumstances are:

$721 million as of December 31, 2005, as a result of changes inthe discount

" a significant decrease inthe market price of an asset; rate assumption, expected compared with actual asset returns and changes in

" a significant adverse change inthe manner inwhich an asset is being used demographic assumptions and experience. The losses, to the extent not offset or inits physical condition; by future gains, will be amortized inaccordance with PPL's policy regarding

• a significant adverse change inlegal factors or inthe business climate; recognition of gains and losses as detailed inNote 1 to the Financial Statements.

" an accumulation of costs significantly in excess of the amount originally Strong asset returns and falling foreign currency conversion rates offset expected for the acquisition or construction of an asset; the impact of the decrease inthe discount rate, allowing PPL to reduce its

" a current-period operating or cash flow loss combined with a history of additional minimum pension liability for its international pension plans, offset losses or a forecast that demonstrates continuing losses; or by a modest increase for PPL's domestic pension plans. Recording the change

" a current expectation that, more likely than not, an asset will be sold or other-inthe additional minimum liability resulted ina $19 million decrease to the wise disposed of before the end of its previously estimated useful life.

pension-related charge to OCl, net of taxes, translation adjustment and unrec-ognized prior service costs, with no effect on net income. The pension-related For a long-lived asset, an impairment exists when the carrying value exceeds balance inOCt, which is a reduction to shareowners' equity, was reduced from the sum of the estimated undiscounted cash flows expected to result from the use and eventual disposition of the asset. Ifthe asset is impaired, an impairment loss isrecorded to adjust the asset's carrying value to its estimated fair value.

PPL CORPORATION 2005 ANNUAL REPORT 43

MANAGEIMENT'S DISCUSSION ANI) ANALYSIS Indetermining asset impairments, management must make significant unit is considered not impaired. Ifthe carrying value exceeds the estimated judgments to estimate future cash flows, the useful lives of long-lived assets, fair value of the reporting unit, the second step is performed to measure the the fair value of the assets and management's intenl to use the assets. Changes amount of impairment loss, ifany.

inassumptions and estimates included within the impairment reviews could The second step requires a calculation of the implied fair value of goodwill.

result insignificantly different results than those identified and recorded inthe The implied fair value of goodwill is determined inthe same manner as the financial statements. For determining fair value, the FASB has indicated that amount of goodwill in a business combination. That is, the estimated fair value quoted market prices inactive markets are Ihe besl evidence of fair value. of a reporting unil isallocated to all of the assets and liabilities of that unit as if However, when market prices are unavailable, other valuation techniques may the reporting unit had been acquired ina business combination and the esti-be used. PPL has generally used a present value technique (i.e., discounted mated fair value of Ihe reporting unit was the price paid to acquire the reporting cash flow). Discounted cash flow is calculated by estimating future cash flow unit. The excess of the estimated fair value of a reporting unit over the amounts streams and applying appropriate discount rates to determine the present value assigned to its assets and liabilities is the implied fair value of goodwill. The of the cash flow streams. implied fair value of the reporting unit goodwill is then compared with the car-PPL has determined that, when alternative courses of action to recover the rying value of that goodwill. Ifthe carrying value exceeds the implied fair value, carrying value of a long-lived asset are being considered, ituses estimated an impairment loss is recognized inan amount equal to that excess. The loss cash flows from the most likely approach to assess impairment whenever one recognized cannot exceed the carrying value of the reporting unit's goodwill.

scenario is clearly the most likely outcome. Ifno scenario is clearly most likely, PPL completed its annual goodwill impairment test in the fourth quarter of then a probability-weighted approach is used taking into consideration esti- 2005. This test did not require any second-step assessments and did not result mated cash flows from Ihe alternative scenarios. For assets tested for impair- inany impairments. PPL's most significant assumptions surrounding the good-ment as of the balance sheet dale, the estimates of future cash flows used in will impairment test relate to the estimates of reporting unit fair values. PPL that test consider the likelihood of possible outcomes that existed at the bal- estimated fair values primarily based upon discounted cash flows. Although a ance sheet date, including the assessment of the likelihood of the future sale of full two-step evaluation was not completed, a decrease in the forecasted cash Ihe assets. That assessment made as of the balance sheet date is not revised flows of 10% or an increase of the discount rates by 50 basis points would based on events that occur after Ihe balance sheet date. have resulted inthe carrying value of certain reporting units exceeding their During 2005, PPL and its subsidiaries evaluated certain gas-fired genera- estimated fair values, indicating a potential impairment of goodwill.

tion assets for impairment, as events and circumstances indicated that the

4) Leasing carrying value of these assets may not be recoverable. PPL did not record an PPL applies the provisions of SFAS 13, 'Accounting for Leases," to all leasing impairment of these gas-fired generation assets in2005. For these impairment Iransaclions. Inaddition, PPL applies the provisions of numerous other analyses, the most significant assumption was the estimate of future cash accounting pronouncements issued by the FASB and the EITF that provide spe-flows. PPL estimates future cash flows using information from its corporate cific guidance and additional requirements related to accounting for various business plan adjusted for any recent sale or purchase commitments. Key fac-leasing arrangements. In general, there are two types of leases from a lessee's tors that impact cash flows include projected prices for electricity and gas as perspective: operating leases - leases accounted for off-balance sheet; and well as firm sale and purchase commitments. A10% decrease inestimated capital leases - leases capitalized on the balance sheet.

future cash flows for the gas-fired generation assets would not have resulted In accounting for leases, management makes various assumptions, inan impairment charge.

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 a lease should be classified as SFAS 142, 'Goodwill and Other Intangible Assets. PPL performs an annual operating or capital. Changes inthese assumptions could result inthe differ-impairment test for goodwill, or more frequently ifevents or changes in ence between whether a lease is determined to be an operating lease or a circumstances indicate that the asset might be impaired.

capital lease, thus significantly impacting the amounts to be recognized in SFAS 142 requires goodwill to be tested for impairment at the reporting the financial 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 is tested for impairment using a two-step approach. The lirst when they involve: real estate and/or related integral equipment; sale/lease-step of the goodwill impairment test compares the estimated fair value of a back accounting (leasing transactions where the lessee previously owned the reporting unit with its carrying value, including goodwill. Ifthe estimated fair leased assets); synthetic leases (leases that qualify for operating lease treat-value of a reporting unit exceeds its carrying value, goodwill of the reporting ment for book accounting purposes and financing treatment for tax accounting purposes); and lessee involvement in the construction of leased assets.

44 PPL CORPORATION 2005 ANNUAL REPORT

At December 31, 2005, PPL continued to participate ina significant sale/ InitialIdentificationand Recording of the Loss Accrual leaseback transaction. InJuly 2000, PPL Montana sold its interest inthe PPL uses its internal expertise and outside experts (such as lawyers, tax spe-Colstrip generating plant to owner lessors who are leasing the assets back to cialists and engineers), as necessary, to help estimate the probability that a PPL Montana under four 36-year operating leases. This transaction is loss has been incurred and the amount (or range) of the loss.

accounted for as an operating lease inaccordance with current rules related to Two significant loss accruals were recorded in2005. The first was the sale/leaseback arrangements. Iffor any reason this transaction did not meet loss accrual related to the PJM billing dispute. The second involved the accrual the requirements for off-balance sheet operating lease treatment as a sale/ of remediation expenses inconnection with the ash basin leak at the Martins leaseback, PPL would have recorded approximately $270 million of additional Creek generating station. Significant judgment was required by PPL's manage-assets and approximately $318 million of additional liabilities on its balance ment to perform the initial assessment of these contingencies.

sheet at December 31, 2005, and would have recorded additional expenses " In December 2004, Exelon Corporation, on behalf of its subsidiary, PECO currently estimated at $7million, after-tax, in2005. Energy, Inc. (PECO), filed a complaint against PJM and PPL Electric with the See Note 10 to the Financial Statements for additional information related FERC, alleging that PJM had overcharged PECO from April 1998 through to operating leases. May 2003 as a result of an error by PJM. The complaint requested the FERC, among other things, to direct PPL Electric to refund to PJM $39 million,

5) Loss Accruals plus interest of approximately $8 million, and for PJM to refund these same PPL periodically accrues losses for the estimated impacts of various condi-amounts to PECO. In April 2005, the FERC issued an Order Establishing tions, situations or circumstances involving uncertain outcomes. These events Hearing and Settlement Judge Proceedings (the Order). Inthe Order, the are called "contingencies," and PPL's accounting for such events is prescribed FERC determined that PECO was entitled to reimbursement for the transmis-by SFAS 5, "Accounting for Contingencies," and other related accounting guid-sion congestion charges that PECO asserted PJM erroneously billed. The ance. SFAS 5 defines a contingency as "an existing condition, situation, or set FERC ordered settlement discussions, before a judge, to determine the of circumstances involving uncertainty as to possible gain or loss to an enter-prise that will ultimately be resolved when one or more future events occur or amount of the overcharge to PECO and the parties responsible for reim-bursement to PECO.

fail to occur."

For loss contingencies, the loss must be accrued if(1)information is avail- Based on an evaluation of FERC's Order, PPLs management concluded able that indicates it is "probable" that the loss has been incurred, given the that itwas probable that a loss had been incurred inconnection with the likelihood of the uncertain future events and (2)the amount of the loss can be PJM billing dispute. PPL Electric recorded a loss accrual of $47 million, the reasonably estimated. FASB defines "probable" as cases in which "the future amount of PECO's claim, inthe first quarter of 2005.

" In August 2005, a leak from a disposal basin containing fly ash and water event or events are likely to occur." SFAS 5 does not permit the accrual of con-at the Martins Creek generating station caused a discharge from the basin tingencies that might result in gains. PPL continuously assesses potential loss onto adjacent roadways and fields, and into a nearby creek and the Delaware contingencies for environmental remediation, litigation claims, income taxes, River. PPL immediately began to work with the Pennsylvania DEP and regulatory penalties and other events.

appropriate agencies and consultants to assess the extent of environmental PPL also has accrued estimated losses on long-term purchase commit-ments when significant events have occurred. For example, estimated losses damage caused by the discharge and to remediate the damage. At that time, PPL had, and still has, no reason to believe that the Martins Creek leak has were accrued when long-term purchase commitments were assumed under caused any danger to human health or any adverse biological impact on asset acquisition agreements and when PPL Electric's generation business was the river aquatic life. However, at that time, PPL expected that it would be deregulated. Under regulatory accounting, PPL Electric recorded the above-market cost of energy purchases from NUGs as part of its purchased power subject to an enforcement action by the Pennsylvania DEP and that claims may be brought against it by several state agencies and private litigants.

costs on an as-incurred basis, since these costs were recovered in regulated rates. When the generation business was deregulated, the estimated loss asso- PPLs management assessed the contingency inthe third quarter of 2005.

The ultimate cost of the remediation effort was difficult to estimate due to ciated with these long-term purchase commitments to make above-market NUG purchases was recorded because PPL Electric was committed to purchase a number of uncertainties, such as the scope of the project, the impact of electricity at above market prices but itcould no longer recover these costs in weather conditions on the ash recovery effort, and the ultimate outcome of enforcement actions and private litigation. PPLs management concluded, regulated rates.

The accounting aspects of estimated loss accruals include: (1)the initial at the time, that $33 million was the best estimate of the cost of the remedia-identification and recording of the loss; (2)the determination of triggering tion effort. PPL recorded this loss accrual inthe third quarter of 2005.

events for reducing a recorded loss accrual; and (3)the ongoing assessment as to whether a recorded loss accrual is sufficient. All three of these aspects of accounting for loss accruals require significant judgment by PPLs management.

PPL CORPORATION 2005 ANNUAL REPORT 45

MANAGEMENI"S DISCUSSION ANI) ANALYSIS See Note 14 to the Financial Statements for additional information on schedule. As PPL EnergyPlus reduces the liability for the above-market NUG both of these contingencies and see "Ongoing Assessment of Recorded purchases, it offsets the actual cost of NUG purchases, thereby bringing the net Loss Accruals" for a discussion of the year-end 2005 assessments of these power purchase expense more in line with expected market prices. The above-contingencies. market loss accrual was $206 million at December 31, 2005. This loss accrual PPL has identified certain other events that could give rise to a loss, but will be significantly reduced by 2009, when all but one of the NUG contracts that do not meet the conditions for accrual under SFAS 5.SFAS 5 requires dis- expires. The then-remaining NUG contract will expire in2014.

closure, but not a recording, of potential losses when it is "reasonably possi- Ongoing Assessment of Recorded Loss Accruals ble" that a loss has been incurred. The FASB defines "reasonably possible" as PPL reviews its loss accruals on a regular basis to assure that the recorded cases inwhich "the chance of the future event or events occurring is more than potential loss exposures are sufficient. This involves ongoing communication remote but less than likely." See Note 14 to the Financial Statements for disclo- and analyses with internal and external legal counsel, engineers, tax special-sure of other potential loss contingencies that have not met the criteria for ists, operation management and other parties.

accrual under SFAS 5. Significant management judgment is required indeveloping PPL's contin-Reducing Recorded Loss Accruals gencies, or reserves, for income taxes and valuation allowances for deferred When an estimated loss isaccrued, PPL identifies, where applicable, the trig- tax assets. The ongoing assessment of tax contingencies is intended to result gering events for subsequently reducing the loss accrual. The triggering events inmanagement's best estimate of the ultimate settled tax position for each tax generally occur when the contingency has been resolved and the actual loss year. Annual tax provisions include amounts considered sufficient to pay is incurred, or when the risk of loss has diminished or been eliminated. The assessments that may result from examination of prior year tax returns by tax-following are some of the triggering events that provide for the reduction of ing authorities. However, the amount ultimately paid upon resolution of any certain recorded loss accruals: issues raised by such authorities may differ from the amount accrued. Inevalu-

" Certain loss accruals are systematically reduced based on the expiration of ating the exposure associated with various filing positions, PPL accounts for contract terms. An example of this is the loss accrual for above-market NUG changes in probable exposures based on management's best estimate of the purchase commitments, which is described below. This loss accrual is being amount that should be recognized. An allowance is maintained for the tax con-reduced over the lives of the NUG purchase contracts. tingencies, the balance of which management believes to be adequate. The

" Allowances for excess or obsolete inventory are reduced as the inventory ongoing assessment of valuation allowances is based on an assessment of items are pulled from the warehouse shelves and sold as scrap or otherwise whether deferred tax assets will ultimately be realized. Management considers disposed. a number of factors inassessing the ultimate realization of deferred tax assets,

" Allowances for uncollectible accounts are reduced when accounts are writ- including forecasts of taxable income infuture periods.

ten off after prescribed collection procedures have been exhausted or when As part of the year-end preparation of its financial statements, PPL's man-underlying amounts are ultimately collected. agement re-assessed the loss accruals recorded earlier inthe year for the two

" Environmental and other litigation contingencies are reduced when the contingencies described above under "Initial Identification and Recording of contingency is resolved and PPL makes actual payments or the loss is no the Loss Accrual." See Note 14 to the Financial Statements for additional infor-longer considered probable. mation.

• In re-assessing the ENM billing dispute, PPL's management considered the The largest loss accrual on PPL's balance sheet, and the loss accrual that proposed settlement agreement that was filed with FERC inSeptember 2005.

changed most significantly in 2005, was for an impairment of above-market Under the settlement agreement, PPL Electric would pay $33 million plus NUG purchase commitments. This loss accrual reflects the estimated differ- interest over a four-year period to PJM through a new transmission charge ence between the above-market contract terms, under the purchase commit- that, under applicable law, is recoverable from PPL Electric's retail custom-ments, and the fair value of the electricity to be purchased. This loss accrual ers. Also, all PJM market participants would pay approximately $8 million was originally recorded at $854 million in1998, when PPL Electric's genera- plus interest over a four-year period to PJM through a new market adjustment tion business was deregulated. charge. PJM would forward amounts collected under the two new charges to When the loss accrual related to NUG purchases was recorded in1998, PPL PECO. Numerous parties filed comments with the FERC opposing the settle-Electric established the triggering events for when the loss accrual would be ment agreement, and the FERC has not yet acted on the proposed settlement reduced. Aschedule was established to reduce the liability based on projected agreement. Accordingly, PPL's management had no basis to revise the loss purchases over the lives of the NUG contracts. This loss accrual was transferred accrual that was recorded inthe first quarter of 2005. PPL's management will to PPL EnergyPlus inthe July 1,2000, corporate realignment. PPL EnergyPlus continue to assess the loss accrual for this contingency infuture periods.

continues to reduce the above-market NUG liability based on the aforementioned 46 PPL CORPORATION 2005 ANNUAL REPORT

P also re-assessed the contingency for the Martins Creek ash basin PPL Indetermining AROs, management must make significant judgments and remediation. Based on the ongoing remediation efforts and communications estimates to calculate fair value. Fair value is developed through consideration with the Pennsylvania DEP and other appropriate agencies, PPL's manage- of estimated retirement costs intoday's dollars, inflated to the anticipated retire-ment concluded that $48 million was currently the best estimate of the ment date and then discounted back to the date the ARO was incurred. Changes cost of the remediation effort. Therefore, PPL revised the loss accrual in inassumptions and estimates included within the calculations of the fair value the fourth quarter of 2005. PPL cannot predict the final cost of assessment of AROs could result insignificantly different results than those identified and and remediation of the leak, the outcome of the action initiated by the recorded inthe financial statements.

Pennsylvania DEP or the action initiated by the Delaware Riverside At December 31, 2005, PPL had AROs totaling $298 million recorded on Conservancy and several citizens, the outcome of the natural resource the Balance Sheet. PPLs most significant assumptions surrounding AROs are damage assessment, the exact nature of any other regulatory or other the forecasted retirement costs, the discount rates and the inflation rates. A legal actions that may be initiated against PPL as a result of the disposal variance inthe forecasted retirement costs, the discount rates or the inflation basin leak, the extent of the fines or damages that may be sought inconnec- rates could have a significant impact on the ARO liabilities.

tion with any such actions or the ultimate financial impact on PPL. PPLs The following chart reflects the sensitivities related to the ARO liabilities management will continue to assess the loss accrual for this contingency as of December 31, 2005, associated with a change inthese assumptions at infuture periods. the time of initial recognition. There is no significant change to the ARO asset values, depreciation expense of the ARO assets or accretion expense of the ARO

6) Asset Retirement Obligations liabilities as a result of changing the assumptions. Each sensitivity below reflects SFAS 143, "Accounting for Asset Retirement Obligations," requires legal obli-an evaluation of the change based solely on a change inthat assumption.

gations associated with the retirement of long-lived assets to be recognized as a liability inthe financial statements. The initial obligation should be measured Change in Impact on Assumption AROLiability at the estimated fair value. An equivalent amount should be recorded as an Retirement Cost 10%/(10)% $271$(27) increase inthe value of the capitalized asset and allocated to expense over the Discount Rate 0.25%/(0.25)% $(26)/$29 useful life of the asset. Until the obligation issettled, the liability should be Inflation Rate 0.25%/(0.25)% $31/$(28) increased, through the recognition of accretion expense inthe income state-ment, for changes inthe obligation due to the passage of time.

FIN 47, "Accounting for Conditional Asset Retirement Obligations, an inter- Other Information pretation of FASB Statement No. 143," which was issued in March 2005, and PPL's Audit Committee has approved the independent auditor to provide audit adopted by PPL effective December 31, 2005, clarified the term conditional and audit-related services and other services permitted by the Sarbanes-Oxley ARO as used inSFAS 143. FIN 47 specified that a conditional ARO must be Act of 2002 and SEC rules. The audit and audit-related services include services recognized when incurred if the fair value of the ARO can be reasonably esti- inconnection with statutory and regulatory filings, reviews of offering docu-mated. See Note 21 for further discussion of the impact of FIN 47 on PPL. ments and registration statements, employee benefit plan audits and internal control reviews.

PPL CORPORATION 2005 ANNUAL REPORT 47

REPlORT OF INI)iEPiNI)iENT REGISTERLI) PUBILIC B \ACCOUNTING F:IRMI To the Board of Directors and Shareowners of PPL Corporation: of December 31, 2005 based on criteria established inInternal Control-IntegratedFramework issued by the Committee of Sponsoring Organizations We have completed integrated audits of PPL Corporation's 2005 and 2004 of the Treadway Commission (COSO), isfairly stated, inall material respects, consolidated financial statements and of its internal control over financial based on those criteria. Furthermore, in our opinion, the Company maintained, reporting as of December 31, 2005, and an audit of its 2003 consolidated in all material respects, effective internal control over financial reporting as financial statements in accordance with the standards of the Public Company of December 31, 2005, based on criteria established in Internal Control-Accounting Oversight Board (United States). Our opinions, based on our IntegratedFramework issued by the COSO. The Company's management is audits, are presented below. responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial Consolidatedfinancialstatements reporting. Our responsibility is to express opinions on management's assess-Inour opinion, the accompanying consolidated balance sheets and the ment and on the effectiveness of the Company's internal control over financial related consolidated statements of income, of long-term debt, of shareowners' reporting based on our audit. We conducted our audit of internal control over common equity and comprehensive income, and of cash flows present fairly, in financial reporting inaccordance with the standards of the Public Company all material respects, the financial position of PPL Corporation and its subsid-Accounting Oversight Board (United States). Those standards require that we iaries (the "Company") at December 31, 2005 and 2004, and the results of plan and perform the audit to obtain reasonable assurance about whether their operations and their cash flows for each of the three years inthe period effective internal control over financial reporting was maintained inall material ended December 31, 2005 inconformity with accounting principles generally respects. An audit of internal control over financial reporting includes obtain-accepted inthe United States of America. These financial statements are the ing an understanding of internal control over financial reporting, evaluating responsibility of the Company's management. Our responsibility is to express management's assessment, testing and evaluating the design and operating an opinion on these financial statements based on our audits. We conducted effectiveness of internal control, and performing such other procedures as we our audits of these statements inaccordance with the standards of the Public consider necessary in the circumstances. We believe that our audit provides Company Accounting Oversight Board (United States). Those standards a reasonable basis for our opinions.

require that we plan and perform the audit to obtain reasonable assurance Acompany's internal control over financial reporting is a process designed about whether the financial statements are free of material misstatement. An to provide reasonable assurance regarding the reliability of financial reporting audit of financial statements includes examining, on a test basis, evidence sup-and the preparation of financial statements for external purposes inaccor-porting the amounts and disclosures inthe financial statements, assessing the dance with generally accepted accounting principles. Acompany's internal accounting principles used and significant estimates made by management, control over financial reporting includes those policies and procedures that and evaluating the overall financial statement presentation. We believe that our (i)pertain to the maintenance of records that, inreasonable detail, accurately audits provide a reasonable basis for our opinion.

and fairly reflect the transactions and dispositions of the assets of the com-As discussed inNote 1 to the consolidated financial statements, the pany; (ii)provide reasonable assurance that transactions are recorded as Company adopted Emerging Issues Task Force Issue No. 03-11, Reporting necessary to permit preparation of financial statements inaccordance with Realized Gains and Losses on Derivative Instruments That Are Subject to generally accepted accounting principles, and that receipts and expenditures FASB Statement No. 133 and Not "Heldfor Trading Purposes"as Defined in of the company are being made only inaccordance with authorizations of Issue No. 02-3, in2003. As discussed in Note 8 to the consolidated financial management and directors of the company; and (iii) provide reasonable assur-statements, the Company adopted Statement of Financial Accounting ance regarding prevention or timely detection of unauthorized acquisition, Standards ("SFAS") No. 150, Accounting for Certain FinancialInstruments with use, or disposition of the company's assets that could have a material effect Characteristicsof both Liabilitiesand Equity, in2003. As discussed in Note 21 on the financial statements.

to the consolidated financial statements, the Company adopted SFAS No. 143, Because of its inherent limitations, internal control over financial report-Accounting forAsset Retirement Obligations,in2003. As discussed in Note 22 ing may not prevent or detect misstatements. Also, projections of any evalua-to the consolidated financial statements, the Company adopted FASB tion of effectiveness to future periods are subject to the risk that controls may Interpretation ("FIN") No. 46, Consolidationof Variable InterestEntities - an become inadequate because of changes in conditions, or that the degree of interpretationof ARB 51, as amended by FIN No. 46(R), in 2003. As discussed compliance with the policies or procedures may deteriorate.

inNote 21 to the consolidated financial statements, the Company adopted FIN No. 47, Accounting for ConditionalAsset Retirement Obligations,in2005.

Internalcontrol over financial reporting Also, in our opinion, management's assessment, included inthe accompany-ing "Management's Report on Internal Control Over Financial Reporting," that Philadelphia, Pennsylvania the Company maintained effective internal control over financial reporting as February 24, 2006 48 PPL CORPORATION 2005 ANNUAL REPORT

1\IANAGI'M\IIN'fS RIAIGORT ON INTERNAL CONTROL OVI-R FINANCIAL REPORTING PPL's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inExchange Act Rule 13a-15(t). PPLs internal control over financial reporting isa process designed to provide reasonable assurance to PPL's 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, 2005. Our management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated intheir report, contained herein.

PPL CORPORATION 2005 ANNUAL REPORT 49

CONSOLIDATED STATEMENT OF INCOMIE (Millions of dollars, except per share data) For the years ended December 31, 2005 2004 2003 Operating Revenues Utility $,2 390$,1 4,32 $3,10 $,178 Unregulated retail electric and gas 1,12 1,24 1,248 Wholesale energy marketing 1,12 1224 Net energy trading margins 1,1 326 224 497 Energy related businesses 6,269 5374 4978 Total6,95,4558 Operating Expenses Operation937164 Fuel 933 7710 Energy purchases 6490 9230 91023 1,002 Other operation and maintenance1,1123117 Amortization of recoverable transition costs 268 257 260 Depreciation (Note 1) 420 404 376 Taxes, other than income (Note 5) 279 249 256 Energy-related businesses 546 Workforce reduction (Note 20) 90 48 3,94,29 Total4834394,1 Operating Income 1,346 1,400 1,366 Other income - net (Note 16) 29 39 55 Interest expense 508 513 473 Income Irom Continuing Operations Before Income Taxes, Minority Interest and Distributions on Preferred Securities 867 926 948 Income taxes (Note 5) 121 203 179 Minority interest 7 8 7 Distributions on preferred securities (Note 8) 2 2 29 Income from Continuing Operations 737 713 733 Loss from discontinued operations (net of income faxes) (Note 9) 51 15 34 Income Before Cumulative Effects of Changes InAccounting Principles 686 698 699 Cumulative effects of changes inaccounting principles (net of income taxes) (Notes 21 and 22) (8) 35 Net Income $ 678 $ 698 $ 734 Earnings per Share of Common Stock (Note 4)(at Income from Continuing Operations:

Basic $ 1.94 $ 1.93 $ 2.12 Diluted $ 1.92 $ 1.93 $ 2.12 Net Income:

Basic $ 1.79 $ 1.89 $ 2.13 Diluted $ 1.77 $ 1.89 $ 2.12 Dividends Declared Per Share of Common Stock (a) $ 0.96 '$ 0.82 $ 0.77 (a)Prior periods have been adjusted to reflect PP~s 2-tor-1 common stock sptit completed inAugust 2005. See Note 4to the Financial Statements for additional intormation.

The accompanying Notes toConsolidated Financial Statements areanintegral part otthe financial statements.

5o PPL CORPORATION 2005 ANNUAL REPORT

CONSOI.IDATIED STATEMI NT OF CASH FLOWS (Mi/lions of dollars) For fhe years ended December 31, 2005 2004 2003 Cash Flows from Operating Activities Net income $ 678 $ 698 $ 734 Adjustments to reconcile net income to net cash provided by operating activities Cumulative etfects of changes inaccounting principles 8 (35)

Pre-tax loss from the sale ot the Sundance plant 72 Depreciation 423 412 380 Stock compensation expense 32 12 11 Amortizations - recoverable transition costs and other 298 279 256 Pension expense (income) - net 26 (24) (41)

Pension funding (67) (10) (18)

Deterred income taxes (benefits) and investment tax credits (66) 155 96 Accrual for PJM billing dispute 47 Accrual for remediation of ash basin leak - net ot cash paid 32 Unrealized gain on derivatives and other hedging activities (1) (15) (38)

Write-oft (deferral) of storm-related costs (12) 4 (15)

Interest accretion on asset retirement obligation and other 24 23 22 Other 2 14 33 Change incurrent assets and current liabilities Accounts receivable (93) 109 11 Accounts payable 141 (49) 7 Fuel, materials and supplies (38) (52) (13)

Other (101) 3 (10)

Other operating activities Other assets 18 (4) 51 Other liabilities (35) (58) (76)

Net cash provided by operating activities 1,388 1,497 1,355 Cash Flows from Investing Activities Expenditures for property, plant and equipment (811) (734) (767)

Proceeds from the sale of the Sundance plant 190 Proceeds from the sate of minority interest inCGE 123 Purchases of emission allowances (169) (109) (68)

Proceeds from the sale of emission allowances 64 67 72 Purchases of nuclear decommissioning trust investments (239) (134) (161)

Proceeds from the sale of nuclear decommissioning trust investments 223 113 140 Purchases of auction rate securities (116) (130) (15)

Proceeds from the sale of auction rate securities 118 74 5 Net (increase) decrease inrestricted cash (34) (48) 12 Other investing activities (5) 28 Net cash used ininvesting activities (779) (778) (754)

Cash Flows from Financing Activities Issuance o1long-term debt 737 322 992 Retirement of long-term debt (1,261) (1,171) (575)

Issuance of common stock 37 596 426 Payment of common dividends (347) (297) (260)

Payment of preferred distributions (2) (2) (27)

Net increase (decrease) inshort-term debt 184 (14) (877)

Other financing activities (24) (12) (66)

Net cash used infinancing activities (676) (578) (387)

Effect of Exchange Rates on Cash and Cash Equivalents 6 9 7 Net Increase (Decrease) InCash and Cash Equivalents (61) 150 221 Cash and Cash Equivalents at Beginning of Period 616 466 245 Cash and Cash Equivalents at End of Period $ 555 $ 616 $ 466 Supplemental Disclosures of Cash Flow Information Cash paid (received) during the period for:

Interest $ 466 $ 488 $ 456 Income taxes - net $ 149 $ 14 $ (23)

The accompanying Notes to Consolidated Financial Statements are anintegral part ot the financial statements.

PPL CORPORATION 2005 ANNUAL REPORT 51

CONSOLIDATED BALANCE SIIEET (Millions of dollars) At December31, 2005 2004 ASSETS Current Assets Cash and cash equivalents $ 555 $ 616 Restricted cash (Note 18) 93 50 Accounts receivable (less reserve: 2005, $87; 2004, $88) 544 459 Unbilled revenues 479 407 Fuel, materials and supplies (Note 1) 346 309 Prepayments 53 56 Deferred income taxes (Note 5) 192 134 Price risk management assets (Note 17) 488 115 Other 160 130 Total Current Assets 2,910 2,276 Investments Investment inunconsolidated affiliates -at equity (Note 3) 56 51 Nuclear plant decommissioning trust fund (Note 21) 444 409 Other 8 12 Total Investments 508 472 Property, Plant and Equipment (Note 1)

Electric plant inservice Transmission and distribution 7,984 7,936 Generation 8,761 8,946 General 646 666 17,391 17,548 Construction work inprogress 259 148 Nuclear fuel 327 314 Electric plant 17,977 18,010 Gas and oil plant 349 336 Other property 289 285 18,615 18,631 Less: accumulated depreciation 7,699 7,482 Total Property, Plant and Equipment 10,916 11,149 Regulatory and Other Noncurrent Assets (Note 1)

Recoverable transition costs 1,165 1,431 Goodwill (Note 19) 1,070 1,127 Other acquired intangibles (Note 19) 412 336 Other 945 942 Total Regulatory and Other Noncurrent Assets 3,592 3,836 Total Assets $17,926 $17,733 The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

52 PPL CORPORATION 2005 ANNUAL REPORT

CONSOLI I)ATEI) BA LANCE SIHIEET (Millionsof dollars) At December31, 2005 2004 LIABILITIES AND EQUITY Current Liabilities Short-term debt (Note 8) $ 214 $ 42 Long-term debt 1,126 866 Accounts payable 542 407 Above market NUG contracts (Note 14) 70 73 Taxes 168 164 Interest 112 129 Dividends 96 79 Price risk management liabilities (Note 17) 533 167 Other 479 368 Total Current Liabilities 3,340 2,295 Long-term Debt 5,955 6,792 Long-term Debt with Affiliate Trust (Notes 15 and 22) 89 89 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes and investment tax credits (Note 5) 2,197 2,398 Accrued pension obligations (Note 12) 374 476 Asset retirement obligations (Note 21) 298 257 Above market NUG contracts (Note 14) 136 206 Other (Note 12) 1,012 874 Total Deferred Credits and Other Noncurrent Liabilities 4,017 4,211 Commitments and Contingent Liabilities (Note 14)

Minority Interest 56 56 Preferred Stock (Note 7) 51 51 Shareowners' Common Equity Common stock - $0.01 par value(,) 4 2 Capital inexcess of par value 3,623 3,577 Treasury stock (838) (838)

Earnings reinvested 2,182 1,870 Accumulated other comprehensive loss (Note 1) (532) (323)

Capital stock expense and other (21) (49)

Total Shareowners' Common Equity 4,418 4,239 Total Liabilities and Equity $17,926 $17,733 (t)780 million shares authorized; 380 million shares outstanding at December 31, 2005, and 378 million shares outstanding at December 31, 2004.

The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

PPL CORPORATION 2005 ANNUAL REPORT 53

CONSOLIDATED STATEMENT OF SiIAREONNERS' COMMON EQUITY AND COMPREIIENSIVE INCOME (Millions of dollars,except per shareamounts) Forthe years ended December 31, 2005 2004 2003 Common stock at beginning of year $ 2 $ 2 $ 2 Common stock split 2 Common stock at end of year 4 2 2 Capital inexcess of par value at beginning of year .3,577 2,977 2,543 Common stock split (2)

Common stock issued 42 596 426 Other 6 4 8 Capital inexcess of par value at end of year 3,623 3,577 2,977 Treasury stock at beginning of year (838) (837) (836)

Treasury stock purchased (1) (1)

Treasury stock at end of year (838) (838) (837)

Earnings reinvested at beginning of year 1,870 1,478 1,013 Net income(b) 678 698 734 Dividends declared on common stock and restricted stock units (366) (306) (269)

Earnings reinvested at end of year 2,182 1,870 1,478 Accumulated other comprehensive loss at beginning of year*c) (323) (297) (446)

Other comprehensive income (loss)(b) (209) (26) 149 Accumulated other comprehensive toss at end of year (532) (323) (297)

Capital stock expense and other at beginning of year (49) (64) (52)

Issuance costs and other charges to issue common stock (9)

Other 28 15 (3)

Capital stock expense and other at end of year (21) (49) (64)

Total Shareowners' Common Equity $4,418 $4,239 $3,259 Common stock shares at beginning of yeari,) 378,143 354,723 331,472 Common stock issued through the DRIP, ICP, ICPKE, PEPS Units conversion, directors retirement plan, structured equity program and public offering 2,024 23,473 23,303 Treasury stock purchased (22) (53) (52)

Common stock shares at end of year 380,145 378,143 354,723 (a)Shares inthousands. Each share entitles the holder to one vote on any question presented to any shareowners' meeting. Prior periods have been adjusted to reflect PPL's 2-for-1 common stock split completed inAugust 2005.

See Note 4 to the Financial Statements for additional information.

(M)Statement of Comprehensive Income (Note 1):

Net income $ 678 $ 698 $ 734 Other comprehensive income (loss):

Foreign currency translation adjustments (53) 110 104 Net unrealized gains on available-for-sale securities, net of tax expense of $5,$18, $14 8 20 24 Additional minimum pension liability adjustments, net of tax expense (benefit) of $8,$(24), $(4) 19 (52) (10)

Net unrealized gains (losses) on qualifying derivatives, net of tax expense (benefit) of $(115), $(60), $15 (183) (104) 31 Total other comprehensive income (loss) (209) (26) 149 Comprehensive Income $ 469 $ 672 $ 883 WC)See Note 1 for 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.

54 PPL CORPORATION 2005 ANNUAL REPORT

CONSOLI.I)ATEI) STAD'EBIFTN] 01: IONG-TERI I)ElT Outstanding (Millionsof dollars) Al December31, 2005 2004 Maturity (a)

Bonds:

6-1/2% - 7.7% First Mortgage Bonds (b) $ 156 $ 225 2005-2014 3.125% - 6.40% First Mortgage Pollution Control Bonds (b) 314 314 2008-2029 4.30% 1/4% Senior Secured Bonds (b) 1,041 841 2007-2020 6.83% - 7.15% Series 1999-1 Transition Bonds 892 1,159 2005-2008 5.875% - 9.25% Unsecured Bonds 1,784 (gt 2,051 2004-2028 6.107% - 6.40% Inflation-linked Bonds 190 (g) 161 2006-2022 Floating Rate Pollution Control Revenue Bonds (c) 9 9 2027 (h) 22 2005-2010 6.8% - 9.0% Bolivian Bonds 2 3 Notes:

6.17% - 8.375% Medium-term Notes 283 632 2005-2007 4.33% - 6.40% Senior Unsecured Notes 1,301 1,001 2009-2035 8.05% - 8.30% Senior Secured Notes (d) 437 437 2013 2.625% Convertible Senior Notes 400 400 2023 7.29% Subordinated Notes 148 290 2006 8.70% Unsecured Promissory Notes 10 10 2022 Senior Floating Rate Notes (e) 99 99 2006 Other Long-term Debt 13 - 15 2011-2013 7,100 7,666 Fair value adjustments from hedging activities (15) 17 Unamortized premium 13 Unamortized discount (17) (25) 7,081 7,658 Less amount due within one year (1,126) (866)

Total Long-term Debt $ 5,955 $6,792 Long-term Debt with Affiliate Trusts:

8.23% Subordinated Debentures Mf $ 89 $ 89 2027 See Note 8 for information on debt issuances, debt retirements and other changes inlong-term debt.

(a)Aggregate maturities of long-term debt through 2010 are (millions of dollars): 2006, $1,126; 2007, $1,020; 2008, $627; 2009, $692; and 2010, $10.

Mb) 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 distribution plant and certain transmission 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 distribution plant and certain transmission plant owned by PPL Electric and which isjunior to [he lien of the 1945 First Mortgage Bond Indenture.

(C)Rate at December 31, 2005, was 3.58% and at December 31, 2004, was 2.0%.

(d)Represents lease financing consolidated through a variable interest entity. See Note 22 for additional information.

(e)Rate at December 31, 2005, was 5.42% and at December 31, 2004, was 3.36%.

Mt) Represents debt with awholly owned trust that was deconsolidated effective December 31, 2003, as a result of the adoption of FIN 46, 'Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," for certain entities. See Notes 8 and 22 for further discussion.

(t)Increase isdue to or partially due to an increase inforeign currency exchange rates.

(h) Aportion of [he bonds have interest rates that are inflation-linked.

The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

PPL CORPORATION 2005 ANNUAL REPORT 55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Terms and abbreviations appearing inNotes to Consolidated Financial Statements are explained in the glossary. Dollars are inmillions, except per share data, unless otherwise noted.

1. Summary of Significant Effective December 31, 2003, PPL deconsolidated PPL Capital Funding Accounriting Policies Trust Iand SIUK Capital Trust I, both of which are wholly owned trusts. See Note 22 for further discussion.

General The consolidated financial statements of PPL include its share of undivided Business and Consolidation interests injointly-owned facilities, as well as its share of the related operating PPL is an energy and utility holding company that, through its subsidiaries, is costs of those facilities. See Note 13 for additional information.

primarily engaged inthe generation and marketing of electricity inthe north-eastern and western U.S. and inthe delivery of electricity inPennsylvania, the Regulation PPL Electric and PPL Gas Utilities account for regulated operations inaccor-U.K. and Latin America. Based inAllentown, PA, PPLs principal direct subsid-dance with the provisions of SFAS 71, "Accounting for the Effects of Certain iaries are PPL Energy Funding, PPL Electric, PPL Gas Utilities, PPL Services Types of Regulation," which requires rate-regulated entities to reflect the and PPL Capital Funding.

PPL Energy Funding isthe parent of PPL Energy Supply, which serves as effects of regulatory decisions intheir financial statements.

The following regulatory assets were included inthe 'Regulatory and Other the holding company for PPL's principal unregulated subsidiaries. PPL Energy Noncurrent Assets" section of the Balance Sheet at December 31.

Supply is the parent of PPL Generation, PPL EnergyPlus and PPL Global.

PPL Generation owns and operates a portfolio of domestic power generat- 2005 2004 ing assets. These power plants are located inPennsylvania, Montana, Arizona, Recoverable transition costs $1,165 $1,431 Illinois, Connecticut, New York and Maine and use well-diversified fuel sources Taxes recoverable through future rates 250 276 Other 29 20 including coal, uranium, natural gas, oil and water. PPL EnergyPlus markets or brokers electricity produced by PPL Generation, along with purchased power, $1,444 $1,727 natural gas and oil, incompetitive wholesale and deregulated retail markets, Based on the PUC Final Order, PPL Electric began amortizing its competi-primarily inthe northeastern and western portions of the U.S. PPL Global owns tive transition (or stranded) costs, $2.97 billion, over an 11-year transition and operates international energy businesses that are primarily focused on period effective January 1,1999. InAugust 1999, competitive transition costs the distribution of electricity. of $2.4 billion were converted to intangible transition costs when they were PPL Electric isa rate-regulated subsidiary of PPL. PPL Electric's principal securitized by the issuance of transition bonds. The intangible transition costs businesses are the transmission and distribution of electricity to serve retail are being amortized over the life of the transition bonds, through December customers in its franchised territory ineastern and central Pennsylvania, and 2008, in accordance with an amortization schedule filed with the PUC. The the supply of electricity to retail customers inthat territory as a PLR. assets of PPL Transition Bond Company, including the intangible transition The consolidated financial statements of PPL include its own accounts as property, are not available to creditors of PPL or PPL Electric. The transition well as the accounts of all entities inwhich the company has a controlling bonds are obligations of PPL Transition Bond Company and are non-recourse financial interest. Investments inentities inwhich the company has the ability to PPL and PPL Electric. The remaining competitive transition costs are also to exercise significant influence but does not have a controlling financial inter- being amortized based on an amortization schedule previously filed with the est are accounted for under the equity method. See Note 3 for further discus- PUC, adjusted for those competitive transition costs that were converted to sion. All other investments are carried at cost or fair value. All significant intangible transition costs. As a result of the conversion of a significant por-intercompany transactions have been eliminated. Any minority interests are tion of the competitive transition costs into intangible transition costs, amorti-reflected in the consolidated financial statements. zation of substantially all of the remaining competitive transition costs will It is the policy of PPL to consolidate or record equity inearnings of foreign occur in2009.

entities on a lag, based on the availability of financial data on a U.S. GAAP basis: Included in "Other" above as of December 31, 2005 and 2004, were

• PPL and its subsidiaries consolidate the results of foreign entities inwhich approximately $10 million and $11 million of storm restoration costs associ-they have a controlling financial interest (WPD, Emel, EC, the Bolivian ated with the September 2003 Hurricane Isabel. PPL Electric deferred these subsidiaries and other investments) on a one-month lag. costs based on assessment of the PUC declaratory order of January 2004.

• Earnings from foreign equity method investments are recorded on a The costs are being recovered through customer transmission and distribution three-month lag. rates, and are being amortized over ten years effective January 1,2005.

Elfective December 31, 2003, PPLs consolidated financial statements Also included in"Other" at December 31, 2005, were approximately include the accounts of the lessors under the operating leases for the Sundance, $12 million of costs associated with severe ice storms in PPL Electric's University Park and Lower Mt. Bethel generation facilities. InJune 2004, PPL service territory inJanuary 2005. These costs have been deferred based on Energy Supply subsidiaries purchased the Sundance and University Park gener- an assessment of an order issued by the PUC on August 26, 2005. The rate-ation assets from the lessor. See Note 22 for further discussion. InMay 2005, making treatment of these costs will be addressed in PPL Electric's next a subsidiary of PPL Generation completed the sale of its Sundance generation distribution base rate case. PPL believes there is a reasonable basis for assets to Arizona Public Service Company. See Note 9 for further discussion. recovery of all regulatory assets.

56 PPL CORPORATION 2005 ANNUAL REPORT

Elfec accounts for regulated operations inaccordance with the Comprehensive Income provisions of SFAS 71. Regulatory assets as of December 31, 2005 and Comprehensive income consists of net income and other comprehensive 2004 were insigniticant. income, defined as changes in common equity trom transactions not related to shareowners. Comprehensive income isshown on PPLs Statement of Accounting Records Shareowners' Common Equity and Comprehensive Income.

The system of accounts for PPL Electric and PPL Gas Utilities are maintained Accumulated other comprehensive loss, which ispresented on the Balance inaccordance with the Uniform System of Accounts prescribed by the FERC Sheet, consisted of these after-tax amounts at December 31.

and adopted by the PUC.

2005 2004 Use of Estimates Foreign currency translation adjustments $ 15 $ 68 The preparation of financial statements in conformity with U.S. GAAP Net unrealized gains on available-tor-sale securities 48 40 requires management to make estimates and assumptions that affect the Additional minimum pension liability (349) (368) reported amounts of assets and liabilities, the disclosure of contingent Net unrealized losses on qualifying derivatives (246) (63) liabilities at the date of the financial statements and the reported amounts $(532) $(323) of revenues and expenses during the reporting period. Actual results could differ from those estimates. Price Risk Management PPL enters into energy and energy-related contracts to hedge the variability Loss Accruals of expected cash flows associated with its generating units and marketing Loss accruals are recorded in accordance with SFAS 5, "Accounting for activities, as well as for trading purposes. PPL enters into interest rate deriva-Contingencies," and other related accounting guidance. Potential losses are tive contracts to hedge its exposure to changes inthe fair value of its debt accrued when (1)information is available that indicates it is "probable" that the instruments and to hedge its exposure to variability inexpected cash flows loss has been incurred, given the likelihood of the uncertain future events and associated with existing debt instruments or forecasted transactions. PPL also (2)the amount of the loss can be reasonably estimated. FASB defines "proba-enters into foreign currency derivative contracts to hedge foreign currency ble" as cases inwhich "the future event or events are likely to occur." SFAS 5 exposures, including firm commitments, recognized assets or liabilities, does not permit the accrual of contingencies that might result ingains. PPL forecasted transactions, net investments, or foreign earnings translation.

continuously assesses potential loss contingencies for environmental remedia-Contracts that meet the definition of a derivative are accounted for under tion, litigation claims, income taxes, regulatory penalties and other events.

SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as PPL also has accrued estimated losses on long-term purchase commit-amended and interpreted. Certain energy contracts have been excluded from ments when significant events have occurred. For example, estimated losses the requirements of SFAS 133 because they meet the definition of a "normal were accrued when long-term purchase commitments were assumed under purchase or normal sale." These contracts are reflected inthe financial state-asset acquisition agreements and when PPL Electric's generation business ments using the accrual method of accounting.

was deregulated.

Additionally, PPL adopted SFAS No. 149, "Amendment of Statement 133 on Changes in Classification Derivative Instruments and Hedging Activities," as of July 1,2003. The require-The classification of certain amounts inthe 2004 and 2003 financial state- ments of SFAS 149, which required prospective application, placed additional ments has been changed to conform lo the current presentation. The changes limitations on the use of the normal purchase or normal sale exception.

inclassification did not affect net income or total equity. All derivative contracts that are subject to the requirements of SFAS 133 Inaddition, based on recent clarifications of accounting guidance, the and its amendments are reflected on the balance sheet at their fair value. On Statement of Cash Flows has been revised to reflect the purchases and sales the date the derivative contract is executed, PPL may designate the derivative of emission allowances, and the purchases and sales of investments inthe as a hedge of the fair value of a recognized asset or liability or of an unrecog-nuclear decommissioning trust, on a gross basis within "Cash Flows from nized firm commitment ("fair value" hedge), a hedge of a forecasted transaction Investing Activities." Previously, these cash flows were presented on a net or of the variability of cash flows to be received or paid related to a recognized basis within "Cash Flows from Operating Activities." The net impact of this asset or liability ("cash flow" hedge), a foreign currency fair value or cash flow revised presentation was to increase "Cash Flows from Operating Activities" hedge ("foreign currency" hedge), or a hedge of a net investment ina foreign and to decrease "Cash Flows from Investing Activities" by $63 million in2004 operation ("net investment" hedge). Changes in the fair value of derivatives are and $17 million in2003. This revision had no impact on "Cash and Cash recorded in either other comprehensive income or incurrent-period earnings Equivalents" for the periods reported. This revision is not considered by inaccordance with SFAS 133.

management as material to the Financial Statements. Unrealized gains and losses from changes inmarket prices of energy See Note 19 for additional information regarding emission allowances contracts accounted for as lair value hedges are reflected in "Energy purchases" and Note 21 for additional information regarding investments inthe nuclear on the Statement of Income, as are changes inthe underlying positions. Realized decommissioning trust. gains and losses from energy contracts accounted for as fair value hedges or cash flow hedges, when recognized on the Statement of Income, are reflected in "Fuel" or "Energy purchases," consistent with the hedged item. Changes in the fair value of derivatives that are not designated as hedging instruments are PPL CORPORATION 2005 ANNUAL REPORT 57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS reflected in "Net energy trading margins" revenues. However, unrealized gains Certain PPL subsidiaries participate inRTOs, primarily inPJM, but also and losses on FTRs and options to hedge synthetic fuel tax credits, which are inthe surrounding regions of New York (NYISO), New England (ISO-NE) and not designated as hedging instruments, are reflected in"Energy purchases" the Midwest (MISO). In PJM, PPL EnergyPlus is a marketer, a load-serving and "Energy-related business" revenues, respectively. Gains and losses from entity to its customers who have selected itas a supplier and a seller for PPL's interest rate and foreign currency derivative contracts that hedge interest pay- generation subsidiaries. PPL Electric is a transmission owner and PLR inPJM.

ments, when recognized on the Statement of Income, are accounted for in In ISO-NE, PPL EnergyPlus is a marketer, a load-serving entity, and a seller for "Interest Expense." Gains and losses from foreign currency derivative contracts PPL's New England generating assets. Inthe NYISO and MISO regions, PPL that economically hedge foreign earnings translation are recognized in "Other EnergyPlus acts as a marketer. PPL Electric does not participate in ISO-NE, Income - net." Gains and losses from foreign currency derivative contracts that NYISO or MISO. Afunction of interchange accounting isto match participants' hedge foreign currency payments for equipment, when recognized on the MWh entitlements (generation plus scheduled bilateral purchases) against Statement of Income, are accounted for in "Depreciation." their MWh obligations (load plus scheduled bilateral sales) during every hour Under EITF 02-3, "Issues Involved inAccounting for Derivative Contracts of every day. Ifthe net result during any given hour is an entitlement, the par-Held for Trading Purposes and Contracts Involved inEnergy Trading and ticipant is credited with a spot-market sale to the ISO at the respective market Risk Management Activities," PPL reflects its net realized and unrealized gains price for that hour; ifthe net result is an obligation, the participant is charged and losses associated with all derivatives that are held for trading purposes with a spot-market purchase from the ISO at the respective market price for in "Net energy trading margins" revenues on the Statement of Income. The that hour. ISO purchases and sales are not allocated to individual customers.

physical volumes for electricity and gas associated with energy trading were PPL records the hourly net sales and purchases in its financial statements 5,800 GWh and 13.4 Bcf in 2005; 5,700 GWh and 11.7 Bcf in2004; and as sales to and purchases from the respective ISOs.

5,200 GWh and 12.6 Bcf in2003. "Energy-related businesses" revenue includes revenues from the mechanical PPL adopted the final provisions of EITF 03-11, "Reporting Realized Gains contracting and engineering subsidiaries, WPD's telecommunications and and Losses on Derivative Instruments That Are Subject to FASB Statement property subsidiaries and PPL Global's proportionate share of affiliate earnings No. 133 and Not 'Held for Trading Purposes' as Defined in Issue No. 02-3," under the equity or cost method of accounting, as described inthe "Business prospectively as of October 1,2003. As a result of the adoption, non-trading and Consolidation" section of Note 1.The mechanical contracting and engineer-bilateral sales of electricity at major market delivery points are netted with ing subsidiaries record profits from construction contracts on the percentage-purchases that offset the sales at those same delivery points. Amajor market of-completion method of accounting. Income from time and material contracts delivery point is any delivery point with liquid pricing available. is recognized currently as the work is performed.

See Note 17 for additional information on SFAS 133, its amendments Allowance for Doubtful Accounts and related accounting guidance. Accounts receivable collectibility is evaluated using a combination of factors.

Revenue Reserve balances are analyzed to assess the reasonableness of the balances UtilityRevenue in comparison to the actual accounts receivable balances and write-offs.

The Statement of Income "Utility" line item contains revenues from domestic Adjustments are made to reserve balances based on the results of analysis, and international rate-regulated delivery operations. the aging of receivables, and historical and industry trends.

WPD revenues are stated net of value-added lax. Additional specific reserves for uncollectible accounts receivable, such as bankruptcies, are recorded on a case-by-case basis after having been Revenue Recognition researched and reviewed by management. Unusual items, trends inwrite-offs, Operating revenues, except for "Energy-related businesses," are recorded the age of the receivable, counterparty creditworthiness and economic condi-based on energy deliveries through the end of the calendar month. Unbilled tions are considered as a basis for determining the adequacy of the reserve retail revenues result because customers' meters are read and bills are ren- for uncollectible account balances.

dered throughout the month, rather than all being read at the end of the month. PPL's significant specific reserves relate to receivables from Enron, which Unbilled revenues for a month are calculated by multiplying an estimate of filed for bankruptcy in2001, and from the California ISO, which has withheld unbilled kWh by the estimated average cents per kWh. Unbilled wholesale payment pending the outcome of regulatory proceedings arising from the energy revenues are recorded at month-end to reflect estimated amounts until California electricity supply situation that began in2000. At December 31, actual dollars and MWhs are confirmed and invoiced. At that time, unbilled 2005 and 2004, these two reserves accounted for 60% and 59% of PPL's total revenue is reversed and actual revenue is recorded.

allowance for doubtful accounts.

PPL records energy marketing activity inthe period when the energy is delivered. The wholesale sales and purchases that meet the criteria in EITF Cash and Investments 03-11 are reported net on the Statement of Income within "Wholesale energy Cash Equivalents marketing." Additionally, the bilateral sales and purchases that are designated All highly liquid debt instruments purchased with original maturities of three as trading activities are also reported net, inaccordance with EITF 02-3 and months or less are considered to be cash equivalents.

are reported on the Statement of Income within "Net energy trading margins."

Spot market activity that balances PPL's physical trading positions is included on the Statement of Income in "Net energy trading margins."

58 PPL CORPORATION 2005 ANNUAL REPORT

PPL invests inauction rate and similar securities which provide for periodic Depreciation reset of interest rates and are highly liquid. Even though PPL considers these Depreciation iscomputed over the estimated useful lives of property using debt securities as part of its liquid portfolio, itdoes not include these securities various methods including the straight-line, composite and group methods.

incash and cash equivalents due to the stated maturity of the securities. These When a component of PP&E is retired that was depreciated under the compos-securities are included in *Current Assets - Other" on the Balance Sheet. ite or group method, the original cost is charged to accumulated depreciation.

When all or a significant portion of an operating unit that was depreciated Restricted Cash under the composite or group method is retired or sold, the property and the Bank deposits that are restricted by agreement or that have been designated related accumulated depreciation account is reduced and any gain or loss is for a specific purpose are classified as restricted cash. The change in included inincome, unless otherwise required by regulators.

restricted cash is reported as an investing activity inthe Statement of Cash PPL and its subsidiaries periodically review the useful lives of their fixed Flows. On the Balance Sheet, the current porlion of restricted cash is shown assets. In light of significant planned environmental capital expenditures, PPL as "Restricted cash" within current assets, while the noncurrent portion is Generation conducted studies of the useful lives of Montour Units 1 and 2 and included in "Other" within other noncurrent assets. See Note 18 for the com-Brunner Island Unit 3 during the first quarter of 2005. Based on these studies, ponents of restricted cash. the useful lives of these units were extended from 2025 to 2035, effective Investments in Debtand Marketable Equity Securities January 1,2005. Inthe second quarter of 2005, PPL Generation conducted Investments in debt securities are classified as held-to-maturity, and mea- additional studies of the useful lives of certain Eastern fossil-fuel and hydro-sured at amortized cost, when there isan intent and ability to hold the securi- electric generation plants. The most significant change related to the useful ties to maturity. Debt securities and marketable equity securities that are lives of Brunner Island Units 1 and 2 and Martins Creek Units 3 and 4,which acquired and held principally for the purpose of selling them inthe near-term were extended from 2025 to 2035, effective July 1,2005. The effect of these are classified as trading. All other investments indebt and marketable equity changes inuseful lives for 2005 was to increase net income, as a result of securities are classified as available-for-sale. Both trading and available-for- lower depreciation, by approximately $7 million.

sale securities are carried at fair value. Any unrealized gains and losses for As a result of the final regulatory outcome published by Ofgem of the most trading securities are included inearnings. Unrealized gains and losses for recent price control review and an assessment of the economic life of meters, available-for-sale securities are reported, net of tax, inother comprehensive WPD reduced the remaining depreciable lives of its existing meter stock to income or are recognized currently in earnings when a decline in fair value is approximately nine years. The lives of new meters were reduced from 40 years determined to be other than temporary. The specific identification method is to 19 years. The effect for 2005 was to decrease net income, as a result of used to calculate realized gains and losses on debt and marketable equity higher depreciation, by approximately $5 million.

securities. See Note 21 for additional information on securities held inthe Following are the weighted-average rates of depreciation at December 31.

nuclear decommissioning trusts. 2005 2004 Generation 2.01% 2.11%

Long-Lived and Intangible Assets Transmission and distribution 3.03% 2.86%

Property,Plantand Equipment General 3.78% 3.41%

PP&E is recorded at original cost, unless impaired. Ifimpaired, the asset is written down to fair value at that time, which becomes Ihe asset's new cost The annual provisions for depreciation have been computed principally in basis. Original cost includes material, labor, contractor costs, construction accordance with the following ranges, in years, of assets lives: generation, overheads and financing costs, where applicable. The cost of repairs and minor 2-50 years; transmission and distribution, 5-70 years; and general, 3-80 years.

replacements are charged to expense as incurred. PPL records costs associ-Goodwill and OtherAcquired IntangibleAssets ated with planned major maintenance projects inthe period inwhich the costs Goodwill represents the excess of the purchase price paid over the estimated are incurred. No costs are accrued inadvance of the period inwhich the work fair value of the assets acquired and liabilities assumed inthe acquisition of a is performed. business. In accordance with SFAS 142, "Goodwill and Other Intangible AFUDC iscapitalized as part of the construction costs for regulated projects. Assets," PPL and its subsidiaries do not amortize goodwill.

Interest iscapitalized as part of construction costs for non-regulated projects. Other acquired intangible assets that have finite useful lives are valued at Included inPP&E on the balance sheet are capitalized costs of software cost and amortized over their useful lives based upon the pattern inwhich the projects that were developed or obtained for internal use. At December 31, economic benefits of the intangible assets are consumed or otherwise used up.

2005 and 2004, capitalized software costs were $92 million and $83 million, and there was $57 million and $46 million of accumulated amortization. Such Asset Impairment capitalized amounts are amortized ratably over the expected lives of the proj- PPL and its subsidiaries review long-lived assets, including intangibles, that ects when they become operational, generally not to exceed 10 years. During are subject to depreciation or amortization for impairment when events or cir-2005, 2004 and 2003, PPL amortized capitalized software costs of $13 million, cumstances indicate carrying amounts may not be recoverable. An impairment

$11 million and $14 million. loss is recognized ifthe carrying amount of long-lived assets is not recover-able from undiscounted future cash flow. The impairment charge is measured by the difference between the carrying amount of the asset and its fair value.

See Note 9 for a discussion of asset impairment charges recorded.

PPL CORPORATION 2005 ANNUAL REPORT 59

NOTES TO CONSOLIDATEI) FINANCIAL STATEIMENNTS Goodwill is reviewed for impairment, at the reporting unit level, annually record compensation expense for stock-based compensation plans at fair value or more frequently when events or circumstances indicate that the carrying but provides the option of measuring compensation expense using the intrinsic value may be greater than the implied fair value. PPL's reporting units are one value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued level below its operating segments. Ifthe carrying value of the reporting unit to Employees." The fair value method under SFAS 123 is the preferable method exceeds its fair value, the implied fair value of goodwill must be calculated. If of accounting for stock-based compensation, as itprovides a consistent basis the implied fair value of goodwill is less than its carrying value, the difference of accounting for all stock-based awards, thereby facilitating a better measure represents the amount of impairmenl. of compensation cost and improved financial reporting.

Prior to 2003, PPL and its subsidiaries accounted for stock-based com-Asset Retirement Obligations pensation inaccordance with APB Opinion No. 25, as permitted by SFAS 123.

In 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Effective January 1,2003, PPL and its subsidiaries adopted the fair value Obligations," which addresses the accounting for obligations associated with method of accounting for stock-based compensation, as prescribed by SFAS the retirement of tangible long-lived assets. SFAS 143 requires legal obliga-123, using the prospective method of transition permitted by SFAS 148, tions associated with the retirement of long-lived assets to be recognized as a "Accounting for Stock-Based Compensation - Transition and Disclosure, an liability inthe financial statements. The initial obligation is measured at the Amendment of FASB Statement No. 123." The prospective method of transition estimated fair value. An equivalent amount is recorded as an increase inthe requires PPL and its subsidiaries to use the fair value method under SFAS 123 value of the capitalized asset and allocated to expense over the useful life of for all stock-based compensation awards granted, modified or settled on or the asset. Until the obligation is settled, the liability is increased, through the after January 1,2003. Thus, all awards granted prior to January 1,2003, were recognition of accretion expense inIhe income statement, for changes inthe accounted for under the intrinsic value method of APB Opinion No. 25, to the obligation due to the passage of time.

extent such awards are not modified or settled.

In2005, the FASB issued FIN No. 47, *Accounting for Conditional Asset Use of the fair value method prescribed by SFAS 123 requires PPL and Retirement Obligations, an interpretation of FASB Statement No. 143" that its subsidiaries to recognize compensation expense for stock options issued.

clarifies certain aspects of SFAS 143 related to conditional AROs. Fair value for the stock options is determined using the Black-Scholes options See Note 21 for a discussion of accounting for AROs. pricing model. Stock options with graded vesting (i.e., that vest in installments)

Compensation and Benefits are valued as a single award.

Pension and Other PostretirementBenefits PPL and its subsidiaries were not required to recognize compensation PPL and certain of its subsidiaries sponsor various pension and other postre- expense for stock options issued and accounted for under the intrinsic value tirement and postemployment benefit plans. PPL follows the guidance of method of APB Opinion No. 25, since PPL grants stock options with an exer-SFAS 87, 'Employers' Accounting for Pensions," and SFAS 106, "Employers' cise price that is not less than the fair market value of PPLs common stock on Accounting for Postretirement Benefits Other Than Pensions," when accounting the date of grant. As currently structured, awards of restricted stock, restricted for these benefits. stock units and stock units result in the same amount of compensation expense PPL uses a market-related value of plan assets inaccounting for its pension under the fair value method of SFAS 123 as they would under the intrinsic plans. The market-related value of assets is calculated by rolling forward the value method of APB Opinion No. 25. See Note 11 for a discussion of stock-prior year market-related value with contributions, disbursements and expected based compensation. Stock-based compensation is included in "Other opera-return on investments. One-fifth of the difference between the aclual value and tion and maintenance" expense on the Statement of Income.

the expected value is added (or subtracted ifnegative) to the expected value to The table below illustrates the pro forma effect on net income and EPS as if determine the new market-related value. the fair value method had been used to account for all outstanding stock-based PPL uses an accelerated amortization method for the recognition of compensation awards in2004 and 2003. For 2005, the difference between the gains and losses for its pension plans. Under the accelerated method, gains pro forma and reported amounts would have been insignificant.

and losses in excess of 10% but less than 30% of the greater of the plan's 2005 2004 projected benefit obligation or the market-related value of plan assets are Net Income amortized on a straight-line basis over the estimated average future service Net Income - as reported $ 698 $734 period of plan participants. Gains and losses in excess of 30% of the plan's Add: Stock-based employee compensation expense included inreported net income, net of lax 8 5 projected benefit obligation are amortized on a straight-line basis over a period Deduct: Total stock-based compensation expense determined equal to one-half of the average future service period of the plan participants. under the fair value method for all awards, net of tax 10 9 See Note 12 for a discussion of pension and other postretirement benefits. Pro forma Net Income $ 696 $ 730 Stock-Based Compensation EPS Basic- as reported $1.89 $2.13 PPL grants stock options, restricted stock, restricted stock units and stock units $1.89 $2.12 Basic- pro forma to employees and directors under several stock-based compensation plans. Diluted - as reported $1.89 $2.12 SFAS 123, *Accounting for Stock-Based Compensation," encourages entities to Diluted - pro forma $1.88 $2.11 60 PPL CORPORATION 2005 ANNUAL REPORT

In December 2004, the FASB issued SFAS 123 (revised 2004), "Share- Annual tax provisions include amounts considered sufficient to pay Based Payment," which is known as SFAS 123(R) and replaces SFAS 123, assessments that may result from examination by taxing authorities of prior "Accounting for Stock-Based Compensation," as amended by SFAS 148, year tax returns; the amount ultimately paid upon resolution of issues raised by "Accounting for Stock-Based Compensation-Transition and Disclosure." PPL such authorities may differ materially from the amount accrued and may mate-and its subsidiaries adopted SFAS 123(R) effective January 1,2006. See rially impact PPLs financial statements. Inevaluating the exposure associated Note 23 for a discussion of SFAS 123(R). with various tax filing positions, PPL and its subsidiaries accrue charges for InSFAS 123(R), the FASB provided additional guidance on the requirement probable exposures based on management's best estimate of the amount that to accelerate expense recognition for employees who are at or near retirement should be recognized. PPL and its subsidiaries maintain an allowance for tax age and who are under a plan that allows for accelerated vesting upon an contingencies, the balance of which management believes to be adequate.

employee's retirement. Such guidance is relevant to prior accounting for stock- PPL Energy Supply and PPL Electric deferred investment tax credits when based compensation under other accounting guidance. PPL's stock-based they were utilized and are amortizing the deferrals over the average lives of the compensation plans allow for accelerated vesting upon an employee's retire- related assets. See Note 5 for additional discussion regarding income taxes.

ment. Thus, for employees who are retirement eligible when stock-based The provision for PPL Electric's deferred income taxes for regulated assets awards are granted, PPL will recognize the expense immediately. For employ- is based upon the ratemaking principles reflected inrates established by the ees who are not retirement eligible when stock-based awards are granted, PUC and the FERC. The difference inthe provision for deferred income taxes PPL will amortize the awards on a straight-line basis over the shorter of the for regulated assets and the amount that otherwise would be recorded under vesting period or the period up to the employee's attainment of retirement age. U.S. GAAP is deferred and included intaxes recoverable through future rates Retirement eligible has been defined by PPL as the early retirement age of 55. in "Regulatory and Other Noncurrent Assets - Other" on the Balance Sheet.

The adjustments below related to retirement-eligible employees were recorded See Note 5 for additional information.

based on the aforementioned clarification of existing guidance and are not Leases related to the adoption of SFAS 123(R).

PPL and its subsidiaries apply the provisions of SFAS 13, "Accounting for In2005, PPL recorded a charge of approximately $10 million after tax, Leases," as amended and interpreted, to all transactions that qualify for lease or $0.03 per share, to accelerate stock-based compensation expense for accounting. See Note 10 for a discussion of accounting for leases under which retirement-eligible employees. Approximately $5 million of the after-tax total, PPL and its subsidiaries are lessees.

or $0.01 per share, was related to periods prior to 2005. The prior period In2002, PPL began commercial operation of its 79.9 MW oil-powered amounts were not material to previously issued financial statements.

station inShoreham, New York. The Long Island Power Authority has con-Other tracted to purchase all of the plant's capacity and ancillary services as part of Income Taxes a 15-year power purchase agreement with PPL EnergyPlus. The capacity pay-The income tax provision for PPL and its subsidiaries is calculated inaccor- ments inthe power purchase agreement result inthe plant being classified as dance with SFAS 109, "Accounting for Income Taxes." PPL and its domestic a direct-financing lease, under which PPL EnergyPlus is the lessor.

subsidiaries file a consolidated U.S. federal income tax return. In December 2004, PPL recorded a sales-type lease related to an 8 MW Significant management judgment is required in developing PPL's provi- on-site electrical generation plant, under which a subsidiary of PPL Energy sion for income taxes, including the determination of deferred tax assets and Supply is the lessor.

liabilities and any valuation allowances that might be required against the As of December 31, 2005 and 2004, PPL had receivable balances of deferred tax assets, as well as estimating the phase-out range for synthetic $256 million and $273 million (included in"Current Assets - Other" and fuel tax credits that is not published by the IRS until April of the following year. "Regulatory and Other Noncurrent Assets - Other") and unearned revenue PPL and its subsidiaries record valuation allowances to reduce deferred tax balances of $143 million and $158 million (included in "Deferred Credits assets to the amounts that are more likely than not to be realized. PPL and its and Other Noncurrent Liabilities - Other"). The receivable balances include subsidiaries have considered future taxable income and ongoing prudent and $65 million of an unguaranteed residual value. Rental income received during feasible tax planning strategies inassessing the need for valuation allowances. 2005, 2004 and 2003 was $15 million, $14 million and $15 million. Total IfPPL and its subsidiaries determined that they would be able to realize future minimum lease payments expected to be received on both leases are deferred tax assets in the future inexcess of net deferred tax assets, adjust- estimated at $16 million for each of the years from 2006 through 2010.

ments to the deferred tax assets would increase income by reducing tax Fuel, Materialsand Supplies expense in the period that such determination was made. Likewise, if PPL PPL and its subsidiaries value inventory at the lower of cost or market, primarily and its subsidiaries determined that they would not be able to realize all or using the average-cost method. At December 31, 2005, PPL Gas Utilities part of net deferred tax assets inthe future, adjustments to the deferred tax valued all of its natural gas inventory using the last-in, first-out method assets would decrease income by increasing tax expense in the period that (LIFO). The carrying value of that inventory was $16 million and $5million at such determination was made.

December 31, 2005 and 2004, and the excess of replacement cost over carry-ing value was $15 million and $7million at December 31, 2005 and 2004.

PPL CORPORATION 2005 ANNUAL REPORT 61

NOTES TO CONSOLIDATED FINANCIAL STA\TEMIENTS Guarantees Financial data for the segments are:

Inaccordance with the provisions of FIN 45, "Guarantor's Accounting and 2005 2004 __2003 Disclosure Requirements for Guarantees, Including Indirect Guarantees of Income Statement Dat a Indebtedness of Others, an Interpretation of FASB Statements No. 5,57, and Revenues from external customers 107 and Rescission of FASB Interpretation No. 34," the fair values of guaran- Supply $1,814 $1,823 $1,788 tees related to arrangements entered into prior to January 1,2003, as well as International Delivery 1,206 1,102 1,013 guarantees excluded from the initial recognition and measurement provisions Pennsylvania Delivery 3.199 2,869 2,784 of FIN 45, are not recorded inthe financial statements. See Note 14 for further 6,219 5,794 5,585 Intersegment revenues(a discussion of recorded and unrecorded guarantees. 1,590 1.500 1,444 supply Treasury Stock Pennsylvania Delivery 152 156 161 Equity inearnings of unconsolidated affiliates Treasury shares are reflected on the balance sheet as an offset to common Supply (12) (10) (14) equity under the cost method of accounting. Management has no definitive International Delivery 3 2 3 plans for the future use of these shares. Treasury shares are not considered (0) (8) (11) outstanding incalculating EPS. Depreciation At December 31, 2005 and 2004, PPL held 62,113,489 and 62,091,706 Supply 144 144 120 shares of treasury stock. International Delivery 157 146 147 Pennsylvania Delivery 119 114 109 Foreign Currency Translation and Transactions 420 404 376 Assets and liabilities of international operations, where the local currency is Amortizations - recoverable transition the functional currency, are translated at year-end exchange rates, and related costs and other Supply 33 14 (15) revenues and expenses are translated at average exchange rates prevailing International Delivery (13) (2) during the year. Adjustments resulting from translation are recorded inaccu- Pennsylvania Delivery 278 267 271 mulated other comprehensive loss.

298 279 256 Gains or losses relating to foreign currency transactions are recognized Interest income currently inincome. The aggregate transaction losses were insignificant in Supply (6) 15 (2) 2005, 2004 and 2003. International Delivery 8 8 7 Pennsylvania Delivery 21 16 7 New Accounting Standards 23 39 12 See Note 23 for adiscussion of new accounting standards recently adopted Interest expense or pending adoption. Supply 116 114 38 International Delivery 203 203 218 Pennsylvania Delivery 189 196 217

2. Segment and Related Information Income tax expense 508 513 473 PP~s reportable segments are Supply, International Delivery (formerly Supply 20 127 186 International) and Pennsylvania Delivery (formerly Delivery). In2005, there International Delivery 34 59 (30)

Pennsylvania Delivery 67 17 23 were no changes to the reportable segments except that the segments were 121 203 179 renamed to more specifically describe their businesses. The Supply segment Deterred income taxes and investment tax credits primarily consists of the domestic energy marketing, domestic generation and Supply (92) 18 13 domestic development operations of PPL Energy Supply. The International International Delivery 18 50 55 Delivery segment includes operations of the international energy businesses of Pennsylvania Delivery 10 87 22 PPL Global that are primarily focused on the distribution of electricity. The (64) 155 90 majority of PPL Global's international businesses are located inthe U.K., Chile, Net Income ElSalvador and Bolivia. The Pennsylvania Delivery segment includes the regu- Supply (DI(0l 311 421 502 International Delivery (d) 215 197 196 lated electric and gas delivery operations of PPL Electric and PPL Gas Utilities.

Pennsylvania Delivery 152 80 36 Segments include direct charges, as well as an allocation of indirect corpo-

$678 $698 $734 rate costs, for services provided by PPL Services. These service costs include functions such as financial, legal, human resources and information services.

62 PPL CORPORATION 2005 ANNUAL REPORT

2005 2004 2003

3. Investment in Unconsolidated Cash Flow Data Affiliates - at Equity Expenditures for property, plant and equipment Investment inunconsolidated affiliates accounted for under the equity method Supply $332 $259 $270 at December 31 (equity ownership percentages as of December 31, 2005) was:

International Delivery 289 279 246 Pennsylvania Delivery 190 196 251 2005 2004

$811 $734 $767 Aguaytia Energy, LLC - 11.4% $10 $9 Bangor-Pacific Hydro Associates - 50.0% 17 15 Safe Harbor Water Power Corporation -33.3% 15 15 As of December31, 2005 2004 Other 14 12 Balance Sheet Data $56 $51 Net investment in unconsolidated affiliates - at equity Supply $ 41 $ 36 InJanuary 2006, PPL Global entered into an agreement to sell its minority International Delivery 15 15 interest inAguaytia Energy, LLC.

56 51 APPL subsidiary has a 50% interest ina partnership that owns the Griffith Total assets gas-fired generation station. The partnership arrangement isessentially a cost-Supply 7,118 6,645 sharing arrangement, inthat each of the partners has rights to one-half of the International Delivery 5,089 5,390 Pennsylvania Delivery 5,719 5,698 plant capacity and energy, and an obligation to cover one-half of the operating

$17,926 $17,733 costs of the station. Accordingly, the equity investment is not reflected inthe table above and is classitied as 'Electric plant in service - Generation" on the Balance Sheet.

2005 2004 2003 Geographic Data Revenues from external customers U.S. $5,013 $4,692 $4,572 4. Earnings Per Share Foreign:

In August 2005, PPL completed a 2-for-1 split of its common stock. The record U.K. 750 715 651 Latin America 456 387 362 date for the stock split was August 17, 2005, and the distribution date was 1,206 1,102 1,013 August 24, 2005. As a result of the stock split, approximately 190 million shares were issued to shareholders, and approximately 31 million shares were

$6,219 $5,794 $5,585 issued as treasury shares as of the record date. The par value of the stock remains at $0.01 per share and, accordingly, $2 million was transferred from As of December31, 2005 2004 "Capital inexcess of par value" to "Common stock" on the Balance Sheet. The Property, Plant and Equipment number of shares, the market price, and earnings and dividends per share U.S. $ 7,292 $ 7,359 amounts, as well as PPLs stock-based compensation awards, the conversion Foreign:

rate and market price trigger of PPL Energy Supply's 2.625% Convertible U.K. 3,162 3,373 Latin America 462 417 Senior Notes due 2023 and the threshold appreciation price and shares issued under the PEPS Units transaction, included inthese financial statements have 3,624 3,790 been adjusted for all periods presented to reflect the stock split.

$10,916 $11,149 Basic EPS is calculated using the weighted-average number of common (a) See 'PLRContracts' and 'NUG Purchases" inNote 15 for the basis of accounting between reportable segments.

shares outstanding during the period. Diluted EPS is calculated using weighted

( 2005 and 2003 include cumulative effects of changes inaccounting principles. See Notes 21 average shares outstanding that are increased for additional shares that would and 22 for additional information. be outstanding ifpotentially dilutive securities were converted to common IC) 2005, 2004 and 2003 include the operating results of the Sundance plant recorded in'Loss stock. Potentially dilutive securities consist of:

from Discontinued Operations.' 2005 also includes the loss on the sale of the Sundance plant thatis recorded in'Loss from Discontinued Operations.' See Note 9 for additional " stock options, restricted stock and restricted stock units granted under information. the incentive compensation plans; (d) 2004 includes the operating results of a Latin American telecommunications company, as

" stock units representing common stock granted under the directors well as an insignificant write-down of its net assets, recorded in *Loss from Discontinued Operations.' See Note 9 for additional information. compensation programs;

• common stock purchase contracts that were a component of the PEPS Units and PEPS Units, Series B; and

" convertible senior notes.

PPL CORPORATION 2005 ANNUAL REPORT 63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The basic and diluted EPS calculations, and the reconciliation of the shares InMay 2003, PPL Energy Supply issued $400 million of 2.625%

(inthousands) used inthe calculations, are: Convertible Senior Notes due 2023. The notes are guaranteed by PPL and, as 2005 2004 2003 originally issued, could be converted into shares of PPL common stock if:

Income (Numerator)

• during any fiscal quarter starting after June 30, 2003, the market price of Income from continuing operations $ 737 $ 713 $ 733 PPLs common stock trades at or above $29.84 per share over a certain Loss from discontinued operations (net of tax) 51 15 34 period during the preceding fiscal quarter; Cumulative effects of changes inaccounting " PPL calls the debt for redemption; principles (net of tax) (8) 35

" the holder exercises its right to put the debt on any five-year anniversary Net Income $ 678 $ 698 $ 734 of the offering; Shares (Denominator) " the long-term credit rating assigned to the notes by Moody's Investors Shares for Basic EPS 379,132 368,456 345,589 Service, Inc. and Standard &Poor's Ratings Services falls below Ba2 and Add incremental shares Convertible Senior Notes 2,263 134 8Bor the notes are not rated; or Restricted stock, stock options and other " certain specified corporate transactions occur, e.g., change in control and share-based awards 2,342 1,396 1,194 certain distributions to the holders of PPL common stock.

Shares for Diluted EPS 383,737 369.986 346,783 Basic EPS The conversion rate is 40.2212 shares per $1,000 principal amount of Income from continuing operations $ 1.94 $ 1.93 $ 2.12 notes. It will be adjusted if certain specified distributions, whether inthe form Loss from discontinued operations (net of tax) 0.13 0.04 0.09 of cash, stock, other equity interests, evidence of indebtedness or assets, are Cumulative effects of changes inaccounting made to holders of PPL common stock. Additionally, the conversion rate can be principles (net of tax) (0.02) 0.10 increased by PPL if its Board of Directors has made a determination that to do Net Income $ 1.79 $ 1.89 $ 2.13 so would be inthe best interests of either PPL or holders of PPL common stock.

Diluted EPS Depending upon which of the conversion events identified above occurs, Income from continuing operations $ 1.92 $ 1.93 $ 2.12 the Convertible Senior Notes, as originally issued, could have been settled in Loss from discontinued operations (net of tax) 0.13 0.04 0.10 Cumulative effects of changes inaccounting cash or shares. However, the notes were modified inNovember 2004 to require principles (net of tax) (0.02) 0.10 cash settlement of the principal amount, permit settlement of any conversion Net Income $ 1.77 $ 1.89 $ 2.12 premium incash or stock and eliminate a provision that required settlement in stock inthe event of default. These modifications were made in response to the InMay 2001, PPL and PPL Capital Funding Trust I issued 23 million PEPS FASB's ratification of EITF Issue 04-8, 'The Effect of Contingently Convertible Units that contained a purchase contract component for PPL's common stock.

Instruments on Diluted Earnings per Share," as well as other anticipated rules The purchase contracts were only dilutive if the average price of PPL's common relating to EPS. EITF Issue 04-8 requires contingently convertible instruments stock exceeded a threshold appreciation price, which was adjusted for cash to be included in diluted EPS. It also requires restatement of prior-period distributions on PPL common stock. The threshold appreciation price was diluted EPS, incertain circumstances, based upon the terms of the contin-initially set at $32.52 and was adjusted to $31.69 as of April 1,2004, based on gently convertible instruments as of the date of adoption, which was dividends paid on PPL's common stock since issuance. The purchase contracts December 31, 2004, for PPL.

were settled inMay 2004. Since the average price did not exceed the threshold The Convertible Senior Notes have a dilutive impact when the average appreciation price, the purchase contracts were excluded from the diluted EPS market price of PPL common stock exceeds the conversion price of $24.87.

calculations for 2004 and 2003.

The Convertible Senior Notes did not have a dilutive impact on EPS for 2003.

InJanuary 2004, PPL completed an exchange offer resulting inthe The maximum number of shares that could potentially be issued to exchange of approximately four million PEPS Units for PEPS Units, Series B.

settle the conversion premium, based upon the current conversion rate, is The primary difference inthe units related to the debt component. The pur-16,088,480 shares. Based on PPL's common stock price at December 31, chase contract components of both units, which were potentially dilutive, were 2005, the conversion premium equated to 2,483,038 shares, or approximately identical. The threshold appreciation price for the purchase contract compo-

$73 million.

nent of the PEPS Units, Series Bwas adjusted in the same manner as that of See Note 8 for discussion of attainment of the market price trigger related the PEPS Units and was $31.69 as a result of the adjustment as of April 1, to the Convertible Senior Notes inthe third quarter of 2005 and the related 2004. These purchase contracts were settled inMay 2004. Since the average conversion requests that PPL received inthe fourth quarter.

price did not exceed the threshold appreciation price, the purchase contracts The following number of stock options to purchase PPL common shares were excluded from the diluted EPS calculations for 2004.

were excluded inthe periods' computations of diluted EPS because the effect would have been antidilutive.

(Thousands of Shares) 2005 2004 2003 Antidilutive stock options 402 2,266 3,366 64 PPL CORPORATION 2005 ANNUAL REPORT

5. Income and Other Taxes Details of the components of income tax expense, areconciliation of federal income taxes derived from statutory lax rates applied to income from For 2005, 2004 and 2003. the statutory U.S. corporate federal income tax continuing operations for accounting purposes, and details of taxes other rate was 35%. The statutory corporate net income tax rate for Pennsylvania than income are:

was 9.99%. 2005 2004 2003 "Income from Continuing Operations Before Income Taxes, Minority Income Tax Expense Interest and Distributions on Preferred Securities" included the following Current - Federal $122 $52 $39 components for the years ended December 31. Current -State (1) (31) 15 2005 2004 2003 Current -Foreign 64 27 35 Domestic income $613 $662 $750 185 48 89 Foreign income 254 264 198 Deferred - Federal (83) 102 34

$867 $926 $948 Deferred - State 17 17 23 Deferred -Foreign 17 51 48 Deferred income taxes reflect the net tax effects of temporary differences (49) 170 105 between the carrying amounts of assets and liabilities for accounting purposes Investment tax credit, net- federal (15) (15) (15) and their basis for income tax purposes and the fax effects of net operating Total income tax expense from continuing loss and tax credit carryforwards. operations (at $121 $203 $179 Net deferred tax assets have been recognized based on management's Total income tax expense - Federal $ 24 $139 $ 58 estimates of future taxable income for U.S. and certain foreign jurisdictions Total income tax expense - State 16 (14) 38 inwhich PPL's operations have historically been profitable. Total income tax expense - Foreign 81 78 83 Significant components of PPL's deferred income tax assets and liabilities Total income tax expense from continuing from continuing operations were: operations tat $121 $203 $179 2005 2004 t)Excludes $6 million of deterred federal, state and foreign tax benefit in 2005 and $26 million of current and deferred tederat and state taxexpense in2003 relafed tothecumulative effect Deferred Tax Assets of changes inaccounting principles, recorded netoftax. Excludes current and deferred Deferred investment tax credits $ 36 $ 42 federal and state taxbenefits of $28 million in2005, $8million in2004 and $10 million in NUG contracts and buybacks 102 135 2003 related to toss trom discontinued operations, recorded netof tax.

Unrealized loss on qualifying derivatives 139 30 Accrued pension costs 80 86 In2005, 2004 and 2003, PPL realized tax benefits related to stock-based Federal faxcredit carryforwards 112 58 compensation, recorded as an increase to capital inexcess of par value of Foreign loss carryorwards 140 152 approximately $7million, $3million and $5million.

Foreign - pensions 53 51 2005 2004 2003 Foreign - other 36 26 Contribution inaid of construction 78 65 Reconciliation of Income Tax Expense Other 195 189 Indicated federal income tax on Income from Vatuation attowance (148) (164) Continuing Operations Before Income Taxes, Minority Interest and Distributions on Preferred 823 670 Securities atstatutory taxrate - 35% $303 $324 $ 332 Deterred Tax Liabilities Increase (decrease) due to:

Plant -net 1,316 1,291 Stale income taxes 21 12 26 Restructuring - CTC 434 526 Amortization of investment tax credit (10) (10) (10)

Taxes recoverablethrough future rates 106 115 Write-down otinternational energy projects (83)

Reacquired debt costs 16 14 Difference related to income recognition of Foreign - plant 692 770 foreign affiliates (net of foreign income taxes) (55) (36) (11)

Foreign - other 98 55 Stranded cost securit izat ion (7) (22)

Other domestic 78 62 Federal income tax credits (107) (74) (52)

Contribution of property (2) (9) 2,740 2,833 Federal income tax return adjustments (16) (1) (11)

Net deferred fax liability $1,917 $2,163 Other (8) 12 (3)

(182) (121) (153)

Total Income fax expense from continuing operations $ 121 $203 $179 Effective income tax rate 14.0% 21.9% 18.9%

During 2005, PPL recorded a $13 million benefit from the reduction of state and federal income taxes from fifing the 2004 income tax returns.

The $13 million benefit included inthe Reconciliation of Income Tax Expense PPL CORPORATION 2005 ANNUAL REPORT 65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS consisted of a $16 million federal benefit reflected in'Federal income tax InOctober 2004, President Bush signed the American Jobs Creation Act of return adjustments," offset by a $3 million state expense reflected in'State 2004 (the Act). The Act creates a temporary incentive for U.S. corporations to income taxes." repatriate accumulated income earned abroad by providing an 85% dividends During 2005, PPL recorded a $12 million benefit related to federal and received deduction for certain dividends from controlled foreign corporations.

state income tax reserve changes. The $12 million benefit included inthe During 2005, PPL did not repatriate any foreign earned income subject to the Act.

Reconciliation of Income Tax Expense consisted of a $7 million benefit The Act also provides, beginning in2005, a tax deduction from income for reflected in 'Stranded cost securitization," a $2million state benefit reflected certain qualified domestic production activities. FSP FAS 109-1, "Application in'State income taxes' and a $3 million federal benefit reflected in 'Other.! of FASB Statement No. 109, 'Accounting for Income Taxes,' to the Tax During 2004, PPL recorded a $1 million benefit from the reduction of state Deduction on Qualified Production Activities Provided by the American Jobs and federal income taxes from filing the 2003 income tax returns. The $1 mil- Creation Act of 2004," specifies that this tax deduction will be treated as a spe-lion benefit included inthe Reconciliation of Income Tax Expense consisted of cial deduction and not as a tax rate reduction. For 2005, PPL recognized a a $2 million federal benefit reflected in 'Contribution of property" and a $1mil- $3 million tax benefit related to this new deduction.

lion federal benefit reflected in "Federal income tax return adjustments,' offset by a $2 million state expense reflected in 'State income taxes."

During 2004, PPL recorded a$15 million benefit related to federal and state 6. Financial Instruments income tax reserve changes. The $15 million benefit included inthe Reconciliation of Income Tax Expense consisted of a $22 million benefit reflected in"Stranded At December 31, 2005 and 2004, the carrying value of cash and cash equiva-cost securitization" and a $2million state benefit reflected in'State income taxes," lents, investments inthe nuclear decommissioning trust funds,'other invest-offset by a $9 million federal expense reflected in 'Other." ments and short-term debt approximated fair value due to the short-term nature of the instruments, variable interest rates associated with the financial instru-2005 2004 2003 ments or the carrying value of the instruments being based on established Taxes, Other than Income market prices. Price risk management assets and liabilities are recorded at fair State gross receipts $175 $156 $155 State utility realty 6 (10) 3 value using exchange-traded market quotes, prices obtained through third-State capital stock 14 22 27 party brokers or internally developed price curves. Financial instruments where Property - foreign 57 55 47 the carrying amount on the Balance Sheet and the estimated fair value (based Other - foreign 1 1 on quoted market prices for the securities where available and estimates based Domestic property and other 26 25 24 on current rates where quoted market prices are not available) are different,

$279 $249 $256 are set forth below:

December 31, 2005 December 31, 2004 PPL had federal alternative minimum tax credit carryforwards with an Carrying Carrying indefinite carryforward period of $111 million and $58 million at December 31, Amount Fair Value Amount Fair Value 2005 and 2004. PPL also had state net operating loss carryforwards that Long-term debt $7,081 $7,585 $7,658 $8,242 expire between 2006 and 2024 of approximately $97 million and $77 million Long-term debt with affiliate trusts 89 84 89 84 at December 31, 2005 and 2004. Valuation allowances have been established for lhe amount that, more likely than not, will not be realized.

PPL Global had foreign net operating loss carryforwards of approximately 7. Preferred Stock

$50 million and $27 million at December 31, 2005 and 2004. PPL Global also had foreign capital loss carryforwards of $439 million and $486 million at Presented below are the details of PPL Electric's $100 par value cumulative December 31, 2005 and 2004. All of these losses have an unlimited carryfor- preferred stock, without sinking fund requirements, that were outstanding as ward period. However, it is more likely than not that these losses will not be of December 31, 2005 and 2004.

Optional utilized and, as such, a full valuation allowance has been provided against the Issued and Redemption Outstanding Shares Price Per Share related deferred tax asset. Dividend Authorized at 12/31/2005 Outstanding Shares PPL Global does not pay or record U.S. income taxes on the undistributed 4-1/2% $25 247,524 629,936 $110.00 earnings of its foreign subsidiaries where management has determined that the Series Preferred earnings are permanently reinvested. The cumulative undistributed earnings 3.35% 2 20,605 103.50 are included in 'Earnings reinvested" on the Balance Sheet. The amounts 4.40% 12 117,676 102.00 considered permanently reinvested at December 31, 2005 and 2004, were 4.60% 3 28,614 103.00

$650 million and $406 million. Ifthe earnings were remitted as dividends, 6.75% 9 90,770 102.70 PPL Global may be subject to additional U.S. taxes, net of allowable foreign Total Series Preferred 26 257,665 10,000,000 tax credits. It is not practical to estimate the amount of additional taxes that Total Preferred Stock $51 505,189 might be payable on these foreign earnings.

66 PPL CORPORATION 2005 ANNUAL REPORT

The involuntary liquidation price of the preferred stock is $100 per share. 2004, $131 million and $96 million of accounts receivable and $142 million and The optional voluntary liquidation price is the optional redemption price per $128 million of unbilled revenue were pledged under the credit agreement. At share ineffect, except for the 4-1/2% Preferred Stock and the 6.75% Series December 31, 2005 and 2004, there was $42 million of short-term debt out-Preferred Stock for which such price is$100 per share (plus, ineach case, standing under the credit agreement at an interest rate of 4.3% for 2005 and any unpaid dividends inarrears). 2.33% for 2004, all of which was being used to cash collateralize letters of Holders of the outstanding preferred stock are entitled to one vote per credit issued on PPL Electric's behalf. At December 31, 2005, based on the share on matters on which PPL Electric's shareowners are entitled to vote. accounts receivable and unbilled revenue pledged, an additional $108 million The following are decreases in preferred stock due to the redemption of was available for borrowing. The funds used to cash collateralize the letters of previously outstanding preferred stock with sinking fund requirements. credit are reported in"Restricted cash" on the Balance Sheet. PPL Electric's 2005 2004 2003 sale to its subsidiary of the accounts receivable and unbilled revenue is an Shares Amount Shares Amount Shares Amount absolute sale of the assets, and PPL Electric does not retain an interest in Series Preferred these assets. However, for financial reporting purposes, the subsidiary's finan-6.125% (167,500) $(17) cial results are consolidated in PPL Electric's financial statements. PPL Electric 6.15% (97,500) (10) performs certain record-keeping and cash collection functions with respect to 6.33% (46,000) (4) the assets inreturn for a servicing fee from the subsidiary. PPL Electric cur-PPL Electric is authorized to issue 5 million shares of preference stock. No rently expects the subsidiary to renew the credit agreement on an annual basis.

preference stock had been issued or was outstanding at December 31, 2005. PPL Energy Supply maintains credit facilities inorder to enhance liquidity PPL is authorized to issue up to 10 million shares of preferred stock. No and provide credit support, and as a backstop to its commercial paper program.

preferred stock had been issued or was outstanding at December 31, 2005. PPL Energy Supply increased its facility capacity in2005 inorder to provide more liquidity capacity.

InMarch 2005, PPL Energy Supply entered into a 364-day reimbursement

8. Credit Arrangements and agreement with a bank for the purpose of issuing letters of credit. Under the Financing Activities agreement, PPL Energy Supply can cause the bank to issue up to $200 million of letters of credit. At December 31, 2005, there were $199 million of letters of Credit Arrangements credit and no cash borrowings outstanding under this agreement.

PPL Electric maintains credit facilities inorder to enhance liquidity and InJune 2005, PPL Energy Supply extended to June 2010 its $800 million provide credit support, and as a backstop to its commercial paper program.

five-year facility originally set to expire in2009 and entered into a new At December 31, 2005, no cash borrowings were outstanding under any

$600 million five-year credit facility expiring in June 2010, which replaced its PPL Electric credit facilities.

$300 million three-year facility due to expire in2006. PPL Energy Supply has In June 2005, PPL Electric extended to June 2010 its $200 million five- the ability to cause the lenders under these facilities to issue letters of credit.

year facility originally set to expire in2009. PPL Electric also maintains a At December 31, 2005, PPL Energy Supply had $172 million of letters of credit

$100 million three-year credit facility maturing inJune 2006. PPL Electric has and no cash borrowings outstanding under these credit facilities.

the ability to cause the lenders under its facilities to issue letters of credit. At In December 2005, PPL Energy Supply entered into a new $500 million December 31, 2005, PPL Electric had less than $1million of letters of credit five-year credit facility expiring in December 2010. The credit agreement allows outstanding under its credit facilities.

for cash borrowings and issuances of letters of credit. PPL Energy Supply PPL Electric maintains a commercial paper program for up to $200 million, expects that this facility will be used primarily as a commercial paper backstop to provide itwith an additional financing source to fund its short-term liquidity and for issuing letters of credit to satisfy collateral requirements of PPL Energy needs, ifand when necessary. Commercial paper issuances are supported by Supply's affiliates. At December 31, 2005, no cash borrowings or letters of certain credit agreements of PPL Electric. PPL Electric had no commercial credit were outstanding under this facility.

paper outstanding at December 31, 2005 and 2004. Also, inDecember 2005, PPL Energy Supply entered into a new $300 mil-PPL Electric participates inan asset-backed commercial paper program lion five-year letter of credit and revolving credit facility expiring inMarch 2011.

through which PPL Electric obtains financing by selling and contributing its eli-The credit agreement allows for cash borrowings and issuances of letters of gible accountsreceivable and unbilled revenue to a special purpose, wholly credit. PPL Energy Supply expects that this facility will be used primarily for owned subsidiary on an ongoing basis. The subsidiary has pledged these assets issuing letters of credit to satisfy collateral requirements of PPL Energy Supply's to secure loans from a commercial paper conduit sponsored by a financial insti-affiliates. At December 31, 2005, there were no cash borrowings and $286 mil-tution. PPL Electric uses the proceeds from the credit agreement for general lion of letters of credit outstanding under this facility. PPL Energy Supply's obli-corporate purposes and to cash collateralize letters of credit. The subsidiary's gations under this facility are supported by a $300 million letter of credit issued borrowing limit under this credit agreement is $150 million, and interest under on PPL Energy Supply's behalf under a separate $300 million five-year letter the credit agreement varies based on the commercial paper conduit's actual cost of credit and reimbursement agreement also expiring inMarch 2011.

to issue commercial paper that supports the debt. At December 31, 2005 and PPL CORPORATION 2005 ANNUAL REPORT 67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PPL Energy Supply maintains a commercial paper program for up to or another PPL affiliate were to become a debtor ina bankruptcy case, there

$500 million to provide it with an additional financing source to fund its short- can be no assurance that a court would not order PPL Electric's assets and term liquidity needs, if and when necessary. Commercial paper issuances are liabilities to be consolidated with those of PPL or such other PPL affiliate.

supported by certain credit arrangements of PPL Energy Supply. PPL Energy The subsidiaries of PPL are separate legal entities. PPUs subsidiaries are Supply had $100 million of commercial paper outstanding at December 31, not liable for the debts of PPL. Accordingly, creditors of PPL may not satisfy 2005 with a weighted-average interest rate of 4.51% and no commercial paper their debts from the assets of the subsidiaries absent a specific contractual outstanding at December 31, 2004. undertaking by a subsidiary to pay PPL's creditors or as required by applicable WPD (South West) maintains three committed credit facilities: a £100 mil- law or regulation. Similarly, absent a specific contractual undertaking or as lion 364-day facility, a £150 million three-year facility and a £150 million five- required by applicable law or regulation, PPL is not liable for the debts of its year facility. In October 2005, WPD (South West) extended the £100 million subsidiaries. Accordingly, creditors of PPL's subsidiaries may not satisfy their 364-day facility until October 2006 and the £150 million three-year facility debts from the assets of PPL absent a specific contractual undertaking by until October 2008. The £150 million five-year facility expires inOctober 2009. PPL to pay the creditors of its subsidiaries or as required by applicable law At December 31, 2005, WPD (South West) also has uncommitted credit facilities or regulation.

of £65 million. The balance outstanding under the WPD (South West) credit Financing Activities facilities at December 31, 2005, was £41 million (approximately $71 million InApril 2005, PPL Capital Funding retired all $320 million of its 7-3/4%

at current exchange rates) with a weighted-average interest rate of 4.98%.

Medium-term Notes due April 2005 upon maturity. The funds for the retirement In2001, PPL Electric completed a strategic initiative to confirm its legal were primarily obtained from PPL Energy Supply's August 2004 issuance of separation from PPL and PPL's other affiliated companies. This initiative was

$300 million of 5.40% Senior Notes maturing inAugust 2014.

designed to enable PPL Electric to substantially reduce its exposure to volatil-InJuly 2005, PPL Capital Funding retired $142 million of its 7.29%

ity in energy prices through 2009 and to reduce its business and financial risk Subordinated Notes due May 2006 at a market value of $145 million. PPL profile by, among other things, limiting its business activities to the transmis-recorded a loss of $3 million related to this transaction in 2005.

sion and distribution of electricity and businesses related to or arising out of PPL Capital Funding retired all $10 million of its 6.17% Medium-term the electric transmission and distribution businesses. Inconnection with this Notes due September 2005 and retired all $20 million of its 6.39% Medium-initiative, PPL Electric:

term Notes due October 2005 upon maturity.

" obtained long-term electric supply contracts to meet its PLR obligations InDecember 2004, WPD borrowed £108 million (approximately $208 mil-(with its affiliate PPL Energy Plus) through 2009, as further described in lion at December 2004 exchange rates) under its credit facilities to retire Note 15 under "PLR Contracts';

$178 million of 6.75% Unsecured Bonds due December 2004 and settle the

" agreed to limit its businesses to electric transmission and distribution and related $30 million cross-currency swap. The total amount is included on the related activities; Statement of Cash Flows as "Retirement of long-term debt.' This bond retire-

" adopted amendments to its Articles of Incorporation and Bylaws containing ment was recorded in2005, due to the one-month reporting lag.

corporate governance and operating provisions designed to clarify and rein-InOctober 2005, PPL Energy Supply issued $300 million aggregate princi-force its legal and corporate separateness from PPL and its other affiliated pal amount of 5.70% REset Put Securities due 2035 (REPSsM). The REPS companies; bear interest at a rate of 5.70% per annum to, but excluding, October 15, 2015

" appointed an independent director to its board of directors and required (Remarketing Date). The REPS are required to be put by existing holders on the the unanimous approval of the board of directors, including the consent of Remarketing Date either for (a)purchase and remarketing by a designated the independent director, to amendments to these corporate governance remarketing dealer, or (b)repurchase by PPL Energy Supply. Ifthe remarketing and operating provisions or to the commencement of any insolvency pro-dealer elects to purchase the REPS for remarketing, itwill purchase the REPS ceedings, including any filing of a voluntary petition inbankruptcy or other at 100% of the principal amount, and the REPS will bear interest on and after similar actions; and the Remarketing Date at a new fixed rate per annum determined inthe remar-

• appointed an independent compliance administrator to review, on a semi-keting. PPL Energy Supply has the right to terminate the remarketing process.

annual basis, its compliance with the corporate governance and operating Ifthe remarketing is terminated at the option of PPL Energy Supply, or under requirements contained inits Articles of Incorporation and Bylaws.

certain other circumstances, including the occurrence of an event of default The enhancements to PPL Electric's legal separation from its affiliates are by PPL Energy Supply under the related indenture or a failed remarketing for intended to minimize the risk that a court would order PPL Electric's assets and certain specified reasons, PPL Energy Supply will be required to pay the liabilities to be substantively consolidated with those of PPL or another affiliate remarketing dealer a settlement amount. The settlement amount will be the of PPL inthe event that PPL or another PPL affiliate were to become a debtor present value of an annuity equal to the positive difference, if any, between in a bankruptcy case. Based on these various measures, PPL Electric was able (a)a stream of interest payments that would have been due on the REPS after to issue and maintain a higher level of debt and use itto replace higher cost the Remarketing Date, assuming the REPS were to bear interest at a rate based equity, thereby maintaining a lower total cost of capital. Nevertheless, if PPL on the 20-year swap rate ineffect on October 20, 2005, and (b)a stream of 68 PPL CORPORATION 2005 ANNUAL REPORT

interest payments that would have been due on the REPS after the Remarketing pal and interest payments on the LCIDA bonds are insured. Inorder to secure Date, assuming the REPS were to bear interest at a rate based on the 20-year its obligations to the insurance provider, PPL Electric issued $224 million swap rate in effect on the date of calculation of the settlement amount. Also, if aggregate principal amount of its Senior Secured Bonds (under its 2001 Senior the remarketing is terminated for any reason, PPL Energy Supply must repur- Secured Bond Indenture), which also have payment terms that correspond to chase the entire principal amount of the REPS on the Remarketing Date at the LCIDA bonds.

100% of the principal amount. PPL Energy Supply received net proceeds of InApril 2005, PPL Electric retired all $69 million of its 6-1/2% First approximately $311 million from the issuance of the REPS, which includes a Mortgage Bonds due April 2005 upon maturity.

premium of approximately $13 million associated with the remarketing feature. In December 2005, PPL Electric sold $200 million of Senior Secured These proceeds will be used by PPL Energy Supply's affiliates to repay indebt- Bonds to certain institutional buyers ina private placement. The bonds were edness and by PPL Energy Supply for capital expenditures and/or general issued in two tranches: $100 million of bonds maturing in December 2015 with corporate purposes. a coupon of 4.95%, and $100 million of bonds maturing in December 2020 In November 2005, Emel entered into a contract that established the fixed with a coupon of 5.15%. PPL Electric will use the proceeds from the bonds to terms under which Emel will borrow UF 2,535,000 (approximately $73 million at refund maturing First Mortgage Bonds.

current exchange rates) inJuly 2006 to partially finance the UF 3 million bond During 2005, PPL Transition Bond Company made principal payments on maturity due August 1,2006. Any borrowing will be recorded when drawn. transition bonds of $266 million.

The terms of PPL Energy Supply's 2.625% Convertible Senior Notes due Dividends and Dividend Restrictions 2023 include a market price trigger that permits holders to convert the notes There were two common stock dividend increases in 2005. InFebruary 2005, during any fiscal quarter if the closing sale price of PPL's common stock PPL announced an increase to its quarterly common stock dividend to 23 cents exceeds $29.83 for at least 20 trading days inthe 30 consecutive trading days per share (equivalent to $0.92 per annum) and in August 2005, PPL announced ending on the last trading day of the preceding fiscal quarter. This market price an increase, effective October 1,2005, to 25 cents per share (equivalent to trigger was met inthe third quarter of 2005. Therefore, holders of the

$1.00 per annum). In February 2006, PPL announced an increase to its quar-Convertible Senior Notes were entitled to convert their notes at any time during terly common stock dividend, payable April 1,2006, to 27.5 cents per share the fourth quarter of 2005. As discussed in Note 4,when holders elect to con-(equivalent to $1.10 per annum). Future dividends, declared at the discretion of vert the Convertible Senior Notes, PPL Energy Supply isrequired to settle the the Board of Directors, will be dependent upon future earnings, cash flows, principal amount incash and any conversion premium incash or PPL common financial requirements and other factors.

stock. InDecember 2005, an insignificant amount of bonds was presented for The PPL Montana Colstrip lease places certain restrictions on PPL conversion and settled inJanuary 2006 with the issuance of PPL common Montana's ability to declare dividends. At this time, PPL believes that these stock and the payment by PPL Energy Supply of an insignificant amount of covenants will not limit PPL's ability to operate as desired and will not affect its cash. As a result of the market price trigger being met inthe third quarter, PPL ability to meet any of its cash obligations. Certain of PPL Global's international Energy Supply wrote-off $6 million of unamortized debt issuance costs during subsidiaries also have financing arrangements which limit their ability to pay 2005, which is included in"Interest Expense" on the Statement of Income.

dividends. However, PPL does not, at this time, expect that any of such limita-The market price trigger was not met inthe fourth quarter of 2005.

tions would significantly impact PPL's ability to meet its cash obligations.

InFebruary 2005, the Lehigh County Industrial Development Authority PPL Electric's 2001 Senior Secured Bond Indenture restricts dividend pay-(LCIDA) issued $116 million of 4.70% Pollution Control Revenue Refunding ments inthe event that PPL Electric fails to meet interest coverage ratios or Bonds due 2029 on behalf of PPL Electric. The proceeds of the LCIDA bonds fails to comply with certain requirements included inits Articles of were used in March 2005 to refund the LCIDA's $116 million of 6.40%

Incorporation and Bylaws to maintain its separateness from PPL and PPL's Pollution Control Revenue Refunding Bonds due 2029, previously issued on other subsidiaries. PPL Electric does not, at this time, expect that any of such behalf of PPL Electric. A$2 million premium was paid to redeem these bonds.

limitations would significantly impact its ability to declare dividends.

In May 2005, the LCIDA issued $108 million of 4.75% Pollution Control Revenue Refunding Bonds due 2027 on behalf of PPL Electric. The proceeds of Mandatorily Redeemable Securities these LCIDA bonds were used inJune 2005 to refund the LCIDA's $53 million On July 1,2003, PPL adopted the provisions of SFAS 150, "Accounting for of 5.50% Pollution Control Revenue Refunding Bonds due 2027 and inAugust Certain Financial Instruments with Characteristics of Both Liabilities and 2005 to refund the LCIDA's $55 million of 6.15% Pollution Control Revenue Equity." As a result, PPL changed its classification of the trust preferred securi-Refunding Bonds due 2029, previously issued on behalf of PPL Electric. A ties of PPL Capital Funding Trust I,which were issued as a component of the

$1million premium was paid as part of each bond redemption. PEPS Units, PPL Energy Supply changed its classification of the trust preferred In connection with the issuance of each of these new series of LCIDA securities issued by SIUK Capital Trust Iand PPL Electric changed its classifi-bonds, PPL Electric entered into a loan agreement with the LCIDA pursuant to cation of its preferred stock with sinking fund requirements. Under SFAS 150, which the LCIDA has loaned to PPL Electric the proceeds of the LCIDA bonds these securities were required to be classified as liabilities instead of 'mezza-on payment terms that correspond to the LCIDA bonds. The scheduled princi- nine" equity on the balance sheet because they were considered mandatorily PPL CORPORATION 2005 ANNUAL REPORT 69

NOTES TO CONSOLIDATED FINANCIAl. STATEMENTS redeemable securities. As of December 31, 2005 and 2004, no amounts were $25 million, and PPL Maine would receive rights to increase energy output at included inlong-term debt for any of these securities because of the following: its other hydroelectric dams inMaine. The coalition has announced plans to PPL deconsolidated PPL Capital Funding Trust I inaccordance with FASB remove or bypass the dams subject to the agreement inorder to restore runs Interpretation No. 46, 'Consolidation of Variable Interest Entities, an of Atlantic salmon and other migratory fish to the Penobscot River. The agree-Interpretation of ARB No. 51," effective December 31, 2003, and terminated the ment requires several approvals by the FERC. Certain of these regulatory trust in2004; PPL Energy Supply deconsolidated SIUK Capital Trust Iinaccor- approvals have been obtained, but PPL cannot predict whether or when all dance with FIN 46, effective December 31, 2003; and there was no preferred of them will be obtained.

stock with sinking fund requirements of PPL Electric outstanding (due to pre-International Energy Projects ferred stock redemptions). See Note 22 for a discussion of the deconsolidation Sale of CEMAR of the trusts. As a result of the deconsolidation and continued existence of InJune 2002, PPL made a decision to exit its CEMAR investment after a series SIUI Capital Trust I,the subordinated debt securities that support the SIUK of impairment losses were recorded. At that time, PPL Global's remaining Capital Trust I preferred securities, rather than the trust preferred securities portion of its CEMAR investment was written-off.

themselves, are reflected inlong-term debt as of December 31, 2005 and 2004.

InApril 2004, PPL Global transferred its interest inCEMAR to two companies SFAS 150 also required the distributions on these mandatorily redeemable controlled by a private equity fund managed by GP Investimentos, a Brazilian securities to be included as a component of "Interest Expense" instead of private equity firm. The sale resulted ina credit of approximately $23 million as "Distributions on Preferred Securities" inthe Statement of Income, effective a result of the reversal of the negative carrying value and the associated cumu-July 1,2003. "Interest Expense" for 2003 includes distributions on these secu-lative translation adjustment, which is included in "Other Income - net" on rities totaling $27 million and "Distributions on Preferred Securities" for 2003 the Statement of Income.

includes distributions on these securities totaling $27 million. As a result of the adoption of FIN 46 by PPL and the redemption of the preferred stock with Sale of CGE sinking fund requirements, no amounts are reflected in "Interest Expense" for InMarch 2004, PPL Global completed the sale of its minority interest inshares these mandatorily redeemable securities in2005 and 2004. of CGE for approximately $123 million. The sale resulted ina pre-tax charge of approximately $15 million ($7 million after tax), which is included in operating expenses as "Energy-related businesses" on the Statement of Income. This

9. Acquisitions, Development charge was due to the write-off of the associated cumulative translation adjust-and Divestitures ment, primarily as a result of the devaluation of the Chilean peso since the From time to time, PPL and its subsidiaries are involved in negotiations with original acquisition in2000.

third parties regarding acquisitions and dispositions of businesses and assets, Other Sales joint ventures and development projects. Any such transactions may impact In2003, a subsidiary of WPD sold certain Hyder properties. PPL Global future financial results. received approximately $17 million from the sales, and recorded a pre-tax gain Domestic Generation Projects of approximately $2 million. This gain is included in "Other Income - net" on the Statement of Income.

InJanuary 2003, PPL announced that it had decided not to proceed with devel-InJanuary 2006, PPL Global executed an agreement for the sale of its opment of a 300 MW project at the Kings Park site on Long Island, New York.

In March 2003, PPL Global sold its interest inKings Park Energy, LLC. At that minority interest inAguaytia Energy, LLC, a combined generating and natural time, six unassigned gas combustion turbine generators and other related gas facility inPeru.

equipment to be used at the Kings Park site were transferred to PPL Generation Discontinued Operations and retained as spare parts. Sale of Sundance Plant In November 2003, PPL Generation sold four of the six spare gas combus- InMay 2005, a subsidiary of PPL Generation completed the sale of its 450 MW tion turbine generators and related equipment for approximately $33 million. Sundance power plant located in Pinal County, Arizona, to Arizona Public Service The pre-tax loss on the sale of approximately $3 million is included in "Other Company for approximately $190 million incash. Proceeds from the sale were Income - net" on the Statement of Income in 2003. In2004, a subsidiary of used to reduce PPL's outstanding debt and improve liquidity. The book value of PPL Generation sold the remaining two spare gas combustion turbine genera- the plant was approximately $260 million on the sale date. PPL recorded a loss tors and related equipment for approximately $18 million. The net loss from on the sale inMay 2005 of approximately $47 million, or $0.12 per share, net these two sales was insignificant. of a lax benefit of $26 million. The loss on the sale is reflected as "Loss from In 2004, PPL Maine entered into an agreement with a coalition of govern- Discontinued Operations," along with operating losses of the Sundance plant ment agencies and private groups to sell three of its nine hydroelectric dams of $4 million, $13 million, and $14 million in2005, 2004 and 2003. The 2003 inMaine. Under the agreement, a non-profit organization designated by the operating loss excludes a charge of $9 million due to a cumulative effect of a coalition would have a five-year option to purchase the dams for approximately change inaccounting principle discussed in Note 22. At December 31, 2004, 70 PPL CORPORATION 2005 ANNUAL REPORT

the Sundance plant had a book value of $263 million, which was recorded in Other Leases "Electric plant inservice - Generation" on the Balance Sheet. The plant had PPL and its subsidiaries have leases for vehicles, office space, land, buildings, been included inthe total assets of the Supply segment prior to the sale. personal computers and other equipment. Rental expense for all operating leases, including the Colstrip generating plant, was $68 million in2005, Sale of Latin American Telecommunications Company

$65 million in2004 and $85 million in2003, and was primarily included in In December 2003, PPL Global's Board of Managers authorized PPL Global "Operation and maintenance" on the Statement of Income.

to sell its investment ina Latin American telecommunications company, and Total future minimum rental payments for all operating leases, including approved a plan of sale. It was determined that the viability of this non-strate-those with cancelable terms but covered by residual value guarantees, are gic business was not economical. As a result, PPL Global recorded an $18 mil-estimated to be:

lion write-down inthe carrying value of the company's net assets to their estimated fair value of approximately $1 million as of December 31, 2003. 2006 $ 77 InJune 2004, PPL Global sold this investment to local management for a 2007 68 nominal amount. The operating results of the Latin American telecommunica- 2008 66 tions company, which was a loss of approximately $2 million in2004 and 2009 63 2010 61 2003, as well as the write-down of its net assets, which was an insignificant Thereafter 423 amount in2004 and approximately $18 million in2003, are reflected as "Loss

$758 from Discontinued Operations" on the Statement of Income.

Inconnection with the acquisition of the fiber optic network discussed in Other Note 9,a subsidiary of PPL Telcom assumed a capital lease obligation through In2003, a subsidiary of PPL Telcom acquired the fiber optic network of a 2020 for the right to use portions of the fiber optic network. The balance out-Fairfax, Virginia-based company for approximately $21 million, consisting of standing at December 31, 2005 and 2004 was $11 million. Total future mini-

$9 million in cash and a $12 million capital lease obligation for the right to use mum rental payments for this capital lease are estimated at $1million for each portions of a fiber optic network. The 1,330-route-mile metropolitan area fiber of the years from 2006 through 2010, and $12 million thereafter.

network connects New York, northern New Jersey, Philadelphia, Baltimore and Washington, D.C. The acquisition required certain regulatory approvals and authorizations inthe area served by the network.

InJune 2004, a PPL subsidiary evaluated its investment ina technology

11. Stock-Based Compensation supplier for impairment. As a result of the evaluation, the subsidiary recorded a Under the PPL Incentive Compensation Plan (ICP) and the Incentive pre-tax impairment charge of approximately $10 million ($6 million after tax), Compensation Plan for Key Employees (ICPKE) (together, the Plans), restricted which is included in"Other Income - net" on the Statement of Income. shares of PPL common stock, restricted stock units and stock options may be granted to officers and other key employees of PPL and other affiliated compa-nies. Awards under the Plans are made by the Compensation and Corporate

10. Leases Governance Committee (CCGC) of the PPL Board of Directors, inthe case of the ICP, and by the PPL Corporate Leadership Council (CLC), inthe case of the Colstrip Generating Plant ICPKE. The ICP limits the total number of awards that may be granted under it PPL Montana leases a 50% interest in Colstrip Units 1 and 2 and a 30%

after April 23, 1999, to 15,769,430 awards, or 5%of the total shares of com-interest in Unit 3,under four 36-year non-cancelable operating leases. These mon stock that were outstanding at April 23, 1999. The ICPKE limits the total leases provide two renewal options based on the economic useful life of the number of awards that may be granted under itafter April 25, 2003, to generation assets. PPL Montana is required to pay all expenses associated 16,573,608 awards, or 5%of the total shares of common stock that were out-with the operations of the generation units. The leases place certain restric-standing at January 1,2003, reduced by outstanding awards for which com-tions on PPL Montana's ability to incur additional debt, sell assets and declare mon stock was not yet issued as of April 25, 2003. Inaddition, each Plan limits dividends and require PPL Montana to maintain certain financial ratios related the number of shares available for awards inany calendar year to 2% of the to cash flow and net worth. There are no residual value guarantees in these outstanding common stock of PPL on the first day of such calendar year. The leases. However, upon an event of default or an event of loss, the lessee could maximum number of options that can be awarded under each Plan to any sin-be required to pay a termination value of amounts sufficient to allow the lessor gle eligible employee in any calendar year is three million shares. Any portion to repay amounts owing on the lessor notes and make the lessor whole for its of these options that has not been granted may be carried over and used inany equity investment and anticipated return on investment. The events of default subsequent year. Ifany award lapses, is forfeited or the rights of the participant include payment defaults, breaches of representations or covenants, accelera-terminate, the shares of common stock underlying such an award are again tion of other indebtedness of PPL Montana, change incontrol of PPL Montana available for grant. Shares delivered under the Plans may be in the form of and certain bankruptcy events. The termination value was estimated to be authorized and unissued common stock, common stock held intreasury

$637 million at December 31, 2005.

by PPL or common stock purchased on the open market (including private purchases) inaccordance with applicable securities laws.

PPL CORPORATION 2005 ANNUAL REPORT 71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Restricted Stock At December 31, 2005, PPL had 417,740 restricted shares and 1,139,383 Restricted shares of PPL common stock are outstanding shares with full voting restricted units outstanding. These awards currently vest from three to 25 years and dividend rights. Restricted stock awards are subject to a restriction or vest- from the date of grant.

ing period as determined by the CCGC inthe case of the ICP, and the CLC in Compensation expense related to restricted stock and restricted stock the case of the ICPKE. Inaddition, the shares are subject to forfeiture or accel- unit awards was $18 million, $6 million and $5million for PPL for 2005, 2004 erated payout under Plan provisions for termination, retirement, disability and and 2003. Compensation expense for 2005 included an adjustment to record death of employees. Restricted shares vest fully if control of PPL changes, as accelerated recognition of expense for employees at or near retirement age.

defined by the plans. See Note 1 for additional details.

Restricted Stock Units Stock Options The Plans allow for the grant of restricted stock units. Restricted stock units Under the Plans, stock options may also be granted with an option exercise are awards based on the fair market value of PPL common stock. Actual PPL price per share not less than the fair market value of PPLs common stock on common shares will be issued upon completion of a restriction or vesting the date of grant. The options are exercisable beginning one year after the date period as determined by the CCGC inthe case of the ICP, and the CLC in the of grant, assuming the individual is still employed by PPL or a subsidiary, in case of the ICPKE. Recipients of restricted stock units may also be granted the installments as determined by the CCGC inthe case of the ICP, and the CLC in right to receive dividend equivalents through the end of the restriction period the case of the ICPKE. Options outstanding at December 31, 2005, become or until the award is forfeited. Restricted stock units are subject to forfeiture or exercisable over a three-year period from the date of grant inequal install-accelerated payout under the Plan provisions for termination, retirement, dis- ments. The CCGC and CLC have discretion to accelerate the exercisability of ability and death of employees. Restricted stock units vest fully ifcontrol of the options, except that the exercisability of an option issued under the ICP PPL changes, as defined by the Plans. may not be accelerated unless the individual remains employed by PPL or a Asummary of restricted stock/unit grants follows. subsidiary for one year from the date of grant. All options expire no later than Restricted Weighted Restricted Weighted ten years from the grant date. The options become exercisable immediately Shares Average Fair Units Average Fair if control of PPL changes, as defined by the Plans.

Granted Value Granted Value PPL recorded compensation expense related to stock options of $12 million, 2005 509,105 $27.08 2004 466,110 $23.03

$6million and $3 million for 2005, 2004 and 2003. Compensation expense 2003 84,180 $18.12 279,464 $17.55 for 2005 included an adjustment to record accelerated recognition of expense for employees at or near retirement age. See Note 1 for additional details.

Asummary of stock option activity follows.

2005 2004 2003 Number of Weighted Average Number of Weighted Average Number of Weighted Average Options Exercise Price Options Exercise Price Options Exercise Price Outstanding at beginning of year 5,961,950 $19.42 5,824,516 $17.78 6,017,370 $16.05 Granted 1,607,140 26.66 1,520,880 22.59 1,632,220 18.12 Exercised (1,983,018) 18.56 (1,307,306) 15.70 (1,721,830) 12.05 Forfeited (76,140) 21.37 (103,244) 17.66 Outstanding at end of year 5,586,072 21.81 5,961,950 19.42 5,824,516 17.78 Options exercisable at end of year 2,741,033 19.36 3,100,674 18.77 2,708,150 17.32 Weighted-average fair value of options granted $3.99 $6.16 $5.96 The estimated fair value of each option granted was calculated using a Black-Scholes option-pricing model. The weighted average assumptions used inthe model were:

2005 2004 2003 Risk-free interest rate 4.09% 3.79% 3.81%

Expected option life 7.00 yrs. 7.47 yrs. 7.75 yrs.

Expected stock volatility 18.09% 32.79% 39.94%

Dividend yield 3.88% 3.51% 3.48%

72 PPL CORPORATION 2005 ANNUAL REPORT

The following table summarizes information about stock options at December 31, 2005.

Options Outstanding Options Exercisable Weighted-Average Weighted- Weighted-Number Remaining Average Number Average Range of Exercise Prices Outstanding Contractual Life Exercise Prices Exercisable Exercise Price

$ 9.00-$14.99 99,600 3.7 $12.25 99,600 $12.25

$15.00-$19.99 1,719,420 6.6 17.54 1,286,568 17.35

$20.00-$24.99 2,194,612 6.6 22.10 1,354,865 21.80

$25.00-$29.99 1,572,440 9.1 26.66 Total options outstanding had a weighted-average remaining life of 7.2 years at December 31, 2005.

Directors Stock Units Under the Directors Deferred Compensation Plan, stock units are used to

12. Retirement and PIostemplo)'mlent Benefits compensate members of PPL's Board of Directors who are not employees of PPL. Such stock units represent shares of PPL's common stock to which board Pension and Other Postretirement Benefits members are entitled after they cease serving as a member of the Board of PPL and certain of its subsidiaries sponsor various pension and other post-Directors. Board members are also entitled to defer any or all of their cash retirement and postemployment benefit plans. PPL follows the guidance of compensation into stock units. The stock unit accounts of each board member SFAS 87, 'Employers' Accounting for Pensions," and SFAS 106, "Employers' are increased based on dividends paid or other distributions on PPL's common Accounting for Postretirement Benefits Other Than Pensions," and SFAS 112, stock. There were 273,775 stock units outstanding at December 31, 2005. "Employers Accounting for Postemployment Benefits," when accounting for Compensation expense was $2 million for 2005 and insignificant for 2004 these benefits.

and 2003. The majority of PPL's domestic employees are eligible for pension benefits under non-contributory defined benefit pension plans with benefits based on Stock Appreciation Rights length of service and final average pay, as defined by the plans. Employees of WPD uses stock appreciation rights to compensate senior management PPL Montana are eligible for pension benefits under a cash balance pension employees. Stock appreciation rights are granted with a reference price to plan and employees of certain of PPL's mechanical contracting companies are PPL's common stock at the date of grant. These awards vest over a three- eligible for benefits under multi-employer plans sponsored by various unions.

year period and have a 10-year term, during which time employees are entitled The employees of PPL's U.K. subsidiary, WPD, are eligible for benefits from to receive a cash payment of any appreciation inthe price of PPLs common one pension scheme with benefits based on length of service and final average stock over the grant date value. At December 31, 2005, there were 294,060 pay. Retirees of PPL's Latin American subsidiaries may be eligible for coverage stock appreciation rights outstanding. Compensation expense for all periods under government-sponsored and administered programs.

reported was insignificant. PPL and certain of its subsidiaries also provide supplemental retirement benefits to directors, executives and other key management employees through unfunded nonqualified retirement plans.

The majority of employees of PPL's domestic subsidiaries will become eligible for certain health care and life insurance benefits upon retirement through contributory plans. Postretirement benefits under the PPL Retiree Health Plan and PPL Gas Retiree Health Plan are paid from funded VEBA trusts sponsored by the respective companies. Postretirement benefits under the PPL Montana Retiree Health Plan are paid from company assets.

The following disclosures distinguish between PPLs domestic and interna-tional pension plans.

PPL uses a December 31 measurement date for its domestic pension and other postretirement benefit plans and its international pension plans.

PPL CORPORATION 2005 ANNUAL REPORT 73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net periodic pension and other postretirement benefit costs (credits) were:

Pension Benefits Domestic International Other Postretirement Benefits 2005 2004 2003 2005 2004 2003 2005 2004 2003 Service cost $ 56 $ 49 $ 42 $ 17 $ 15 $ 14 $ 7 $ 6 $ 7 Interest cost 114 112 105 150 139 124 26 29 31 Expected return on plan assets (158) (151) (143) (202) (205) (188) (19) (17) (13)

Net amortization and deferral 13 4 (6) 34 11 4 16 19 25 Net periodic pension and postretirement costs (credits) prior to special termination benefits 25 14 (2) (1) (40) (46) 30 37 50 Special termination benefits (a) 9 5 Net periodic pension and postretirement benefit costs (credits) $ 25 $ 14 $ 7 $ 4 $ (40) $ (46) $30 $37 $50 fat The $9million cost of special termination benefits for 2003 was the final cost recorded to complete PPLs 2002 workforce reduction program. See Note 20 for additional information.

The $5million cost of special termination benefits for 2005 was related to the WPD approved staff reduction plan as a result of the merger of its two control rooms, metering reorganization and other staff efficiencies. Additional pension costs were recognized due to early retirement and pension enhancement provisions granted to the employees.

Net periodic pension and other postretirement benefits costs charged (credited) to operating expense, excluding amounts charged to construction and other non-expense accounts, were:

Pension Benefits Domestic International Other Postretirement Benefits 2005 2004 2003 2005 2004 2003 2005 2004 2003 Operating Expenser') $21 $12 $(2) $4 $(36) $(40) $26 $31 $43 (a) The domestic amount for 2003 excludes the $9million cost of special termination benefits, which are included separately on the Statement of Income, within the 'Workforce reduction' charge for that year.

The following assumptions were used in the valuation of the benefit obligations at December 31 and determination of net periodic benefit cost for the years ended December 31.

Pension Benefits Domestic International Other Postretirement Benefits 2005 2004 2003 2005 2004 2003 2005 2004 2003 Discount rate

- obligations 5.70% 5.75% 6.25% 4.75% 5.50% 5.50% 5.70% 5.75% 6.25%

- cost 5.75% 6.25% 6.75% 5.50% 5.50% 5.75% 5.75% 6.25% 6.75%

Rate of compensation increase

- obligations 4.75% 4.00% 4.00% 3.75% 3.75% 3.75% 4.75% 4.00% 4.00%

- cost 4.00% 4.00% 4.00% 3.75% 3.75% 3.75% 4.00% 4.00% 4.00%

Expected return on plan assets ta)

- obligations 8.50% 8.75% 8.75% 8.09% 8.30% 8.30% 8.00% 7.90% 7.80%

- cost 8.75% 8.75% 8.75% 8.30% 8.30% 8.31% 7.90% 7.80% 7.80%

(a)The expected return on plan assets for PPLs Domestic Pension Plans includes a 25 basis point reduction for management fees.

Assumed Health Care Cost Aone-percentage point change inthe assumed health care costs trend rate TrendRates at Vecember 31, 2005 2004 2003 assumption would have the following effects in2005.

Health care cost trend rate assumed for next year One Percentage Point

- obligations 10.0% 10.0% 11.0%

Increase Decrease

- cost 10.0% 11.0% 12.0%

Rate to which the cost trend rate is assumed to Effect on service cost and interest cost components $1 $ (1) decline (the ultimate trend rate) Effect on postretirement benefit obligation 14 (12)

- obligations 5.5% 5.0% 5.0%

- cost 5.0% 5.0% 5.0% The expected long-term rate of return for PPL's domestic pension plans Year that the rate reaches the ultimate trend rate considers the plans' historical experience, but is primarily based on the plans'

- obligations 2011 2010 2010 mix of assets and expectations for long-term returns of those asset classes.

- cost 2010 2010 2010 74 PPL CORPORATION 2005 ANNUAL REPORT

The expected long-term rate of return for PPL's other postretirement benefit The expected rate of return for PPL's international pension plans considers plans is based on the VEBA trusts' mix of assets and expectations for long- that a portfolio largely invested in equities would be expected to achieve an term returns of those asset classes considering that a portion of those assets average rate of return inexcess of a portfolio largely invested in long-term are taxable. bonds. The historical experience has been an excess return of 2%to 4%per annum on average over the return on long-term bonds.

The funded status of the PPL plans was as follows.

Pension Benefits Domestic International Other Postretirement Benefits 2005 2004 2005 2004 2005 2004 Change In Benefit Obligation Benefit Obligation, January 1 $1,969 $1,772 $2,931 $2,474 $485 $512 Service cost 56 49 17 15 7 6 Interest cost 114 112 150 139 26 29 Participant contributions 6 5 7 4 Plan amendments 1 5 16 (47)

Actuarial loss 87 115 233 180 11 17 Special termination benefits 5 Actual expense paid (1)

Net benefits paid (80) (78) (165) (160) (34) (36)

Currency conversion (291) 278 Benefit Obligation, December 31 2,147 1,969 2,891 2,931 518 485 Change In Plan Assets Plan assets at fair value, January 1 1,767 1,653 2,483 2,164 249 219 Actual return on plan assets 191 184 427 232 11 20 Employer contributions 27 9 41 3 25 42 Participant contributions 6 5 7 4 Actual expense paid (1)

Net benefits paid (80) (78) (165) (160) (34) (36)

Currency conversion (252) 239 Plan assets at fair value, December 31 1,905 1,767 2,540 2,483 258 249 Funded Status Funded Status of Plan (242) (202) (351) (448) (260) (236)

Unrecognized actuarial (gain) loss (49) (100) 721 676 156 141 Unrecognized prior service cost 139 154 36 32 35 23 Unrecognized transition assets (18) (23) 61 69 Currency conversion (72) 69 Net amount recognized at end of year $ (170) $ (171) $ 334 $ 329 $ (8) $ (3)

Amounts recognized In the Balance Sheet consist of:

Prepaid benefit cost $ 12 $ 7 $ 334 $ 329 $ 4 $ 8 Accrued benefit liability (182) (178) (12) (11)

Additional minimum liability (40) (37) (545) (635)

Intangible asset 9 9 33 36 Accumulated other comprehensive income (pre-tax) 31 28 472 503 Cumulative translation adjustment 40 96 Netamountrecognizedatendofyear $ (170) $ (171) $ 334 $ 329 $ (8) $ (3)

Total accumulated benefit obligation for defined benefit pension plans $1,883 $1,710 $2,751 $2,789 PPL CORPORATION 2005 ANNUAL REPORT 75

NOTES TO CONSOLII)ATEI) FINANCIAL STATEMENTS Information for pension plans with projected and accumulated benefit obligations inexcess of plan assets follows.

Plans With Projected Benefit Plans With Accumulated Benefit Obligations inExcess of Plan Assets Obligations inExcess of Plan Assets Domestic International Donmestic International 2005 2004 2005 2004 2005 2004 2005 2004 Projected benefit obligation $2,147 $1,969 $2,891 $2,931 $199 $174 $2,891 $2,931 Accumulated benefit obligation 1,883 1,710 2,751 2,789 178 159 2,751 2,789 Fair value of assets 1,905 1,767 2,540 2,483 111 95 2,540 2,483 Other postretirement benefit plans with accumulated postretirement benefit PPLs international pension plan asset allocation and target allocation is obligations in excess of plan assets had accumulated postretirement benefit detailed below.

obligations and fair value of assets of $518 million and $258 million at Percentage of plan assets Target asset December 31, 2005, and $485 million and $249 million at December 31, 2004. at December 31, allocation Asset Category 2005 2004 Plan Assets - Domestic Pension Plans Equity securities 76% 74% 75%

The asset allocation for the PPL Retirement Plan Master Trust and the target Debt securities 21% 22% 23%

allocation, by asset category, is detailed below. Real estate and other 3% 4% 2%

Percentage of plan assets Target asset Total 100% 100% 100%

at December 31, allocation Asset Category 2005 2004 Inconsultation with its investment advisor and with WPD, the group Equity securities 74% 73% 70% trustees of the WPD Group of the ESPS have drawn up a Statement of Debt securities 21% 22% 25% Investment Principles to comply with the requirements of U.K. legislation.

Real estate and other 5% 5% 5% The group trustees' primary investment objective isto maximize invest-Total 100% 100% 100% ment returns within the constraint of avoiding excessive volatility inthe funding position.

The domestic pension plan assets are managed by outsiddeinvestment managers and are rebatanced as necessary to maintain the ta.rget asset alloca- Expected Cash Flows - Domestic Pension and Other tion ranges. PPL's investment strategy with respect to the doimestic pension Postretirement Benefit Plans assets is to achieve a satisfactory risk-adjusted return on ass ets that, incombi- There are no contributions required for PPL's primary domestic pension plan or nation with PPL's funding policy and tolerance for return vola tility, will ensure any of PPL's other domestic subsidiary pension plans. However, PPLs domestic that sufficient dollars are available to provide benefit paymen Is. subsidiaries expect to contribute approximately $37 million to their pension Plan Assets - Domestic Other Postretirement Benefit Plans plans in2006 to ensure future compliance with minimum funding requirements.

PPL sponsors various non-qualified supplemental pension plans for which The asset allocation for the PPL other postretirement benefit plans by asset no assets are segregated from corporate assets. PPL expects to make approxi-category is detailed below.

mately $2 million of benefit payments under these plans in2006.

Perce Wnage of plan assets at December 31, PPL is not required to make contributions to its other postretirement Asset Category 2005 2004 benefit plans but has historically funded these plans inamounts equal to the Equity securities 62% 60% postretirement benefit costs recognized. Continuation of this past practice Debt securities 38% 40% would provide for PPL to contribute $39 million to its other postretirement Total 100% 100% benefit plans in 2006.

The following benefit payments, which reflect expected future service, PP's investment strategy with respect to its other postretirement benefit as appropriate, are expected to be paid and the following federal subsidy obligations is to fund the VEBA trusts with voluntary contribu tions and to payments are expected to be received by the separate plan trusts.

invest ina tax efficient manner utilizing a prudent mix of assets. Based on the Other Postretirement current VEBA and postretirement plan structure, a targeted asset allocation Expected range of 50% to 60% equity and 40% to 50% debt is maintained. Benefit Federal Pension Payment Subsidy Plan Assets - International Pension Plans 2006 $ 83 $ 40 $2 WPD operates three defined benefit plans, the WPD Group segment of the 2007 88 45 2 Electricity Supply Pension Scheme (ESPS), the Western Power Utilities 2008 95 50 2 2009 101 56 2 Pension Scheme and the Infralec 1992 Scheme. The assets of all three schemes 2010 109 61 3 are held separately from those of WPD intrustee-administered funds. 2011-2015 699 389 18 76 PPL CORPORATION 2005 ANNUAL REPORT

Expected Cash Flows - International Pension Plans Certain of PPL Global subsidiaries, including Emel, EC, Elfec and Integra, The pension plans of WPD are subject to formal actuarial valuations every provide limited non-pension benefits to all current employees. All active three years, which are used to determine funding requirements. Future contri- employees are entitled to benefits inthe event of termination or retirement in butions were evaluated inaccordance with the latest valuation performed as of accordance with government-sponsored programs. These plans generally obli-March 31, 2004, inrespect of WPD's principal pension scheme, the ESPS, to gate a company to pay one month's salary per year of service to employees in determine contribution requirements for 2005 and forward. WPD expects to the event of involuntary termination. Under certain plans, employees with five make contributions of approximately $47 million in2006. or more years of service are entitled to this payment inthe event of voluntary The following benefit payments, which reflect expected future service, as or involuntary termination.

appropriate, are expected to be paid by the separate plan trusts. The liabilities for these plans are accounted for under the guidance of Pension EITF 88-1, "Determination of Vested Benefit Obligation for a Defined Benefit 2006 $159 Pension Plan," using what iscommonly referred to as the *shut down" method, 2007 163 where a company records the undiscounted obligation as if it were payable at 2008 167 each balance sheet date. The combined liabilities for these plans at December 31, 2009 171 2005 and 2004, were $10 million and $9million, and are recorded in"Deferred 2010 176 Credits and Noncurrent Liabilities - Other" on the Balance Sheet.

2011-2015 945 Savings Plans Substantially all employees of PP~s domestic subsidiaries are eligible to par- 13. Jointly-Owned Facilities ticipate in deferred savings plans (401(k)s). Contributions to the plans charged At December 31, 2005, subsidiaries of PPL owned interests inthe facilities listed to operating expense approximated $13 million in2005 and 2004 and $11 mil- below. The Balance Sheet includes the amounts noted in the following table.

lion in2003. Electric Construction Ownership Plant in Other Accumulated Work in Employee Stock Ownership Plan Interest Service Properly Depreciation Progress PPL sponsors a non-leveraged ESOP, inwhich substantially all employees, PPL Generation excluding those of PPL Global, PPL Montana, PPL Gas Utilities and the mechani- Generating Stations cal contractors, are enrolled after one year of credited service. Dividends paid Susquehanna 90.00% $4,308 $3,447 $57 on ESOP shares are treated as ordinary dividends by PPL. Under existing Griffith(a) 50.00% 151 Conemaugh 16.25% 199 83 3 income tax laws, PPL is permitted to deduct the amount of those dividends for Keystone 12.34% 100 54 3 income tax purposes and to contribute the resulting tax savings (dividend- Wyman Unit 4 8.33% 15 5 based contribution) to the ESOP. Merrill Creek Reservoir 8.37% $22 14 The dividend-based contribution is used to buy shares of PPL's common (a) A PPL subsidiary has a 50% interest ina partnership that owns the Griffith gas-fired gener-stock and is expressly conditioned upon the deductibility of the contribution ating station. The partnership arrangement is essentially a cost-sharing arrangement, inthat each of the partners has rights to one-half of the plant capacity and energy, and an obligation for federal income tax purposes. Contributions to the ESOP are allocated to to cover one-half of the operating costs of the station. Accordingly, the equity investment is eligible participants' accounts as of the end of each year, based 75% on shares classified as 'Electric Plant inService - Generation" on the Balance Sheet.

held in existing participants' accounts and 25% on the eligible participants' Each PPL Generation subsidiary provided its own funding for its share of compensation.

. Amounts charged as compensation expense for ESOP contributions the facility. Each receives a portion of the total output of the generating stations equal to its percentage ownership. The share of fuel and other operating costs approximated $6 million in2005 and $5 million ineach of 2004 and 2003.

associated with the stations is reflected on the Statement of Income.

These amounts were offset by the dividend-based contribution tax savings In addition to the interests mentioned above, PPL Montana is the operator and had no impact on PPL's earnings.

of the jointly-owned, coal-fired generating units comprising the Colstrip steam ESOP shares outstanding at December 31, 2005, were 8,836,536, or 2% of generation facility. At December 31, 2005 and 2004, PPL Montana had a 50%

total common shares outstanding, and are included inall EPS calculations.

leasehold interest in Colstrip Units 1 and 2 and a 30% leasehold interest in Postemployment Benefits Colstrip Unit 3 under operating leases. See Note 10 for additional information.

Certain PPL subsidiaries provide health and life insurance benefits to disabled PPL Montana's share of direct expenses associated with the operation and employees and income benefits to eligible spouses of deceased employees. maintenance of these facilities is included in the corresponding operating Postemployment benefits charged to operating expenses for 2005 were $8mil- expenses on the Statement of Income. Each joint-owner in these facilities pro-lion, primarily due to an updated valuation for Long Term Disability benefits vides its own financing. As operator of all Colstrip Units, PPL Montana completed in2005, and were not significant in2004 and 2003. invoices each joint-owner for their respective portion of the direct expenses.

The amount due from joint-owners was approximately $7 million and $6 mil-lion at December 31, 2005 and 2004.

PPL CORPORATION 2005 ANNUAL REPORT 77

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2005, NorthWestern owned a 30% leasehold interest in As part of the purchase of generation assets from Montana Power, PPL Colstrip Unit 4.PPL Montana and NorthWestern have a sharing agreement to Montana assumed a power sales agreement, which was still ineffect at govern each party's responsibilities regarding the operation of Colstrip Units 3 December 31, 2005. In accordance with purchase accounting guidelines, PPL and 4,and each party is responsible for 15% of the respective operating and Montana recorded a liability of $7 million as the estimated fair value of the construction costs, regardless of whether a particular cost is specified to Colstrip agreement at the acquisition date. The agreement was re-evaluated under DIG Unit 3 or 4.However, each party is responsible for its own fuel-related costs. Issue C20, *Scope Exceptions: Interpretation of the Meaning of Not Clearly and Closely Related inParagraph 10(b) Regarding Contracts with a Price Adjustment Feature," which changed its fair value and reclassified it as a deriv-

14. Commitments and ative instrument in2003. At December 31, 2005, $5 million was recorded as Contingent Liabilities a component of accumulated other comprehensive loss.

On July 1,2002, PPL Montana began to sell to NorthWestern an aggregate Energy Purchases, Energy Sales and Other Commitments of 450 MW of energy supplied by PPL Montana. Under two five-year agree-EnergyPurchase Commitments ments, PPL Montana is supplying 300 MW of around-the-clock electricity PPL enters into long-term purchase contracts to supply the fuel requirements and 150 MW of unit-contingent on-peak electricity. PPL Montana also makes for generation facilities. These include contracts to purchase coal, emission short-term energy sales to NorthWestern.

allowances, natural gas, oil and nuclear fuel. These contracts extend for terms In 2002, PPL began commercial operations inNew York of its Edgewood through 2019. PPL also enters into long-term contracts for the storage and trans- natural gas-fired generating station and its Shoreham oil-fired generating port of natural gas. These contracts extend through 2014 and 2032, respectively. station. Each of these New York plants has a capacity of 79.9 MW. Initially, the Additionally, PPL enters into long-term contracts to purchase power to meet load Long Island Power Authority contracted to purchase all of Edgewood's capacity requirements. These contracts extend for terms through April 2010. and ancillary services as part of a 3-year power purchase agreement with PPL entered into long-term power purchase agreements with two wind PPL EnergyPlus beginning at commercial operation, and all of Shoreham's project developers to purchase the full output of their facilities when they begin capacity and ancillary services as part of a 15-year power purchase agree-commercial operation. One of the power purchase agreements isfor 50-100 MW ment with PPL EnergyPlus beginning at commercial operation. In2005, and extends for a term of 15 years. The in-service date for this project is under PPL EnergyPlus extended the Edgewood power purchase agreement for an evaluation. The other agreement is for 24 MW and extends for a term of 20 years, additional term that runs through October 2008. The Shoreham power and the project is expected to be inservice in early 2006. purchase agreement remains in effect until 2017.

As part of the purchase of generation assets from Montana Power, PPL As a result of New Jersey's Electric Discount and Energy Competition Montana assumed a power purchase agreement, which was still in effect at Act, the New Jersey Board of Public Utilities authorized and made available December 31, 2005. Inaccordance with purchase accounting guidelines, PPL to power suppliers, on a competitive basis, the opportunity to provide Basic Montana recorded a liability of $58 million as the estimated fair value of the Generation Service (BGS) to all non-shopping New Jersey customers. In agreement at the acquisition date. The liability is being reduced over the term February 2003, PPL EnergyPlus was awarded a 34-month fixed-price BGS of the agreement, through 2010, as an adjustment to "Energy purchases" on contract for a fixed percentage of customer load (approximately 1,000 MW) for the Statement of Income. The unamortized balance of the liability related to the Atlantic City Electric Company (ACE), Jersey Central Power &Light Company agreement at December 31, 2005, was $49 million and is included in"Deferred (JCPL) and Public Service Electric &Gas Company (PSEG). This contract Credits and Other Noncurrent Liabilities - Other" on the Balance Sheet. commenced inAugust 2003. In February 2004, PPL EnergyPlus was awarded In1998, PPL Electric recorded a loss accrual for above-market contracts a 12-month hourly energy price supply BGS contract for a fixed percentage of with NUGs of $854 million, due to its generation business being deregulated. customer load (approximately 450 MW) for ACE, JCPL and PSEG. These con-Effective January 1999, PPL Electric began reducing this liability as an offset tracts commenced inJune 2004 and expired inMay 2005. Inthe first quarter to 'Energy purchases" on the Statement of Income. This reduction is based on of 2005, PPL EnergyPlus was awarded a portion of the Commercial Industrial the estimated timing of the purchases from the NUGs and projected market Energy Pricing tranche, which amounts to approximately 85 MW after expected prices for this generation. The final existing NUG contract expires in 2014. shopping. These 12-month contracts commenced inJune 2005. In February In connection with the corporate realignment in2000, the remaining balance 2006, PPL EnergyPlus was awarded 36-month fixed-price BGS contracts for of this liability was transferred to PPL EnergyPlus. At December 31, 2005, fixed percentages of customer load (an aggregate of approximately 600 MW) the remaining liability associated with the above market NUG contracts was for ACE, JCPL and PSEG. These contracts commence inJune 2006.

$206 million. InJanuary 2004, PPL EnergyPlus began supplying 12.5% of Connecticut Energy Sales Commitments Light &Power Company's (CL&P) Transitional Standard Offer load under a PPL Energy Supply enters into long-term power sales contracts inconnection three-year fixed-price contract. During peak hours, PPL EnergyPlus' obligation with its load-serving activities or associated with certain of its power plants. to supply the Transitional Standard Offer load may reach 625 MW. Additionally, These power sales contracts extend for terms through 2017. All long-term con- inJanuary 2006, PPL EnergyPlus will begin to supply an additional 6.25% of tracts were executed at pricing that approximated market rates, including profit margin, at the time of execution.

78 PPL CORPORATION 2005 ANNUAL REPORT

CL&P's Transitional Standard Offer load under a one-year fixed-price contract. and participated ina strategy whereby Montana Power would sell its generation During peak hours, PPL EnergyPlus' obligation to supply the Transitional assets to PPL Montana without first obtaining Montana Power shareholder Standard Offer load may reach 313 MW. approval, and that PPL Montana has made net profits inexcess of $100 million InDecember 2005 and January 2006, PPL EnergyPlus entered into agree- as the result of this alleged illegal sale. Inthe second claim, plaintiffs request ments with Delmarva Power and Light Company to provide a portion of its full that the court impose a "resulting and/or constructive trust" on both the gener-requirements service from May 2006 through May 2008. ation assets themselves and all profits, plus interest on the amounts subject to the trust. This lawsuit has been pending inthe U.S. District Court of Montana, PPL Montana HydroelectricLicense Commitments Butte Division and the judge has placed this proceeding on hold pending the PPL Montana has 11 hydroelectric facilities and one storage reservoir licensed outcome of certain motions currently before the U.S. Bankruptcy Court for the by the FERC pursuant to the Federal Power Act under long-term licenses.

District of Delaware, the resolution of which may impact this proceeding. PPL Pursuant to Section 8(e) of the Federal Power Act, the FERC approved the cannot predict the outcome of this matter.

transfer from Montana Power to PPL Montana of all pertinent licenses and any amendments inconnection with the Montana APA. NorthWestern CorporationLitigation The Kerr Dam Project license was jointly issued by the FERC to Montana InSeptember 2002, NorthWestern filed a lawsuit against PPL Montana in Power and the Confederated Salish and Kootenai Tribes of the Flathead Montana state court seeking specific performance of a provision inthe Reservation in 1985, and required Montana Power to hold and operate the Montana Power APA concerning the proposed purchase by PPL Montana of a project for 30 years. The license required Montana Power, and subsequently portion of NorthWestern's interest inthe 500-kilovolt Colstrip Transmission PPL Montana as a result of the purchase of the Kerr Dam from Montana System (CTS) for $97 million. In2005, PPL Montana and NorthWestern settled Power, to continue to implement a plan to mitigate the impact of the Kerr the litigation, and PPL Energy Supply recorded a charge of $9million ($6 mil-Dam on fish, wildlife and the habitat. Under this arrangement, PPL Montana lion after tax, or $0.02 per share) in the first quarter of 2005 related to the has a remaining commitment to spend approximately $19 million between settlement agreement. Pursuant to the settlement agreement, all claims of the 2006 and 2015, at which point the tribes have the option to purchase, hold parties inthe litigation were dismissed with prejudice, NorthWestern retained and operate the project. its interest inthe CTS, and PPL Montana paid NorthWestern $9 million in PPL Montana entered into two Memorandums of Understanding (MOUs) October 2005.

with state, federal and private entities related to the issuance in2000 of the MontanaHydroelectric Litigation FERC renewal license for the nine dams for the Missouri-Madison project.

InOctober 2003, a lawsuit was filed against PPL Montana, PPL Services, The MOUs require PPL Montana to implement plans to mitigate the impact Avista Corporation, PacifiCorp and nine John Doe defendants inthe U.S.

of its projects on fish, wildlife and the habitat, and to increase recreational District Court of Montana, Missoula Division, by two residents allegedly acting opportunities. The MOUs were created to maximize collaboration between the ina representative capacity on behalf of the State of Montana. InJanuary 2004, parties and enhance the possibility for matching funds from relevant federal the complaint was amended to, among other things, include the Great Falls agencies. Under this arrangement, PPL Montana has a remaining commitment school districts as additional plaintiffs. In May 2004, the Montana Attorney to spend approximately $35 million between 2006 and 2040.

General filed a motion to allow the State of Montana to intervene as an addi-Legal Matters tional plaintiff inthe litigation. This motion was granted without objection.

PPL and its subsidiaries are involved in numerous legal proceedings, claims The individual plaintiffs, the school districts and the State sought declaratory and litigation inthe ordinary course of business. PPL and its subsidiaries can- judgment, compensatory damages and attorneys fees and costs for use of state not predict the outcome of such matters, or whether such matters may result and/or "school trust" lands by hydropower facilities and to require the defen-inmaterial liabilities. dants to adequately compensate the State and/or the State School Trust fund for full market value of lands occupied. Generally, the suit is founded on allega-Montana PowerShareholders'Litigation tions that the bed of navigable rivers became state-owned property upon InAugust 2001, a purported class-action lawsuit was filed by a group of share-Montana's admission to statehood, and that the use thereof for placement of holders of Montana Power against Montana Power, the directors of Montana dam structures, affiliated structures and reservoirs should, under an existing Power, certain advisors and consultants of Montana Power and PPL Montana.

regulatory scheme, trigger lease payments for use of land underneath. The The plaintiffs allege, among other things, that Montana Power was required to, plaintiffs also sought relief on theories of unjust enrichment, trespass and and did not, obtain shareholder approval of the sale of Montana Power's gener-negligence. No specific amount of damages or future rental value has been ation assets to PPL Montana in1999. Although most of the claims inthe com-claimed by the plaintiffs. The defendants filed separate motions to dismiss the plaint are against Montana Power, its board of directors, and its consultants individual plaintiffs' and school districts' complaint, as well as the complaint and advisors, two claims are asserted against PPL Montana. Inthe first claim, of the State of Montana. In September 2004, the federal court granted the plaintiffs seek a declaration that because Montana Power shareholders did not motions to dismiss the individual plaintiffs' and school districts' complaint but vote on the 1999 sale of generating assets to PPL Montana, that sale "was null denied the similar motions as to the State of Montana's complaint. Following and void ab initio." The second claim alleges that PPL Montana was privy to the federal court's September decision, PPL Montana and the other defendants PPL CORPORATION 2005 ANNUAL REPORT 79

NOTES TO CONSOLIDI)ATEI) FINANCIAL STATE\IENTS filed a motion to dismiss the State of Montana's complaint for lack of diversity things, abuse of market power, manipulation of market prices, unfair trade jurisdiction and also filed a motion to vacate certain portions of the decision. practices and violations of state antitrust laws, and seek other relief, including The federal court granted both of these motions in September 2005. treble damages and attorneys' fees. While PPL's subsidiaries have not been In November 2004, PPL Montana, Avista Corporation and PacifiCorp com- named by the plaintiffs inthese legal proceedings, PPL Montana was named menced an action for declaratory judgment in Montana First Judicial District by a defendant inits cross-complaint ina consolidated court proceeding, Court seeking a determination that no lease payments or other compensation which combined into one master proceeding several of the lawsuits alleging for the hydropower facilities' use and occupancy of streambeds can be collected antitrust violations and unfair trade practices. This generator denies that any by the State of Montana. The State subsequently filed counterclaims and a unlawful, unfair or fraudulent conduct occurred but asserts that, if it is found motion for summary judgment. InFebruary 2005, the individual plaintiffs liable, the other generators and power marketers, including PPL Montana, and school districts who were dismissed from the federal court proceeding, caused, contributed to and/or participated inthe plaintiffs' alleged losses.

along with a state teachers' union, filed a motion to intervene as additional In February 2004, the Montana Public Service Commission initiated a lim-defendants inthis state court proceeding, and also filed a proposed answer ited investigation of the Montana retail electricity market for the years 2000 and counterclaims to be used iftheir motion to intervene is granted. The and 2001, focusing on how that market was affected by transactions involving state court denied this motion to intervene, but has not yet ruled on any of the possible manipulation of the electricity grid inthe western U.S. The investi-the other above-described motions. PPL cannot predict the outcome of gation includes all public utilities and licensed electricity suppliers in Montana, the state court proceeding. as well as other entities that may possess relevant information. Through its subsidiaries, PPL is a licensed electricity supplier inMontana and a wholesale Regulatory Issues supplier inthe western U.S. InJune 2004, the Montana Attorney General CaliforniaISO and Western Markets served PPL Montana and more than 20 other companies with subpoenas Through its subsidiaries, PPL made approximately $18 million of sales to the requesting documents, and PPL Montana has provided responsive documents California ISO during the period from October 2000 through June 2001, of to the Montana Attorney General. As with the other investigations taking place which $17 million has not been paid to PPL subsidiaries. Given the myriad of as a result of the issues arising out of the electricity supply situation in electricity supply problems presently faced by the California electric utilities California and other western states, PPL and its subsidiaries believe that they and the California ISO, PPL cannot predict whether or when itwill receive have not engaged inany improper trading or marketing practices affecting the payment. At December 31, 2005, PPL has fully reserved for possible under-Montana retail electricity market.

recoveries of payments for these sales.

PPL and its subsidiaries believe that they have not engaged inany Regulatory proceedings arising out of the California electricity supply improper trading practices. However, they cannot predict whether, or the extent situation have been filed at the FERC. The FERC has determined that all sellers to which, any PPL subsidiaries will be the target of any additional governmental of energy into markets operated by the California ISO and the California Power investigations or named inother lawsuits or refund proceedings. PPL also can-Exchange, including PPL Montana, should be subject to refund liability for the not predict the outcome of any such lawsuits or proceedings or whether the period beginning October 2, 2000, through June 20, 2001, and initiated an evi-ultimate impact on them of the electricity supply situation inCalifornia and dentiary hearing concerning refund amounts. InApril 2003, the FERC changed other western states will be material.

the manner inwhich this refund liability isto be computed and ordered further proceedings to determine the exact amounts that the sellers, including PPL PJM CapacityLitigation Montana, would be required to refund. InSeptember 2004, the U.S. Court of In December 2002, PPL was served with a complaint against PPL, PPL Appeals for the Ninth Circuit held that the FERC had the additional legal EnergyPlus and PPL Electric filed inthe U.S. District Court for the Eastern authority to order refunds for periods prior to October 2,2000, and ordered District of Pennsylvania by a group of 14 Pennsylvania boroughs that appar-the FERC to determine whether or not itwould be appropriate to grant such ently alleges, among other things, violations of the federal antitrust laws in additional refunds. connection with the pricing of installed capacity inthe PJM daily market during InJune 2003, the FERC took several actions as a result of a number of the first quarter of 2001. These boroughs were wholesale customers of PPL related investigations. The FERC terminated proceedings pursuant to which it Electric. Inaddition, in November 2003, PPL and PPL EnergyPlus were served had been considering whether to order refunds for spot market bilateral sales with a complaint which was filed inthe same court by Joseph Martorano, III made inthe Pacific Northwest, including sales made by PPL Montana, during (d/b/a ENERCO), that also alleges violations of the federal antitrust laws inearly the period December 2000 through June 2001. The FERC also commenced 2001. The complaint indicates that ENERCO provides consulting and energy additional investigations relating to "gaming" and bidding practices during procurement services to clients in Pennsylvania and New Jersey. InSeptember 2000 and 2001, but, to their knowledge, neither PPL EnergyPlus nor PPL 2004, this complaint was dismissed by the District Court, and inJune 2005 the Montana is a subject of these investigations. U.S. Court of Appeals for the Third Circuit denied the plaintiff's appeal.

Litigation arising out of the California electricity supply situation has been Each of the U.S. Department of Justice - Antitrust Division, the FERC and filed inCalifornia courts against sellers of energy to the California ISO. The the Pennsylvania Attorney General conducted investigations regarding PPLs plaintilfs and intervenors inthese legal proceedings allege, among other PJM capacity market transactions inearly 2001 and did not find any reason to take action against PPL.

80 PPL CORPORATION 2005 ANNUAL REPORT

New England Investigation InSeptember 2005, PPL Electric and Exelon Corporation filed a proposed InJanuary 2004, PPL became aware of an investigation by the Connecticut settlement agreement regarding this matter with the FERC. Under the settle-Attorney General and the FERC's Office of Market Oversight and Investigation ment agreement, PPL Electric would pay $33 million plus interest over a four-(OMOI) regarding allegations that natural gas-fired generators located inNew year period to PJM through a new transmission charge that, under applicable England illegally sold natural gas instead of generating electricity during the law, is recoverable from PPL Electric's retail customers. Also, all PJM market week of January 12, 2004. Subsequently, PPL and other generators were served participants would pay approximately $8 million plus interest over a four-year with a data request by OMOI. The data request indicated that PPL was not under period to PJM through a new market adjustment charge. PJM would forward suspicion of a regulatory violation, but that OMOI was conducting an initial amounts collected under the two new charges to PECO. PJM filed comments investigation. PPL has responded to this data request. PPL also has responded with the FERC neither supporting nor opposing the settlement agreement, and to data requests of ISO New England and data requests served by subpoena from the FERC Trial Staff filed comments with the FERC supporting the settlement the Connecticut Attorney General. Both OMOI and ISO New England have issued agreement. Numerous other parties, including PJM market participants, filed preliminary reports finding no regulatory or other violations concerning these comments with the FERC opposing the settlement agreement. The FERC has matters. While PPL does not believe that itcommitted any regulatory or other not yet acted on the proposed settlement agreement.

violations concerning the subject matter of these investigations, PPL cannot PPL cannot be certain of the outcome of this matter or the impact on PPL predict the outcome of these investigations. and its subsidiaries. Some or all of the first quarter 2005 charges for this mat-ter may be reversed ina future period depending on the outcome of this matter, PJM Billing the potential for recovery of any amounts paid as a result of the additional In December 2004. Exelon Corporation, on behalf of its subsidiary, PECO FERC proceedings, the application of the relevant provisions of the energy sup-Energy, Inc. (PECO), filed a complaint against PJM and PPL Electric with the ply agreements between PPL Electric and PPL EnergyPlus and other factors.

FERC alleging that PJM had overcharged PECO from April 1998 through May Depending on these factors, PPL Energy Supply, the parent company of PPL 2003 as a result of an error by PJM inthe State Estimator Model used incon-EnergyPlus, may incur some or all of the costs associated with this matter nection with billing all PJM customers for certain transmission, spot market ina future period.

energy and ancillary services charges. Specifically, the complaint alleges that PJM mistakenly identified PPL Electric's Elroy substation transformer as FERC Market-BasedRate Authority belonging to PECO and that, as a consequence, during times of congestion, InDecember 1998, the FERC issued an order authorizing PPL EnergyPlus to PECO's bills for transmission congestion from PJM erroneously reflected make wholesale sales of electric power and related products at market-based energy that PPL Electric took from the Elroy substation and used to serve PPL rates. Inthat order, the FERC directed PPL EnergyPlus to file an updated mar-Electric's load. The complaint requests the FERC, among other things, to direct ket analysis within three years of the date of the order, and every three years PPL Electric to refund to PJM $39 million, plus interest of approximately thereafter. PPL EnergyPlus filed its initial updated market analysis in December

$8 million, and for PJM to refund these same amounts to PECO. InFebruary 2001. Several parties thereafter filed interventions and protests requesting that 2005, PPL Electric filed its response with the FERC stating that neither PPL PPL EnergyPlus be required to provide additional information demonstrating Electric nor any of its affiliates should be held financially responsible or liable that it has met the FERC's market power tests necessary for PPL EnergyPlus to to PJM or PECO as a result of PJM's error. continue its market-based rate authority. PPL EnergyPlus has responded that In April 2005, the FERC issued an Order Establishing Hearing and, the FERC does not require the economic test suggested by the intervenors and Settlement Judge Proceedings (the Order). Inthe Order, the FERC determined that, inany event, it would meet such economic test ifrequired by the FERC.

that PECO is entitled to reimbursement for the transmission congestion InJune 2004, FERC approved certain changes to its standards for granting charges that PECO asserts PJM erroneously billed to itat the Elroy substation. market-based rate authority. As a result of the schedule adopted by the FERC, The FERC set for additional proceedings before a judge the determination of PPL EnergyPlus, PPL Electric, PPL Montana and most of PPL Generation's the amount of the overcharge to PECO and which PJM market participants were subsidiaries were required to file, inNovember 2004, updated analyses dem-undercharged and therefore are responsible for reimbursement to PECO. The onstrating that they should continue to maintain market-based rate authority FERC also ordered procedures before a judge to attempt to reach a settlement under the new standards. PPL made two filings, a Western market-based rate of the dispute. filing for PPL Montana and an Eastern market-based rate filing for most of the PPL recognized an after-tax charge of approximately $27 million (or $0.07 other PPL subsidiaries in the PJM region.

per share) inthe first quarter of 2005 for a loss contingency related to this InSeptember 2005, the FERC issued an order conditionally approving the matter. The pre-tax accrual was approximately $47 million, with $39 million Eastern market-based rate filing. The FERC expressly rejected the concerns included in"Energy purchases" on the Statement of Income, and $8 million in raised by various consumer advocates and industrial customers regarding gen-

"Interest Expense." eration market power of PPL's generation subsidiaries inthe PJM region. The FERC's order required the subsidiaries to make a compliance filing providing PPL CORPORATION 2005 ANNUAL REPORT 81

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS further support that they cannot erect other non-transmission barriers to entry Wallingford Cost-Based Rates into the generation market, and the PPL subsidiaries made this compliance In January 2003, PPL negotiated an agreement with ISO New England that filing inOctober 2005. would declare that four of the five units at PPLs Wallingford, Connecticut facil-Also inSeptember 2005, inan order on PPL's western market-based ity are "reliability must run" units and put those units under cost-based rates.

rate filing, the FERC found that PPL Montana did not pass one of the FERC's This agreement and the cost-based rates are subject to the FERC's approval.

initial screening tests for market power in the Northwestern Energy Control PPL filed a request with the FERC for such approval. PPL requested authority Area, namely the wholesale market share screen. As a result, PPL Montana was for cost-based rates because the current and anticipated wholesale prices in required to make a more detailed filing with the FERC demonstrating that it New England are insufficient to cover the costs of keeping these units available meets the market power tests. Also, the FERC has established a refund effective for operation. In March 2003, PPL filed an application with the New England date of November 8,2005 (for sales made inthe Northwestern Energy Control Power Pool to temporarily deactivate these four units. In May 2003, the FERC Area pursuant to contracts entered into on and after that date), in the event that denied PPL's request for cost-based rates in light of the FERC's changes to the PPL Montana does not pass the FERC's market power tests. The FERC's order market and bid mitigation rules of ISO New England made ina similar case is not a definitive determination that PPL Montana has market power but rather involving generating units owned by NRG Energy, Inc. PPL subsequently has the FERC's mechanism for analyzing market-based rate authority applications explained to the FERC that its changes to the market and bid mitigation rules that require further scrutiny. InOctober 2005, PPL Montana made the more of ISO New England will not provide sufficient revenues to PPL, and PPL con-detailed filing with the FERC, which PPL Montana believes demonstrates that it tinues to seek approval of its cost-based rates. However, PPL has informed cannot exercise generation market power in the Northwestern Energy Control the New England Power Pool that it will not pursue its request to temporarily Area and should be granted market-based rate authority inthat area. The FERC deactivate certain Wallingford units. InAugust 2005, the U.S. Court of Appeals has not yet acted on this more detailed filing. While PPL Montana continues to for the District of Columbia Circuit reversed the FEBC's denial of PPL's request believe that itdoes not have market power inthe Northwestern Energy Control for cost-based rates and remanded the case to the FERC for further consider-Area, itcannot predict the outcome of this proceeding. ation. PPL cannot predict the outcome of this matter.

FERC ProposedRules IRS Synthetic Fuels Tax Credits In July 2002, the FERC issued a Notice of Proposed Rulemaking entitled PPL, through its subsidiaries, has interests intwo synthetic fuel production

'Remedying Undue Discrimination through Open Access Transmission Service facilities: the Somerset facility located inPennsylvania and the Tyrone facility and Standard Electricity Market Design." The proposed rule contained a pro- located in Kentucky. PPL receives tax credits pursuant to Section 29 of the posed implementation date of July 31, 2003. This far-reaching proposed rule Internal Revenue Code based on the sale of synthetic fuel from these facilities purported to establish uniform transmission rules and a standard market to unaffiliated third-party purchasers. Section 29 of the Internal Revenue design by, among other things: Code provides tax credits for the production and sale of solid synthetic fuels

• enacting standard transmission tariffs and uniform market mechanisms; produced from coal. Section 29 tax credits are currently scheduled to expire

• monitoring and mitigating "market power"; at the end of 2007.

• managing transmission congestion through pricing and tradable financial To qualify for the Section 29 tax credits, the synthetic fuel must meet three rights; primary conditions: (i) there must be a significant chemical change inthe coal

• requiring independent operational control over transmission facilities; feedstock, (ii)the product must be sold to an unaffiliated entity, and (iii) the

" forming state advisory committees on regional transmission organizations production facility must have been placed inservice before July 1, 1998.

and resource adequacy; and Inaddition, Section 29 provides for the synthetic fuel tax credit to begin to

" exercising FERC jurisdiction over all transmission service. phase-out when the relevant annual reference price for crude oil, which isthe domestic first purchase price (DFPP), falls within a designated range and to be In April 2003, the FERC issued a white paper describing certain modifica-eliminated when the DFPP exceeds the range. The phase-out range is adjusted tions to the proposed rule. The FERC requested comments and held numerous annually for inflation. The DFPP is published by the IRS annually in April for public comment sessions concerning the white paper. tn July 2005, the FERC the prior year and is calculated based on the annual average wellhead price terminated the proposed rule based on its conclusion that the objectives of the per barrel for all unregulated domestic crude oil. Accounting for inflation, PPL proposed rule had been overtaken by other events in the industry, such as the estimates that the 2005 tax credit phase-out would start at a DFPP for the year continuing development of voluntary ISOs and RTOs.

of about $52 per barrel and the tax credit would be totally eliminated at about InNovember 2003, the FERC adopted a proposed rule to require all exist-

$65 per barrel. PPL currently does not expect any phase-out of the synthetic ing and new electric market-based tariffs and authorizations to include provi-fuel tax credit for 2005. Based on current market conditions and given the sions prohibiting the seller from engaging in anticompetitive behavior or the recent increases inand volatility of crude oil prices, PPL cannot predict the exercise of market power. The FERC order adopts a list of market behavior rules final DFPP for crude oil for 2006 and 2007 or inflation for those years that that apply to all electric market-based rate tariffs and authorizations, including affects the determination of the phase-out range of the tax credit.

those of PPL EnergyPlus and any other PPL subsidiaries that hold market-based rate authority. PPL does not expect this rule to have a significant impact on its subsidiaries.

82 PPL CORPORATION 2005 ANNUAL REPORT

PPL has entered into economic hedge transactions that serve to mitigate

• The FERC will establish incentives for transmission companies, such as per-some of the earnings and cash flow impact of increases in crude oil prices for formance-based rates, recovery of the costs to comply with reliability rules 2006 and 2007, with the mark-to-market value of these hedges reflected in and accelerated depreciation for investments intransmission infrastructure.

"Energy-related businesses" revenues on the Statement of Income.

• The Price Anderson Amendments Act of 1988, which provides the framework Nonetheless, ifthe price of crude oil remains at, or increases above, current for nuclear liability protection, will be extended by twenty years to 2025.

price levels in2006 or 2007, PPL's expected synthetic fuel tax credits for either

• Federal support will be available for certain clean coal power initiatives, or both of those years could be significantly reduced. Based on forecasted oil nuclear power projects and renewable energy technologies.

prices and other market factors for 2006 and 2007, PPL will evaluate its syn-The implementation of the 2005 Energy Act requires proceedings at the thetic fuel production levels and operations.

state level and the development of regulations by the FERC, the DOE and other APPL subsidiary owns and operates the Somerset facility. InNovember federal agencies, some of which have been finalized. PPL cannot predict when 2001, PPL received a private letter ruling from the IRS pursuant to which, all of these proceedings and regulations will be finalized.

among other things, the IRS concluded that the synthetic fuel produced at the PPL cannot predict with certainly the impact of the 2005 Energy Act and Somerset facility qualifies for Section 29 tax credits. The Somerset facility any related regulations on PPL and its subsidiaries.

uses the Covol technology to produce synthetic fuel, and the IRS issued the private letter ruling after its review and approval of that technology. Inreliance Environmental Matters - Domestic on Ihis private letter ruling, PPL has sold synthetic fuel produced at the Due to the environmental issues discussed below or other environmental mat-Somerset facility resulting inan aggregate of approximately $267 million of ters, PPL subsidiaries may be required to modify, replace or cease operating tax credits as of December 31, 2005. certain facilities to comply with statutes, regulations and actions by regulatory PPL owns a limited partnership interest inthe entity that owns and oper- bodies or courts. In this regard, PPL subsidiaries also may incur capital expen-ates the Tyrone facility. InApril 2004, this entity received a private letter ruling ditures or operating expenses inamounts which are not now determinable, from the IRS. Similar to its conclusions relating to the Somerset facility, the but could be significant.

IRS concluded that the synthetic fuel to be produced at the Tyrone facility qual- Air ifies for Section 29 tax credits. In reliance on this private letter ruling, this The Clean Air Act deals, in part, with acid rain, attainment of federal ambient entity has sold synthetic fuel produced at the Tyrone facility resulting in an ozone standards, fine particulate matter standards and toxic air emissions and aggregate of approximately $60 million of fax credits as of December 31, 2005. visibility inthe U.S. Amendments to the Clean Air Act, although not presently The Tyrone facility began commercial operation inthe Ihird quarter of 2004, under consideration, are likely to continue to be brought up for consideration in after being relocated to Kentucky from Pennsylvania. the U.S. Congress. Past proposed amendments would have required significant PPL also purchases synthetic fuel from unaffiliated third parties, at prices further reductions inemissions of nitrogen oxide and sulfur dioxide and reduc-below the market price of coal, for use at its coal-fired power plants. tions inemissions of mercury beyond the reductions discussed below.

InOctober 2003, it was reported that the U.S. Senate Permanent Citing its authority under the Clean Air Act, the EPA has developed new Subcommittee on Investigations, of the Committee on Governmental Affairs, standards for ambient levels of ozone and fine particulates in the U.S. These had begun an investigation of the synthetic fuel industry and its producers. standards have been upheld following court challenges. To facilitate attainment That investigation is ongoing. PPL cannot predict when the investigation will of these standards, the EPA has promulgated the Clean Air Interstate Rule be completed or the potential results of the investigation.

(CAIR) for 28 midwestern and eastern states, including Pennsylvania, to EnergyPolicy Act of 2005 reduce national sulfur dioxide emissions by about 50% by 2010 and to extend InAugust 2005, President Bush signed into law the Energy Policy Act of the current seasonal program for nitrogen oxide emission reductions to a year-2005 (the "2005 Energy Act"). The 2005 Energy Act is comprehensive legisla- round program starting in2009. The CAIR requires further reductions, starting tion that will substantially affect Ihe regulation of energy companies. The Act in2015, in sulfur dioxide and nitrogen oxide of 30% and 20%, respectively, amends federal energy laws and provides the FERC with new oversight respon- from 2010 levels. The CAIR allows these reductions to be achieved through sibilities. Among the important changes to be implemented as a result of this cap-and-trade programs. Pennsylvania and Montana have not challenged the legislation are: CAIR, but the rule has been challenged by several states and environmental

" The Public Utility Holding Company Act of 1935, or PUHCA, will be repealed groups as not being sufficiently strict, and by industry petitioners as being too effective six months after the 2005 Energy Act isenacted. PUHCA signifi- strict. Inaddition, several Canadian environmental groups have petitioned the cantly restricted mergers and acquisitions in the electric utility sector. EPA under the Clean Air Act to revise the CAIR to require deeper reductions in

" The FERC will appoint and oversee an electric reliability organization to sulfur dioxide and mercury emissions.

establish and enforce mandatory reliability rules regarding the bulk power system.

PPL CORPORATION 2005 ANNUAL REPORT 83

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Inorder to continue meeting existing sulfur dioxide reduction requirements PPL and other energy companies and industry groups oppose state-of the Clean Air Act, PPL is proceeding with the installation of sulfur dioxide specific regulations that are more stringent than the current federal rules and scrubbers at its Montour Units 1 and 2 and Brunner Island Unit 3 by 2008, and regulations regarding nitrogen oxide, sulfur dioxide and mercury emissions.

also plans to install a scrubber at Brunner Island Units 1 and 2 by 2009. Based PPL cannot predict whether more stringent regulations will ultimately be on expected levels of generation, emission allowance shortfalls that would other- adopted inPennsylvania or Montana. The additional costs to comply with any wise occur without significant additional purchases of allowances and projected such regulations are not now determinable, but could be significant.

emission allowance prices, PPL has determined that itis more economic to install In addition to the above rules, the Clean Air Visibility Rule was issued by these scrubbers than to purchase significant additional emission allowances. the EPA on June 15, 2005, to address regional haze or regionally-impaired PPL's current installation plan for the scrubbers and other pollution control visibility caused by multiple sources over a wide area. The rule defines Best equipment (primarily aimed at sulfur dioxide and nitrogen oxide emissions Available Retrofit Technology requirements for electric generating units, reduction) from 2005 to 2010 reflects a cost of approximately $1.5 billion. including presumptive limits for sulfur dioxide and nitrogen oxide controls Also citing its authority under the Clean Air Act, the EPA has finalized for large units. The EPA has stated that this rule will not require reductions in mercury regulations that affect coal-fired plants. These regulations establish sulfur dioxide or nitrogen oxide beyond those required by CAIR. At this time, an emission trading program to take effect beginning January 2010, with a sec- PPL cannot predict whether the Pennsylvania DEP will require additional ond phase to take effect in 2018. At the same time that itfinalized these mer- reductions beyond the visibility requirements established through CAIR. Ifthe cury regulations, the EPA determined that it currently does not need to regulate Pennsylvania DEP establishes regulations to require additional reductions, the nickel emissions from oil-fired units. PPL is still assessing what measures it additional costs to comply with such regulations, which are not now determin-will need to take to comply with the mercury regulations. PPL expects that the able, could be significant. Instates like Montana that are not within the CAIR scrubbers to be installed at Montour and Brunner Island will provide mercury region, the need for and costs of additional controls as a result of this new rule removal co-benefits. However, PPL believes that itmay need to take additional are not now determinable, but could be significant.

measures to comply with the 2010 requirements of the EPA's mercury regula- In1999, the EPA initiated enforcement actions against several utilities, tions and that itwill need to take additional measures to comply with the 2018 asserting that older, coal-fired power plants operated by those utilities have, requirements. The capital costs to PPL of complying with these new mercury over the years, been modified inways that subject them to more stringent "New regulations are not now determinable, but could be significant. Based on pre- Source" requirements under the Clean Air Act. The EPA subsequently issued liminary industry estimates, the costs are expected to exceed $150 million. notices of violation and commenced enforcement activities against other utilities.

Pennsylvania and ten other states have challenged the new EPA mercury However, inthe past several years, the EPA has shifted its position on New regulations inthe D.C. Circuit Court of Appeals as not being sufficiently strict. Source Review. In 2003, the EPA issued changes to its regulations that clari-The Pennsylvania Environmental Quality Board (PaEQB) has accepted a peti- fied what projects are exempt from "New Source* requirements as routine tion filed by PennFuture, an environmental citizens organization, requesting the maintenance and repair. However, these regulations have been stayed by the PaEQB to develop mercury rules that would require by 2008 a level of mercury U.S. Court of Appeals for the District of Columbia Circuit. PPL istherefore reduction that would be more stringent than the level required by 2018 under continuing to operate under the 'New Source" regulations as they existed prior the EPA's mercury regulations. In addition, the Ozone Transport Commission to the EPA's 2003 clarifications.

(consisting of Pennsylvania and 11 other states and the District of Columbia) InOctober 2005, the EPA proposed changing its rules on how to determine has passed a resolution calling for reductions in sulfur dioxide, nitrogen oxide whether a project results inan emissions increase and istherefore subject to and mercury emissions that are more stringent than those under CAIR and the review under the *New Source" regulations. The EPA's proposed tests are EPA's mercury regulations. The Pennsylvania DEP (which works with the consistent with the position of energy companies and industry groups and, if PaEQB to develop Pennsylvania environmental regulations) has initiated a pro- adopted, would substantially reduce the uncertainties under the current cess to develop mercury regulations that are expected to be more stringent regulations. PPL cannot predict whether these proposed new tests will be than the EPAs regulations but different from those requested by PennFuture, adopted. In addition to proposing these new tests, the EPA also announced in and it also has indicated support for developing more stringent regulations October 2005 that itwill not bring new enforcement actions with respect to for reductions insulfur dioxide and nitrogen oxide. Aproposed rule is expected projects that would satisfy the proposed new tests or the EPA's 2003 clarifica-by mid-2006. tions referenced above. Accordingly, PPL believes that it is unlikely that the As a result of a petition to initiate state-specific rulemaking for mercury EPA will follow up on the information requests that had been issued to PPL emissions that was filed by a coalition of environmental and other public Montana's Corette and Colstrip plants by EPA Region VIII in2000 and 2003, interest groups with the Montana Board of Environmental Review (BER) in respectively, and to PPL Generation's Martins Creek plant by EPA Region IIIin September 2005, the Montana Department of Environmental Quality (DEQ) 2002. However, states and environmental groups also have been bringing is developing a rule to recommend to the BER. The DEG has circulated to enforcement actions alleging violations of "New Source" requirements by coal-certain parties, including PPL Montana, a preliminary proposed rule that fired plants, and PPL is unable to predict whether such state or citizens PPL Montana is evaluating. The rule presently is expected to be formally enforcement actions will be brought with respect to any of its affiliates' plants.

proposed to the BER in March 2006.

84 PPL CORPORATION 2005 ANNUAL REPORT

The New Jersey DEP and some New Jersey residents raised environmental dioxide emissions. The Bush administration is promoting a voluntary carbon concerns with respect to the Martins Creek plant, particularly with respect to dioxide reduction program, called the Climate VISION program. In support of sulfur dioxide emissions and the opacity of the plant's plume. These issues this program, the electric power industry has committed to reducing its green-were raised inthe context of an appeal by the New Jersey DEP of the Air house gas emission intensity levels (measured as tons of carbon dioxide Quality Plan Approval issued by the Pennsylvania DEP to PPL's Lower Mt. equivalent against electric power production inMWh) by 3%to 5%by the Bethel generating plant. In October 2003, PPL finalized an agreement with the 2010 to 2012 period. Furthermore, inDecember 2005, seven northeastern New Jersey DEP and the Pennsylvania DEP pursuant to which PPL will reduce states (New York, Connecticut, Delaware, Maine, New Hampshire, New Jersey sulfur dioxide emissions from its Martins Creek power plant. Under the agree- and Vermont) signed an MOU establishing a cap and trade program commenc-ment, PPL Martins Creek will shut down the plant's two coal-fired generating ing inJanuary 2009 for stabilization of carbon dioxide emissions, at base units by September 2007 and may repower them any time after shutting them levels established in2005, from electric power plants larger than 25 MW in down so long as itfollows all applicable state and federal requirements, includ- capacity. This MOU also provides for a 10% reduction incarbon dioxide emis-ing installing the best available pollution control technology. Pursuant to the sions from the base levels by the end of 2018. Increased pressure for carbon agreement, PPL Martins Creek began reducing the fuel sulfur content for the dioxide emissions reduction also is coming from investor organizations and coal units as well as the plant's two oil-fired units inJune 2004. The agreement the international community.

also calls for PPL to donate to a non-profit organization 70% of the excess Pennsylvania and Montana have not, at this time, established any formal emission allowances and emission reduction credits that result from shutting programs to address carbon dioxide and other greenhouse gases. PPL has down or repowering the coal units. Some of these donations have already been conducted an inventory of its carbon dioxide emissions and is continuing to made to the Pennsylvania Environmental Council. As a result of the agreement, evaluate various options for reducing, avoiding, off-setting or sequestering its the New Jersey DEP withdrew its challenge to the Air Quality Plan Approval for emissions. IfPennsylvania or Montana develop regulations imposing manda-the Lower Mt. Bethel facility. The agreement will not result in material costs to tory reductions of carbon dioxide and other greenhouse gases on generation PPL. The agreement does not address the issues raised by the New Jersey DEP facilities, the cost to PPL of such reductions could be significant.

regarding the visible opacity of emissions from the oil-fired units at the Martins InJune 2005, PPL Montour, along with 20 other companies with coal-tired Creek plant. Similar issues also are being raised by the Pennsylvania DEP. PPL generating plants, was named as a defendant ina toxic-tort, purported class-is currently negotiating the matter with the Pennsylvania DEP. Ifit is deter- action lawsuit filed inthe Ontario Superior Court of Justice. The complaint mined that actions must be taken to address the visible opacity of these emis- alleged damages inthe approximate amount of Canadian $49 billion (approxi-sions, such actions could result incosts that are not now determinable, but mately $42 billion at current exchange rates), along with continuing damages could be significant. inthe amount of Canadian $4.1 billion (approximately $3.5 billion at current Inaddition to the opacity concerns raised by the New Jersey DEP, PPL exchange rates) per year and punitive damages of Canadian $1 billion (approx-and the Pennsylvania DEP were engaged in litigation relating to the opacity imately $858 million at current exchange rates), along with such other relief of emissions from the Montour plant. That litigation now has been resolved. as the court deems just. However, the deadline for serving the complaint on The settlement does not impose any material costs. PPL Montour now has expired. PPL does not believe that the complaint was In December 2003, PPL Montana, as operator of the Colstrip facility, served on any of the defendants, and it is not clear whether the plaintiffs received an Administrative Compliance Order (AGO) from the EPA pursuant intend to pursue this action.

to the Clean Air Act. The ACO alleges that Units 3 and 4 of the facility have Water/Waste been in violation of the Clean Air Act permit at Colstrip since 1980. The permit InAugust 2005, a leak from a disposal basin containing fly ash and water required Colstrip to submit for review and approval by the EPA an analysis used inconnection with the operation of the two 150-MW coal-fired generating and proposal for reducing emissions of nitrogen oxide to address visibility units at the Martins Creek generating facility caused the discharge of approxi-concerns upon the occurrence of certain triggering events. The EPA is assert-mately 100 million gallons of water containing ash from the basin onto adjacent ing that regulations itpromulgated in 1980 triggered this requirement. PPL roadways and fields, and into a nearby creek and the Delaware River. The leak believes that the ACO is unfounded. PPL is engaged insettlement negotia-was stopped, and PPL has determined that the problem was caused by a failure tions on these matters with the EPA, the Montana DEO and the Northern inthe disposal basin's discharge structure. PPL is continuing to work with the Cheyenne Tribe.

Pennsylvania DEP and other appropriate agencies and consultants to assess Inaddition to the requirements related to emissions of sulfur dioxide, the extent of the environmental damage caused by the ash inthe discharged nitrogen oxide and mercury noted above, there is a growing concern nationally water and to remediate the damage. PPL shut down the two coal-fired generat-and internationally about carbon dioxide emissions. In June 2005, the U.S.

ing units in August 2005 and placed the units back inservice in December Senate adopted a resolution declaring that mandatory reductions incarbon 2005 after completing the repairs and upgrades to the basin and obtaining dioxide are needed. Various legislative proposals are being considered in the Pennsylvania DEP's approval.

Congress, and several states already have passed legislation capping carbon PPL CORPORATION 2005 ANNUAL REPORT 85

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On September 20, 2005, PPL Martins Creek and the Pennsylvania DEP as part of the process to renew the residual waste permits for these basins that were served with notice by the Delaware Riverside Conservancy and several expire within the next three years. The cost of addressing seepages at PPLs citizens of their intention to file a citizens' suit on the basis that the leak from Pennsylvania plants is not now determinable, but could be significant.

the disposal basin at Martins Creek allegedly violated various state and federal InMay 2003, approximately 50 plaintiffs brought an action now pending laws. The Pennsylvania DEP subsequently filed a complaint in Commonwealth at the Montana Sixteenth Judicial District Court, Rosebud County, against PPL court against PPL Martins Creek and PPL Generation, alleging violations of Montana and the other owners of the Colstrip plant alleging property damage various state laws and regulations and seeking penalties and injunctive relief. from seepage from the freshwater and wastewater ponds at Colstrip. PPL The Delaware Riverside Conservancy and several citizens have filed a motion Montana has undertaken certain groundwater investigation and remediation to intervene inthe Pennsylvania DEP's action, which motion includes a class measures at the Colstrip plant to address groundwater contamination alleged action complaint alleging that the fly ash spill caused damages to property by the plaintiffs as well as other groundwater contamination at the plant. These along a 40-mile stretch of the Delaware River. PPL has objected to the inter- measures include offering to extend city water to certain residents who live vention by certain of the intervenors and both PPL and the Pennsylvania DEP near the plant, some of whom are plaintiffs inthe litigation. Beyond the original have objected to the purported class action suit. PPL intends to engage in estimated reserve of $1 million recorded by PPL Montana in2004 (of which settlement discussions to resolve the Pennsylvania DEP action. only an insignificant amount remains at December 31, 2005) for a proposed At this time, PPL has no reason to believe that the Martins Creek leak has settlement of the property damage claims raised in the litigation, for extending caused any danger to human health or any adverse biological impact on the city water and for a portion of the remedial investigation costs, PPL Montana river aquatic life. However, a group of natural resource trustees, along with the may incur further costs based on its additional groundwater investigations and Delaware River Basin Commission, has been conducting an assessment of any any related remedial measures, which costs are not now determinable, but natural resource damages that could have been caused by the Martins Creek could be significant.

leak. PPL expects the trustees and the Delaware River Basin Commission to The Pennsylvania DEP has stated that the temperature of the cooling water seek to recover their costs as well as any damages they determine were caused discharge at the Brunner Island plant must be lowered. The Pennsylvania DEP by the leak. PPL cannot predict when the assessment will be completed but has also stated that itbelieves the plant is inviolation of a permit condition pro-does not expect it to be completed before the end of 2006. hibiting the discharge from changing the river temperature by more than two PPL recognized a $33 million charge inthe third quarter of 2005 and degrees per hour. PPL is discussing these matters with the agency. Depending an additional $15 million charge inthe fourth quarter of 2005 (or a total of on the outcome of these discussions, the plant could be subject to additional

$31 million after tax, or $0.08 per share) inconnection with the current capital and operating costs that are not now determinable, but could be signifi-expected on-site and off-site costs relating to the leak. Approximately $41 mil- cant. Inearly January, PPL received notice from PennFuture (an environmental lion of the total charge, or $27 million after tax, relates to the off-site costs, citizens organization) that they intended to sue PPL for alleged violations of the and the balance of the total charge, $7 million, or $4 million after tax, relates permit condition that prohibits the discharge from changing the river tempera-to the on-site costs. The pre-tax accrual of $48 million was included in 'Other ture by more than two degrees per hour. PPL cannot predict the outcome of this operation and maintenance" on the Statement of Income. PPL cannot predict potential citizens' suit.

the final cost of assessment and remediation of the leak, the outcome of the The EPA has significantly tightened the water quality standard for arsenic.

action initiated by the Pennsylvania DEP, the outcome of the natural resource The revised standard becomes effective in2006. The revised standard may damage assessment, and the exact nature of any other regulatory or other legal result inaction by individual states that could require several PPL subsidiaries actions that may be initiated against PPL or its subsidiaries as a result of the to either further treat wastewater or take abatement action at their power plants, disposal basin leak. PPL also cannot predict the extent of the fines or damages or both. The cost of complying with any such requirements is not now deter-that may be sought in connection with any such actions or the ultimate finan- minable, but could be significant.

cial impact on PPL or its subsidiaries. The EPA finalized requirements in2004 for new or modified water intake Seepages have been detected at active and retired wastewater basins at structures. These requirements affect where generating facilities are built, various PPL plants, including the Montour, Brunner Island and Martins Creek establish intake design standards, and could lead to requirements for cooling generating facilities. PPL has completed an assessment of some of the seep- towers at new and modified power plants. Another new rule that was finalized ages at the Montour and Brunner Island facilities and isworking with the in2004 addresses existing structures. PPL does not believe that either of these Pennsylvania DEP to implement abatement measures for those seepages. rules will impose material costs on PPL subsidiaries. However, six northeast-PPL is continuing to conduct assessments of other seepages at the Montour ern states have challenged the new rules for existing structures as being inade-and Brunner Island facilities as well as seepages at the Martins Creek facility quate. Ifthis challenge is successful, it could result inthe EPA establishing to determine the appropriate abatement actions. PPL plans to comprehensively stricter standards for existing structures that could impose significant costs address issues related to wastewater basins at all of its Pennsylvania plants, on PPL subsidiaries.

86 PPL CORPORATION 2005 ANNUAL REPORT

Superfund and Other Remediation Under the Pennsylvania Clean Streams Law, subsidiaries of PPL In1995, PPL Electric and PPL Generation and, in1996, PPL Gas Utilities Generation are obligated to remediate acid mine drainage at former mine sites entered into consent orders with the Pennsylvania DEP to address a number and may be required to take additional measures to prevent potential acid mine of sites that were not being addressed under another regulatory program such drainage at previously capped refuse piles. One PPL Generation subsidiary is as Superfund, but for which PPL Electric, PPL Generation or PPL Gas Utilities pumping and treating mine water at two mine sites. Another PPL Generation may be liable for remediation. This may include potential PCB contamination subsidiary is installing passive wetlands treatment at a third site, and the at certain PPL Electric substations and pole sites; potential contamination at a Pennsylvania DEP has suggested that itmay require that PPL Generation sub-number of coal gas manufacturing facilities formerly owned or operated by PPL sidiary to pump and treat the mine water at that third site. At December 31, Electric; oil or other contamination that may exist at some of PPL Electric's for- 2005, a PPL Energy Supply subsidiary had accrued $28 million to cover the mer generating facilities; and potential contamination at abandoned power costs of pumping and treating groundwater at the two mine sites for 50 years plant sites owned by PPL Generation. This may also include former coal gas and for operating and maintaining passive wetlands treatment at the third site.

manufacturing facilities and potential mercury contamination from gas meters In1999, the Montana Supreme Court held infavor of several citizens' and regulators at PPL Gas Utilities' sites. groups that the right to a clean and healthful environment is a fundamental Since the PPL Electric Consent Order expired on January 31, 2005, right guaranteed by the Montana Constitution. The court's ruling could result and since only four sites remained, PPL has negotiated a new consent order in significantly more stringent environmental laws and regulations, as well as and agreement (COA) with the Pennsylvania DEP that combines both PPL an increase incitizens' suits under Montana's environmental laws. The effect Electric's and PPL Gas Utilities' consent orders into one single agreement. on PPL Montana of any such changes inlaws or regulations or any such As of December 31, 2005, PPL Electric and PPL Gas Utilities have 144 sites increase inlegal actions is not currently determinable, but could be significant.

to address under the new combined COA. Additional sites formerly owned Future cleanup or remediation work at sites currently under review, or at or operated by PPL Electric, PPL Generation or PPL Gas Utilities are added sites not currently identified, may result in material additional operating costs to the consent orders on a case-by-case basis. for PPL subsidiaries that cannot be estimated at this time.

At December 31, 2005, PPL Electric and PPL Gas Utilities had accrued Asbestos approximately $2 million and $6 million, respectively, representing the esti-There have been increasing litigation claims throughout the U.S. based on mated amounts each will have to spend for site remediation, including those exposure to asbestos against companies that manufacture or distribute asbes-sites covered by each company's consent orders mentioned above. Depending tos products or that have these products on their premises. Certain of PPL's on the outcome of investigations at sites where investigations have not begun generation subsidiaries and certain of its energy services subsidiaries, such as or have not been completed, the costs of remediation and other liabilities could those that have supplied, may have supplied or installed asbestos material in be substantial. PPL and its subsidiaries also could incur other non-remediation connection with the repair or installation of process piping and heating, venti-costs at sites included inthe consent orders or other contaminated sites, the lating and air conditioning systems, have been named as defendants inasbes-costs of which are not now determinable, but could be significant.

tos-related lawsuits. PPL cannot predict the outcome of these lawsuits or The Pennsylvania DEP has raised concerns regarding potential leakage of whether additional claims may be asserted against its subsidiaries inthe natural gas from the Tioga gas storage field owned by PPL Gas Utilities. The future. PPL does not expect that the resolution of the current lawsuits will have Pennsylvania DEP believes gas is leaking from the storage field and causing a material adverse effect on its results of operations.

methane impacts to nearby residential wells. While PPL Gas has no evidence to confirm or deny the Pennsylvania DEP's position, PPL Gas Utilities has initi- Electricand Magnetic Fields ated a plan to identify and address potential sources of gas leakage from the Concerns have been expressed by some members of the public regarding field. PPL Gas Utilities is discussing the matter with the operator of the field potential health effects of power frequency EMFs, which are emitted by all

• and with the Pennsylvania DER devices carrying electricity, including electric transmission and distribution The EPA isevaluating the risks associated with naphthalene, a chemical lines and substation equipment. Government officials in the U.S. and the U.K.

by-product of coal gas manufacturing operations. As a result of the EPA's have reviewed this issue. The U.S. National Institute of Environmental Health evaluation, individual states may establish stricter standards for water quality Sciences concluded in2002 that, for most health outcomes, there is no evi-and soil clean-up. This could require several PPL subsidiaries to take more dence of EMFs causing adverse effects. The agency further noted that there extensive assessment and remedial actions at former coal gas manufacturing is some epidemiological evidence of an association with childhood leukemia, facilities. The costs to PPL of complying with any such requirements are not but that this evidence isdifficult to interpret without supporting laboratory now determinable, but could be significant. evidence. The U.K. National Radiological Protection Board concluded in2004 PPL CORPORATION 2005 ANNUAL REPORT 87

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS that, while the research on EMFs does not provide a basis to find that EMFs LatinAmerica cause any illness, there is a basis to consider precautionary measures beyond Certain of PPL's affiliates have electric distribution operations inLatin America.

existing exposure guidelines. PPL and its subsidiaries believe the current PPL believes that these affiliates have taken and continue to take measures to efforts to determine whether EMFs cause adverse health effects should con- comply with the applicable laws and governmental regulations for the protec-tinue and are taking steps to reduce EMFs, where practical, inthe design of tion of the environment. There are no material legal or administrative proceed-new transmission and distribution facilities. PPL and its subsidiaries are ings pending against PPL's affiliates inLatin America with respect to unable to predict what effect, if any, the EMF issue might have on their opera- environmental matters.

tions and facilities either inthe U.S. or abroad, and the associated cost, or Other what, ifany, liabilities they might incur related to the EMF issue.

Nuclear Insurance Lower Mt. Bethel PPL Susquehanna isa member of certain insurance programs that provide InAugust 2002, the Northampton County Court of Common Pleas issued a coverage for property damage to members' nuclear generating stations.

decision setting the permissible noise levels for operation of the Lower Mt. Facilities at the Susquehanna station are insured against property damage Bethel facility. PPL appealed the court's decision to the Commonwealth Court, losses up to $2.75 billion under these programs. PPL Susquehanna is also a and an intervenor inthe lawsuit cross-appealed the court's decision. InMay member of an insurance program that provides insurance coverage for the cost 2003, the Commonwealth Court remanded the case to the Court of Common of replacement power during prolonged outages of nuclear units caused by Pleas for further findings of fact concerning the zoning application relating to certain specified conditions. Under the property and replacement power insur-the construction of the facility. In September 2003, the Court of Common Pleas ance programs, PPL Susquehanna could be assessed retroactive premiums in ruled inPPL's favor while also reaffirming its decision on the noise levels, and the event of the insurers' adverse loss experience. At December 31, 2005, this the intervenor appealed this ruling to the Commonwealth Court. InApril 2004, maximum assessment was about $38 million.

the Commonwealth Court affirmed the decision of the Court of Common Pleas, In the event of a nuclear incident at the Susquehanna station, PPL and the Supreme Court of Pennsylvania has denied the intervenor's Petition for Susquehanna's public liability for claims resulting from such incident would Allowance of Appeal. Accordingly, the September 2003 ruling by the Court of be limited to about $10.8 billion under provisions of The Price Anderson Act Common Pleas is final. Amendments under the Energy Policy Act of 2005. PPL Susquehanna is pro-The certificate of occupancy for the Lower Mt. Bethel facility was issued tected against this liability by a combination of commercial insurance and an by the local township zoning officer inApril 2004, and the facility was placed industry assessment program. Inthe event of a nuclear incident at any of the in service in May 2004. In May 2004, the intervenor inthe legal proceedings reactors covered by The Price Anderson Act Amendments under the Energy regarding the facility's permissible noise levels filed an appeal with the town- Policy Act of 2005, PPL Susquehanna could be assessed up to $201 million ship zoning board regarding the issuance of the certificate of occupancy. The per incident, payable at $30 million per year.

hearing on the appeal was held in December 2004, and the intervenor's appeal Guaranteesand Other Assurances was denied. The intervenor appealed the zoning board's decision to the Inthe normal course of business, PPL enters into agreements that provide Northampton County Court of Common Pleas inFebruary 2005, and the Court financial performance assurance to third parties on behalf of certain subsidiar-of Common Pleas denied this appeal inAugust 2005. The intervenor did not ies. Such agreements include, for example, guarantees, stand-by letters of further appeal this matter. Accordingly, the zoning board's decision is final.

credit issued by financial institutions and surety bonds issued by insurance Environmental Matters - International companies. These agreements are entered into primarily to support or enhance U.K. the creditworthiness attributed to a subsidiary on a stand-alone basis or to WPD's distribution businesses are subject to numerous regulatory and statutory facilitate the commercial activities inwhich these subsidiaries enter.

PPL fully and unconditionally guarantees all of the debt securities of PPL requirements with respect to environmental matters. PPL believes that WPD has taken and continues to take measures to comply with the applicable laws and Capital Funding.

governmental regulations for the protection of the environment. There are no material legal or administrative proceedings pending against WPD with respect to environmental matters. See "Environmental Matters - Domestic - Electric and Magnetic Fields" for a discussion of EMFs.

88 PPL CORPORATION 2005 ANNUAL REPORT

PPL provides certain guarantees that are required to be disclosed inaccor- Interpretation of FASB Statements No. 5,57, and 107 and Rescission of dance with FIN 45, "Guarantor's Accounting and Disclosure Requirements for FASB Interpretation No. 34." The table below details guarantees provided as Guarantees, Including Indirect Guarantees of Indebtedness of Others, an of December 31, 2005.

Recorded Liability at Exposure at December 31, December 31, Expiration 2005 2004 2005(a) Date Description Residual value guarantees of $1 $85 2006 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 trom 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 apiece 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 is2006, equipment of similar value isgenerally leased and guaranteed on an ongoing basis.

WPD LLP guarantee of 82 2027 WPD LLP guarantees all of the obligations of SIUK Capital Trust I,an unconsolidated wholly owned obligations under SIUK Capital financing subsidiary of WPD LLP, under its trust preferred securities. The exposure at December 31, Trust I preferred securities 2005, reflects principal payments only. See Note 22 for further discussion.

Support agreements to guarantee 9 2007 PPL Generation has entered into certain partnership arrangements for the sale of coal to third partnerships' obligations for the parties. PPL Generation also has executed support agreements for the benefit of these third-party sale of coal purchasers pursuant to which itguarantees the partnerships' obligations in an amount up to its pro rata ownership interest in the partnerships.

Retroactive premiums under 38 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 Price- 201 This is the maximum amount PPL Susquehanna could be assessed for each incident at any of the Anderson Act Amendments under nuclear reactors covered by this Act. See "Nuclear Insurance" for additional information.

The Energy Policy Act of 2005 Contingent purchase price $11 33 2007 Certain agreements relating to the purchase of ownership interests insynfuel projects contain payments to former owners of provisions that require certain PPL Energy Supply subsidiaries to make contingent purchase price synfuel 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 is not explicitly stated inthe related agreements.

Indemnifications for entities in 262 2008 to 2012 Inconnection with the liquidation of wholly owned subsidiaries that have been deconsolidated upon 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 otthe entities placed into liquidation. In some cases, the indemnifications are limited to a maximum amount that is based 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 is not explicitly stated inthe agreements.

The indemnifications generally expire two to seven years subsequent to the date of dissolution of the entities. The exposure noted is only for those cases inwhich the agreements provide for a spe-cific limit on the amount of the indemnification, and the expiration date was based on an estimate of the dissolution date of the entities.

WPD guarantee of pension and $4 41 2017 As a result of the privatization of the utility industry inthe U.K., certain electric associations' other obligations of unconsoli- roles and responsibilities were discontinued or modified. As a result, certain obligations, primarily dated entities pension-related, associated with these organizations have been guaranteed by the participating members. Costs are allocated lo the members based on predetermined percentages as outlined inspecific agreements. However, ifa member becomes insolvent, costs can be reallocated to and are guaranteed by the remaining members. At December 31, 2005, WPD has recorded an estimated discounted liability based on its current allocated percentage of the total expected costs.

Neither the expiration date nor the maximum amount of potential payments for certain obligations is explicitly stated in the related agreements. Therefore, they have been estimated based on the types of obligations.

Tax indemnification related to 9 2012 Two WPD unconsolidated affiliates were refinanced during the year. Under the terms of the unconsolidated WPD affiliates refinancing, WPD has indemnified the lender against certain tax and other liabilities. Atthis time, WPD believes that the likelihood of such liabilities arising is remote.

WPD guarantee ol an unconsoli- 1 2008 The maximum potential amount of future payments is not explicitly stated in the related agreements.

dated entity's lease obligations PPL CORPORATION 2005 ANNUAL REPORT 89

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Recorded Liability at Exposure at December 31, December 31, Expiration 2005 2004 2005(a) Date Description Indemnifications related to the 1 (b) (b) PPL Energy Supply has provided indemnifications to the purchaser for losses arising out of any sale of the Sundance plant breach of the representations, warranties and covenants under the related transaction documents and for losses arising with respect to liabilities not specifically assumed by the purchaser, including certain pre-closing environmental and tort liabilities. Certain of the indemnifications are triggered only ifthe purchaser's losses reach $1million inthe aggregate, are capped at 50% of the purchase price (or approximately $95 million), and survive for a period of only 24 months after the May 13, 2005, transaction closing. The indemnification provision for unknown environmental and tort liabilities related to periods prior to PPL Energy Suppty's ownership of the real property on which the facility is located are capped at approximately $4million inthe aggregate and survive for a maximum period of five years after the transaction closing.

Guarantee of a portion of an 7 2008 The exposure at December 31, 2005, reflects principal payments only.

unconsolidated entity's debt (a) Represents the estimated maximum potential amount of luture payments that could be required to be made under the guarantee.

(M)PPL Energy Supply's maximum exposure with respect Iothese indemnifications and the expiration of the indemnifications cannot be estimated because, inthe case ofcertain of the indemnification provisions, the maximum potential liability isnot capped by the transaction documents, and the expiration date is based on the applicable statute of limitations.

PPL and its subsidiaries provide other misceltaneous guarantees through " PPL EnergyPlus is party to numerous energy trading or purchase and sale contracts entered into in the normal course of business. These guarantees are agreements pursuant to which the parties indemnify each other for any dam-primarily in the form of various indemnifications or warranties related to ser- ages arising from events that occur while the indemnifying party has title to vices or equipment and vary in duration. The obligated amounts of these guar- the electricity or natural gas. For example, inthe case of the party that is antees often are not explicitly stated, and the overall maximum amount of the delivering the product, such party would be responsible for damages arising obligation under such guarantees cannot be reasonably estimated. Historically, from events occurring prior to delivery.

PPL and its subsidiaries have not made any significant payments with respect " Inconnection with their sales of various businesses, WPD and its affiliates to these types of guarantees. As of December 31, 2005, the aggregate fair have provided the purchasers with indemnifications that are standard for value of these indemnifications related to arrangements entered into subse- such transactions, including indemnifications for certain pre-existing liabili-quent to December 31, 2002, was insignificant. Among these guarantees are: ties and environmental and tax matters. Inaddition, inconnection with

" The companies' or their subsidiaries' leasing arrangements, including those certain of these sales, WPD and its affiliates have agreed to continue their discussed above, contain certain indemnifications in favor of the lessors obligations under existing third-party guarantees, either for a set period of (e.g., tax and environmental matters). time following the transactions or upon the condition that the purchasers

• Inconnection with their issuances of securities, the companies and their make reasonable efforts to terminate the guarantees. Finally, WPD and its subsidiaries engage underwriters, purchasers and purchasing agents to affiliates remain secondarily responsible for tease payments under certain whom they provide indemnification for damages incurred by such parties leases that they have assigned to third parties.

arising from the companies' material misstatements or omissions inthe PPL, on behalf of itself and certain of its subsidiaries, maintains insurance related offering documents. Inaddition, in connection with these securities that covers liability assumed under contract for bodily injury and property offerings and other financing transactions, the companies also engage damage. The coverage requires a $4 million deductible per occurrence and trustees or custodial, escrow or other agents to act for the benefit of the provides maximum aggregate coverage of approximately $175 million. This investors or to provide other agency services. The companies and their sub-insurance may be applicable to certain obligations under the contractual sidiaries typically provide indemnification to these agents for any liabilities arrangements discussed above.

or expenses incurred by them in performing their obligations.

" Inconnection with certain of their credit arrangements, the companies provide the creditors or credit arrangers with indemnification that isstan-dard for each particular type of transaction. For instance, under the credit

15. Related Part)y Transactions agreement for the asset-backed commercial paper program, PPL Electric At both December 31, 2005, and 2004, the Balance Sheet reflected $89 million and its special purpose subsidiary have agreed to indemnify the commercial of 'Long-term Debt with Affiliate Trust." This debt represents obligations of paper conduit, the sponsoring financial institution and the liquidity banks PPL Energy Supply under 8.23% subordinated debentures maturing in for damages incurred by such parties arising from, among other things, a February 2027 that are held by SIUK Capital Trust I, which isa variable interest breach by PPL Electric or the subsidiary of their various representations, entity whose common securities are owned by PPL Energy Supply but which warranties and covenants inthe credit agreement, PPL Electric's activities as is not consolidated by PPL Energy Supply. Interest expense on this obligation servicer with respect to the pledged accounts receivable and any dispute by was $12 million in 2005, $11 million in2004 and $5 million in 2003. See PPL Electric's customers with respect to payment of the accounts receivable. Note 22 for additional information.

90 PPL CORPORATION 2005 ANNUAL REPORT

16. Other Income - Net Management of Market Risk Exposures Market risk is the potential loss PPL may incur as a result of price changes The breakdown of "Other Income - net" was: associated with a particular financial or commodity instrument. PPL is exposed 2005 2004 2003 to market risk from:

Other Income " commodity price risk for energy and energy-related products associated Interest income - IRS settlement $23 with the sale of electricity from its generating assets and other electricity Other interest income $23 16 $12 marketing activities, the purchase of fuel for the generating assets and Sale of CEMAR (Note 9) 23 Equity earnings 3 3 energy trading activities; Realized earnings on nuclear " interest rate risk associated with variable-rate debt and the fair value of decommissioning trust(a) 5 (7) 20 fixed-rate debt used to finance operations, as well as the fair value of debt Hyder-related activity 8 securities invested in by PPLs nuclear decommissioning trust funds; Reduction of reserves for receivables from Enron 10

• foreign currency exchange rate risk associated with investments in affiliates Miscellaneous - Domestic 7 7 9 in Latin America and Europe, as well as purchases of equipment incurren-Miscellaneous - International 7 8 12 cies other than U.S. dollars; and Total 45 73 71 " equity securities price risk associated with the fair value of equity securities Other Deductions invested inby PPL's nuclear decommissioning trust funds.

Impairment of investment intechnology supplier (Note 9) 10 PPL has a risk management policy approved by the Board of Directors to Asset valuation write-down 3 manage market risk and counterparty credit risk. The RMC, comprised of Charitable contributions 4 2 3 senior management and chaired by the Vice President-Risk Management, Realized loss on available-for-sale investment 6 oversees the risk management function. Key risk control activities designed to Non-operating taxes, other than income 1 2 1 Miscellaneous - Domestic 6 6 4 ensure compliance with the risk policy and detailed programs include, but are Miscellaneous - International 5 8 5 not limited to, credit review and approval, validation of transactions and market Other Income - net $29 $39 $55 prices, verification of risk and transaction limits, sensitivity analyses, and daily (a)2004 includes a$(10) million and a $(2) million adjustment to the realized earnings on the portfolio reporting, including open positions, mark-to-market valuations, and nuclear decommissioning trust recorded in2003 and 2004. respectively. The adjustment other risk measurement metrics.

was recorded inthe fourth quarter of 2004, as the adjustment was not material to the finan- PPL utilizes forward contracts, futures contracts, options, swaps and toll-cial statements for any affected periods in2003 or 2004, or as recorded inthe fourth quarter of2004. ing agreements as part of its risk management strategy to minimize unantici-pated fluctuations inearnings caused by commodity price, interest rate and foreign currency volatility. All derivatives are recognized on the balance sheet

17. Derivative Instruments and at their fair value, unless they meet SFAS 133 criteria for exclusion (see dis-cussion in"Accounting Designations" below).

H-edging Activities Fair Value Hedges PPL adopted SFAS 133, "Accounting for Derivative Instruments and Hedging PPL and its subsidiaries enter into financial or physical contracts to hedge a Activities," on January 1,2001. InApril 2003, the FASB issued SFAS 149, portion of the fair value of firm commitments of forward electricity sales and

'Amendment of Statement 133 on Derivative Instruments and Hedging emission allowance positions. These contracts range in maturity through 2007.

Activities," which amended and clarified SFAS 133 to improve financial Additionally, PPL and its subsidiaries enter into financial contracts to hedge accounting and reporting for derivative instruments and hedging activities. fluctuations inthe market value of existing debt issuances. These contracts To ensure that contracts with comparable characteristics are accounted for range inmaturity through 2013. PPL and its subsidiaries also enter into foreign similarly, .SFAS 149 clarified the circumstances under which a contract with currency forward contracts to hedge the exchange rates associated with firm an initial net investment meets the characteristics of a derivative, clarified commitments denominated inforeign currencies. These forward contracts when a derivative contains a financing component, amended the definition of range inmaturity through 2008.

an "underlying" and amended certain other existing pronouncements.

PPL did not recognize significant gains or losses resulting from hedges of Additionally, SFAS 149 placed additional limitations on the use of the firm commitments that no longer qualified as fair value hedges for 2005, 2004 normal purchase or normal sale exception. SFAS 149 was effective for con-or 2003.

tracts entered into or modified and for hedging relationships designated PPL also did not recognize any gains or losses resulting from the ineffec-after June 30, 2003, except certain provisions relating to forward purchases tive portion of fair value hedges for these years.

or sales of when-issued securities or other securities that did not yet exist.

PPL adopted SFAS 149 as of July 1,2003. The adoption of SFAS 149 did Cash Flow Hedges not have a significant impact on PPL or its subsidiaries. PPL and its subsidiaries enter into financial and physical contracts, including forwards, futures and swaps, to hedge the price risk associated with electric, gas and oil commodities. These contracts range inmaturity through 2010.

PPL CORPORATION 2005 ANNUAL REPORT 91

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Additionally, PPL and its subsidiaries enter into financial interest rate swap " Physical electricity-only transactions can receive cash flow hedge treatment contracts to hedge interest expense associated with both existing and antici- ifall of the qualifications under SFAS 133 are met.

pated debt issuances. These interest rate swap contracts range in maturity " Physical capacity-only transactions to sell excess capacity from PPL's through 2016. PPL and its subsidiaries also enter into foreign currency forward generation are considered "normal." These transactions are not recorded in contracts to hedge the cash flows associated with foreign currency-denomi- the financial statements and have no earnings impact until delivery.

nated debt, the exchange rates associated with firm commitments denominated " Any physical energy sale or purchase deemed to be a "market call" is con-inforeign currencies and the net investment of foreign operations. These for- sidered speculative, with unrealized gains or losses recorded immediately ward contracts range inmaturity through 2028. through earnings.

Net investment hedge activity is reported inthe foreign currency transla-

• Financial transactions, which can be settled in cash, cahnot be considered tion adjustments component of other comprehensive income. PPL recorded net "normal" because they do not require physical delivery. These transactions investment hedge losses, after tax, of $6 million and $7 million as of receive cash flow hedge treatment if they lock in the price PPL will receive or December 31, 2005 and 2004. pay for energy expected to be generated or purchased in the spot market.

Cash flow hedges may be discontinued it it is probable that the original Certain financial transactions, specifically FTRs, do not currently qualify for forecasted transaction will not occur by the end of the originally specified time hedge treatment. Unrealized and realized gains and losses from FTRs that period. There were no such events in2005, and there was an insignificant were entered into to offset probable transmission congestion expenses are impact from such an event in 2004. In2003, PPL discontinued certain cash recorded in"Energy purchases" on the Statement of Income.

flow hedges, which resulted inthe reclassification of $7 million of after-tax " Physical and financial transactions for gas and oil to meet fuel and retail tosses from other comprehensive income (reported in "Wholesale energy mar- requirements can receive cash flow hedge treatment if they lock-in the price keting" revenues, "Energy purchases" and "Interest Expense" on the Statement PPL will pay inthe spot market.

of Income). " Option contracts that do not meet the requirements of DIG Issue C15, Hedge ineffectiveness associated with energy derivatives did not have a "Scope Exceptions: Interpreting the Normal Purchases and Normal Sales significant impact in 2005, 2004 and 2003. Exception as an Election," do not receive hedge accounting treatment and Ineffectiveness associated with interest rate and foreign currency deriva- are marked to market through earnings.

tives also was not significant for 2005, 2004 and 2003.

Any unrealized gains or losses on transactions receiving cash flow hedge As of December 31, 2005, the deferred net loss, after tax, on derivative treatment are recorded inother comprehensive income. These unrealized gains instruments in"Accumulated other comprehensive income" expected to be and losses become realized when the contracts settle and are recognized in reclassified into earnings during the next twelve months was $72 million.

income when the hedged transactions occur.

Amounts are reclassified as the energy contracts go to delivery and interest Inaddition to energy-related transactions, PPL enters into financial interest payments are made.

rate and foreign currency swap contracts to hedge interest expense associated This table shows the change in accumulated unrealized gains or losses on with both existing and anticipated debt issuances. PPL and its subsidiaries also derivatives, after tax, inaccumulated other comprehensive income.

enter into foreign currency swap contracts to hedge the fair value of firm com-2005 2004 mitments denominated inforeign currency and net investments inforeign opera-Beginning accumulated derivative gain (loss) $ (63) $ 41 tions. As with energy transactions, the circumstances and intent existing at the Net change associated with current period hedging activities and other (160) (209) time of the transaction determine a contract's accounting designation, which is Net change from reclassification into earnings (23) 105 subsequently verified by an independent internal group on a daily basis. The Ending accumulated derivative loss $(246) $ (63) following is a summary of certain guidelines that have been provided to PPL's finance department, which is responsible for contract designation.

Accounting Designations " Transactions to lock inan interest rate prior to a debt issuance can be desig-For energy contracts that meet the definition of a derivative, the circumstances nated as cash flow hedges. Any unrealized gains or losses on transactions and intent existing at the time that energy transactions are entered into deter- receiving cash flow hedge treatment are recorded inother comprehensive mine their accounting designation, which is subsequently verified by an inde- income and are amortized as a component of interest expense over the life pendent internal group on a daily basis. The following summarizes the of the debt.

electricity guidelines that have been provided to the marketers who are respon- " Transactions entered into to hedge fluctuations inthe value of existing debt sible for contract designation for derivative energy contracts inaccordance can be designated as fair value hedges. To the extent that the change inthe with SFAS 133. fair value of the derivative offsets the change inthe fair value of the existing

• Any wholesale and retail contracts to sell electricity and the related capacity debt, there is no earnings impact, as both changes are reflected in interest that are expected to be delivered from PPL's generation or that do not meet expense. Realized gains and losses over the life of the hedge are reflected the definition of a derivative are considered "normal." These transactions in interest expense.

are not recorded inthe financial statements and have no earnings impact until delivery.

92 PPL CORPORATION 2005 ANNUAL REPORT

" Transactions entered into to hedge the value of a net investment of foreign Credit Concentration operations can be designated as net investment hedges. To the extent that PPL and its subsidiaries enter into contracts with many entities for the the derivatives are highly effective at hedging the value of the net invest- purchase and sale of energy. Many of these contracts are considered a normal ment, gains and losses are recorded inother comprehensive income/loss part of doing business and, as such, the mark-to-market value of these con-and will not be recorded inearnings until the investment is disposed of. tracts is not reflected inthe financial statements. However, the mark-to-market

" Derivative transactions that do not quality for hedge accounting treatment value of these contracts isconsidered when committing to new business from are marked to market through earnings. a credit perspective.

PPL and its subsidiaries have credit exposures to energy trading partners.

Related Implementation Issues The majority of these exposures are the mark-to-market value of multi-year InNovember 2003, the FASB revised the guidance inDIG Issue C15, "Scope contracts for energy sales and purchases. Therefore, ifthese counterparties Exceptions: Normal Purchases and Normal Sales Exception for Certain Option-fail to perform their obligations under such contracts, PPL and its subsidiaries Type Contracts and Forward Contracts inElectricity," to clarify the application would not experience an immediate financial loss but would experience lower of derivative accounting rules for contracts that may involve capacity. The revenues or higher costs infuture years to the extent that replacement sales guidance was effective January 1,2004, for PPL and did not have a significant or purchases could not be made at the same prices as those under the impact on its financial statements.

defaulted contracts.

InJune 2003, the FASB issued DIG Issue C20, "Scope Exceptions:

At December 31, 2005, PPL had a credit exposure of $559 million to Interpretation of the Meaning of Not Clearly and Closely Related in Paragraph energy trading partners. Ten counterparties accounted for 72% of this expo-10(b) Regarding Contracts with a Price Adjustment Feature," which became sure. No other individual counterparty accounted for more than 2%of the effective October 1,2003. DIG Issue C20 addresses a requirement inSFAS 133 exposure. Nine of the ten counterparties had an investment grade credit rating that contracts that qualify for normal treatment must feature pricing that is clearly from S&P. One counterparty was not investment grade but was current on its and closely related to the asset being sold. Diversity inpractice had developed obligations and has posted collateral inthe form of a letter of credit equal to among companies. DIG Issue C20 permits normal treatment ifa price adjust-PPL's exposure.

ment factor, such as a broad market index (e.g., Consumer Price Index), is not PPL and its subsidiaries generally have the right to request collateral from extraneous to both the cost and the fair value of the asset being sold and is not their counterparties inthe event that the counterparties' credit ratings fall significantly disproportionate interms of the magnitude and direction when below investment grade. It isalso the policy of PPL and its subsidiaries to compared with the asset being sold. However, DIG Issue C20 also stated that enter into netting agreements with all of their counterparties to minimize prior guidance did not permit the use of a broad market index to serve as a credit exposure.

proxy for an ingredient or direct factor. Thus, DIG Issue C20 required that con-tracts that had been accounted for as normal, but were not eligible for normal treatment under prior guidance, be reflected on the balance sheet at their fair value, with an offsetting amount reflected inincome as of the date of adoption.

18. Restricted Cash These contracts could then be evaluated under the provisions of DIG Issue C20 The following table details the components of restricted cash by type.

to determine whether they could qualify for normal treatment prospectively. 2005 2004 PPL recorded a pre-tax charge to income of $2 million in the fourth quarter of Current:

2003 to comply with the provisions of DIG Issue C20. Collateral for letters of credit (a) $ 42 $ 42 PPL and its subsidiaries adopted the final provisions of EITF 03-11, Deposits for trading purposes with NYMEX broker 29 "Reporting Realized Gains and Losses on Derivative Instruments That Are Counterparty collateral 9 Subject to FASB Statement No. 133 and Not 'Held for Trading Purposes' as Client deposits 12 5 Miscellaneous 1 3 Defined in Issue No. 02-3," prospectively as of October 1,2003. As a result of Restricted cash - current 93 50 this adoption, non-trading bilateral sales of electricity at major market delivery points are netted with purchases that offset the sales at those same delivery Noncurrent:

Required deposits of WPD (b) 16 37 points. Amajor market delivery point is any delivery point with liquid pricing PPL Transition Bond Company Indenture reserves (c) 32 22 available. The impact of adopting EITF 03-11 was a reduction inboth Restricted cash - noncurrent 48 59 "Wholesale energy marketing" revenues and "Energy purchases" by $290 mil-Total restricted cash $141 $109 lion on the Statement of Income for the year ended December 31, 2005, and a tat Adeposit with a financial institution of funds from the asset-backed commercial paper pro-reduction of $277 million and $105 million for the years ended December 31, gram tofully collateralize $42 million of letters of credit. See Note 8for further discussion 2004 and December 31, 2003, respectively. on the asset-backed commercial paper program.

(b)Includes insurance reserves of $15 million and $37 million at December 31, 2005 and 2004.

(C)Credit enhancement for PPL Transition Bond Company's $2.4 billion Series 1999-1 Bonds to protect against losses or delays inscheduled payments.

PPL CORPORATION 2005 ANNUAL REPORT 93

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19. Goodwill and Other Acquired PPL recorded a final charge of $9million, or $5 million after tax, in2003.

Intangible Assets This final charge included employee terminations associated with implementa-tion of the Automated Meter Reading project.

Goodwill The program provided primarily for enhanced early retirement benefits Goodwill by segment at December 31 was: and/or one-time special pension separation allowances based on an employ-2005 2004 2003 ee's age and years of service. These features of the program were paid from the Supply $ 94 $ 94 $ 93 PPL Retirement Plan pension trust. All of the accrued non-pension benefits International Delivery 921 978 920 have been paid.

Pennsylvania Delivery 55 55 55

$1,070 $1,127 $1,068 In2005, the decrease of $57 million in the International Delivery segment 21. Asset Retirement Obligations was attributable to a decrease of $60 million due to the effect of changes in and Nuclear Decommissioning foreign currency exchange rates, offset by $3 million of adjustments pursuant Asset Retirement Obligations to EITF Issue 93-7, "Uncertainties Related to Income Taxes ina Purchase In connection with the adoption of SFAS 143, "Accounting for Asset Retirement Business Combination." Obligations," effective January 1,2003, PPL recorded a cumulative effect of In2004, the increase of $58 million inthe International Delivery segment adoption that increased net income by $63 million (net of tax of $44 million),

was attributable to an increase of $93 million due to the effect of changes in or $0.18 per share.

foreign currency exchange rates, offset by $35 million consisting primarily of PPL identified various legal obligations to retire long-lived assets, the adjustments pursuant to EITF Issue No. 93-7. largest of which relates to the decommissioning of the Susquehanna plant.

In December2003, the PPL Global Board of Managers authorized the sale PPL identified and recorded other AROs related to significant interim retire-of its investment ina Latin American telecommunications company. As a result ments at the Susquehanna plant, and various environmental requirements of this decision, PPL Global wrote off $6million of goodwill in2003. for coal piles, ash basins and other waste basin retirements at Susquehanna Other Acquired Intangible Assets and other facilities.

The carrying amount and the accumulated amortization of acquired intangible PPL also identified legal retirement obligations that could not be reason-assets were: ably estimated at that time. These items included requirements associated with the retirement of a reservoir and certain transmission assets. These retirement December 31, 2005 December 31,2004 Carrying Accumulated Carrying Accumulated obligations could not be reasonably estimated due to indeterminable settle-Amount Amortization Amount Amortization ment dates.

Land and transmission rights $279 $104 $284 $99 In March 2005, the FASB issued Interpretation No. 47, "Accounting for Emission allowances 176 78 Conditional Asset Retirement Obligations, an Interpretation of FASB Statement Easements 55 56 No. 143." FIN 47 clarifies that an entity is required to recognize a liability for Licenses and other 83 27 67 11 the fair value of a conditional ARO when incurred ifthe fair value of the ARO

$593 $131 $485 $110 can be reasonably estimated. FIN 47 also clarifies when an entity would have Current intangible assets are included in "Current Assets - Other," and sufficient information to reasonably estimate the fair value of an ARO.

long-term intangible assets are included in "Other acquired intangibles" on the PPL adopted FIN 47 effective December 31, 2005. Adoption of the Balance Sheet. new guidance resulted inan increase innet PP&E of $4 million, recognition Amortization expense was approximately $8 million for 2005 and $6 mil- of AROs of $17 million, recognition of deferred tax assets of $5 million and lion for 2004 and 2003. Amortization expense is estimated at $9million per a cumulative effect of adoption that decreased net income by $8 million year for 2006 through 2010. (net of tax of $6 million), or $0.02 per share.

PPL identified several conditional AROs. The most significant of these related to the removal and disposal of asbestos-containing material at various

20. Workforce Reduction generation plants. The fair value of the portion of these obligations that could be reasonably estimated was recorded at December 31, 2005, and resulted in Inan effort to improve operational efficiency and reduce costs, PPL and its AROs of $14 million and a cumulative effect of adoption that decreased net subsidiaries commenced a workforce reduction assessment inJune 2002. The income by $8 million.

program was broad-based and impacted all employee groups, except certain Also, PPL Global identified and recorded conditional AROs that related to positions that are key to providing high-quality service to PPL's electricity treated wood poles and fluid-filled cable, which had an insignificant impact delivery customers. on the financial statements.

94 PPL CORPORATION 2005 ANNUAL REPORT

Inaddition to the AROs that were recorded for asbestos-containing Accretion expense, as determined under the provisions of SFAS 143, material, PPL identified other asbestos-related obligations, but was unable was $19 million in2005, $18 million in2004 and $16 million in2003, and is to reasonably estimate their fair values. These retirement obligations could included in "Other operation and maintenance" on the Statement of Income.

not be reasonably estimated due to their indeterminable settlement dates. The Accrued nuclear decommissioning expenses, as determined under the provi-generation plants, where significant amounts of asbestos-containing material sions of SFAS 143, were $255 million and $236 million at December 31, are located, have been well maintained, and large capital and environmental 2005 and 2004, and are included in"Asset Retirement Obligations" on the investments are being made at these plants. During the last five years, the Balance Sheet.

useful lives of the plants have been reviewed and inmost cases significantly Amounts collected from PPL Electric's customers for decommissioning, extended. See Note 1 for further discussion related to the extension of the less applicable taxes, are deposited inexternal trust funds for investment and useful lives of these assets. Due to these circumstances, PPL management was can only be used for future decommissioning costs. To the extent that the unable to reasonably estimate a settlement date or range of settlement dates actual costs for decommissioning exceed the amounts inthe nuclear decom-for the remediation of all of the asbestos-containing material at the generation missioning trust funds, PPL Susquehanna would be obligated to fund 90%

plants. Ifeconomic events or other circumstances change that enable PPL to of the shortfall.

reasonably estimate the fair value of these retirement obligations, they will Investments inthe trust funds for decommissioning the nuclear plant be recorded at that time. are classified as available-for-sale. The following tables show the fair values The changes in the carrying amounts of AROs were: and gross unrealized gains and gross unrealized losses for the securities 2005 2004 held inthe trust funds.

ARO at beginning of year $257 $242 December 31, 2005 Accretion expense 21 19 Gross Gross Obligations incurred: Unrealized Unrealized Gains Losses Fair Value Adoption of FIN 47 17 Other 3 Cash and cash equivalents $ 10 Obligations settled (4) Equity securities $85 $(2) 295 Debt securities ARO at end of year $298 $257 Government 1 (2) 119 The pro forma ARO liability balances calculated as if FIN 47 had been Other 20 adopted on January 1,2003, would not have been significantly different than Total debt securities 1 (2) 139 those calculated at December 31, 2005. Total $86 $(4) $444 The pro forma income statement effects, including the effects on income December 31,2004 from continuing operations, net income, and basic and diluted EPS, from the Gross Gross application of FIN 47 calculated as ifit had been adopted prior to January 1, Unrealized Unrealized Gains Losses Fair Value 2003, also would have been insignificant for 2003, 2004 and 2005.

Cash and cash equivalents $ 11 Nuclear Decommissioning Equity securities $70 279 The expected cost to decommission the Susquehanna plant is based on a Debt securities Government 1 $(3) 102 2002 site-specific study that estimated the cost to dismantle and decommis-Other 17 sion each unit immediately following final shutdown. PPL Susquehanna's 90%

Total debt securities 1 (3) 119 share of the total estimated cost of decommissioning the Susquehanna plant was approximately $936 million measured in2002 dollars. This estimate Total $71 $(3) $409 includes decommissioning the radiological portions of the station and the cost At December 31, 2005, PPL Susquehanna's nuclear decommissioning of removal of non-radiological structures and materials. trust funds contained investments with an aggregate unrealized loss position of Beginning inJanuary 1999, inaccordance with the PUC Final Order, approximately $4 million, of which $2million was attributable to investments approximately $130 million of decommissioning costs are being recovered from with an aggregate fair value of approximately $69 million that have been ina PPL Electric's customers through the CTC over the 11-year life of the CTC rather continuous unrealized loss position for less than 12 months and $2million than the remaining life of Susquehanna. The recovery includes a return on was attributable to investments with an aggregate fair value of approximately unamortized decommissioning costs. Under the power supply agreements $40 million that have been ina continuous unrealized loss position for between PPL Electric and PPL EnergyPlus, these revenues are passed on to PPL 12 months or longer. The equity securities' unrealized loss position consists EnergyPlus. Similarly, these revenues are passed on to PPL Susquehanna under of 132 investments with an aggregate fair value of $20 million and an average a power supply agreement between PPL EnergyPlus and PPL Susquehanna. unrealized loss of 7%. The largest unrealized loss for any individual invest-ment was $387 thousand, which represents a decrease invalue of only 15%.

PPL CORPORATION 2005 ANNUAL REPORT 95

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The minor decline inthe value of government securities is primarily due to the impact of interest rates as such securities are essentially free of credit risk.

22. Variable Interest Entities Currently, PPL Susquehanna believes it is reasonable to expect these securi- InJanuary 2003, the FASB issued Interpretation No. 46, "Consolidation of ties to recover from this temporary decline in value. Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 clarified that At December 31, 2004, PPL Susquehanna's nuclear decommissioning variable interest entities, as defined therein, that do not disperse risks among trust funds contained investments with an aggregate unrealized loss position of the parties involved should be consolidated by the entity that isdetermined to approximately $3 million, of which $1million was attributable to investments be the primary beneficiary. InDecember 2003, the FASB revised FIN 46 by with an aggregate fair value of approximately $56 million that had been ina issuing Interpretation No. 46 (revised December 2003), "Consolidation of continuous unrealized loss position for less than 12 months, and $2 million Variable Interest Entities, an Interpretation of ARB No. 51," which is known as was attributable to investments with an aggregate fair value of approximately FIN 46(R) and replaces FIN 46. FIN 46(R) does not change the general consol-

$29 million that had been ina continuous unrealized loss position for 12 months idation concepts of FIN 46. Among other things, FIN 46(R) clarifies certain or longer. The minor decline in the value of government securities is primarily provisions of FIN 46 and provides additional scope exceptions for certain types due to the impact of interest rates, as such securities are essentially free of of businesses. FIN 46 applied immediately to variable interest entities created credit risk. after January 31, 2003, and to variable interest entities inwhich an enterprise Of the $139 million of government obligations and other debt securities obtained an interest after January 31, 2003. FIN 46(R) provides that a public held at December 31, 2005, $3million mature within one year, $45 million entity that is not a small business issuer (i)should apply FIN 46 or FIN 46(R) mature after one year through five years, $43 million mature after five years to entities that are considered to be SPEs no later than the end of the first through ten years and $48 million mature after ten years. reporting period that ends after December 15, 2003 and (ii)should apply the The following table shows proceeds from and realized gains and losses provisions of FIN 46(R) to all entities no later than the end of the first reporting on sales of securities held in the trust. period that ends after March 15, 2004.

As permitted by FIN 46(R), PPL and its subsidiaries adopted FIN 46 2005 2004 2003 effective December 31, 2003, for entities created before February 1,2003, Proceeds from sales $223 $113 $140 that are considered to be SPEs. This adoption resulted in the consolidation Gross realized gains 10 3 14 Gross realized losses (a) (12) (17) (3) of the lessors under the operating leases for the Sundance, University Park (a)2004 includes a $(10) million adjustment to the net realized gains recorded in2003. The and Lower Mt. Bethel generation facilities, as well as the deconsolidation of adjustment was included ingross realized losses inthis table. two wholly owned trusts. See below for further discussion. Also, as permitted by FIN 46(R), PPL and its subsidiaries deferred the application of FIN 46 for The proceeds from the sales of securities are reinvested inthe trust. These other entities and adopted FIN 46(R) for all entities on March 31, 2004. The funds, along with deposits of amounts collected from customers, are used t0 adoption of FIN 46(R) did not have a material impact on the results of PPL pay income taxes and fees related to managing the trust. Due to the restricted and its subsidiaries.

nature of these investments, they are not included incash and cash equiva-lents. Additional Entities Consolidated Net unrealized gains associated with current year activities increased accu- In May 2001, a subsidiary of PPL entered into a lease arrangement, as lessee, mulated other comprehensive income by: for the development, construction and operation of commercial power genera-tion facilities. The lessor was created for the sole purpose of owning the facili-2005 2004 2003 ties and incurring the related financing costs. The $660 million operating lease Pre-tax $12 $24 $41 arrangement covered the 450 MW gas-fired Sundance project located inPinal After-tax 7 15 23 County, Arizona and the 540 MW gas-fired University Park project near Net gains (losses) reclassified from accumulated other comprehensive University Park, Illinois. These facilities were substantially complete inJuly income and realized in "Other Income - net" on the Statement of Income were: 2002, at which time the initial lease term commenced. InJune 2004, PPL 2005 2004 2003 subsidiaries purchased the Sundance and University Park generation assets Pre-tax $(2) $(14) $11 from the lessor. In May 2005, a subsidiary of PPL completed the sale of its After-tax (1) (8) 6 Sundance generation assets to Arizona Public Service Company. See Note 9 for further discussion of the sale.

PPL Susquehanna intends to file with the NRC in2006 for license renewals In December 2001, another subsidiary of PPL entered into a $455 million for each of the Susquehanna units to extend their expirations by 20 years, from operating lease arrangement, as lessee, for the development, construction and 2022 to 2042 for Unit 1 and from 2024 to 2044 for Unit 2.

operation of a 582 MW gas-fired combined-cycle generation facility located in Lower Mt. Bethel Township, Northampton County, Pennsylvania. The lessor was created for the sole purpose of owning the facilities and incurring the related financing costs. The initial lease term commenced on the date of com-mercial operation, which occurred in May 2004, and ends inDecember 2013.

The lease financing, which isincluded in"Long-term Debt," is secured by, 96 PPL CORPORATION 2005 ANNUAL REPORT

among other things, the generation facility. At December 31, 2005 and 2004, 23. New Accounting Standards the facility had a carrying value of $459 million and $470 million, net of accumulated depreciation and amortization of $25 million and $10 million, SFAS 123(R) and was included in "Property, Plant and Equipment" and "Other acquired In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-intangibles" on 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, "Accounting for Stock-Based Compensation-Transition and Disclosure."

under the operating leases for the Sundance, University Park and Lower Mt. Bethel generation facilities effective December 31, 2003, since itwas Among other things, SFAS 123(R) eliminates the alternative to use the intrinsic value method of accounting for stock-based compensation. SFAS 123(R) the primary beneficiary of these entities. Upon initial consolidation, PPL requires public entities to recognize compensation expense for awards of recognized a charge of $27 million (net of a tax benefit of $18 million) as equity instruments to employees based on the grant-date fair value of the a cumulative effect of a change inaccounting principle.

awards. SFAS 123(R) was originally effective for public entities that do not file Entities Deconsolidated as small business issuers as of the beginning of the first interim or annual Effective December 31, 2003, PPL deconsolidated PPL Capital Funding Trust I period that begins after June 15, 2005. However, inApril 2005, the SEC issued and SIUK Capital Trust I.These trusts were deconsolidated because PPL was a rule that amended Regulation S-X to change this effective date to the begin-not the primary beneficiary of the trusts under interpretations of FIN 46. The ning of an entity's fiscal year that begins on or after June 15, 2005.

deconsolidation of the trusts did not impact the earnings of PPL. See below for SFAS 123(R) requires public entities to apply the modified prospective a discussion of PPLs interest in the trusts. See Note 15 for a discussion of the application transition method of adoption. Under this application, entities must presentation of the related party debt. recognize compensation expense based on the grant-date fair value for new InMay 2001, PPL and PPL Capital Funding Trust I,a wholly owned financ- awards granted or modified after the effective date and for unvested awards ing subsidiary of PPL, issued $575 million of 7.75% PEPS Units. Each PEPS outstanding on the effective date. Additionally, public entities may choose to Unit consisted of (i) a contract to purchase shares of PPL common stock on or apply modified retrospective application to periods before the effective date of prior to May 2004 and (ii)a trust preferred security of PPL Capital Funding SFAS 123(R). This application may be applied either to all prior years for which Trust Iwith a maturity date of May 2006. The trust's sole source of funds for SFAS 123 was effective or only to prior interim periods inthe year of initial distributions were from payments of interest on 7.29% subordinated notes of adoption of SFAS 123(R). Under modified retrospective application, prior peri-PPL Capital Funding, due May 18, 2006, that were issued to the trust. PPL ods would be adjusted to recognize compensation expense as though stock-guaranteed the payment of principal and interest on the subordinated notes based awards granted, modified or settled incash in fiscal years beginning issued to the trust by PPL Capital Funding. PPL also fully and unconditionally after December 15, 1994, had been accounted for under SFAS 123.

guaranteed all of the trust's obligations under the trust preferred securities. PPL and its subsidiaries adopted SFAS 123(R) effective January 1,2006.

All of the preferred securities of PPL Capital Funding Trust Iwere cancelled in PPL and its subsidiaries will not apply modified retrospective application to 2004, and the trust was terminated inJune 2004. any periods prior to the date of adoption. The adoption of SFAS 123(R) isnot SIUK Capital Trust I issued $82 million of 8.23% preferred securities expected to have a significant impact on PPL and its subsidiaries, since PPL maturing inFebruary 2027 and invested the proceeds in 8.23% subordinated and its subsidiaries adopted the fair value method of accounting for stock-debentures maturing inFebruary 2027 issued by SIUK Limited. Thus, the pre- based compensation, as described by SFAS 123, effective January 1,2003.

ferred securities are supported by a corresponding amount of subordinated debentures. SIUK Limited owned all of the common securities of SIUK Capital SFAS 155 In February 2006, the FASB issued SFAS 155, "Accounting for Certain Hybrid Trust Iand guaranteed all of SIUK Capital Trust I's obligations under the pre-Financial Instruments, an amendment of FASB Statements No. 133 and 140."

ferred securities. InJanuary 2003, SIUK Limited transferred its assets and Among other items, SFAS 155 addresses certain accounting issues surrounding liabilities, including the common securities of SIUK Capital Trust Iand the obligations under the subordinated debentures, to WPD LLR Therefore, WPD securitized financial assets and hybrid financial instruments with embedded derivatives that require bifurcation. PPL and its subsidiaries must adopt SFAS LLP currently guarantees all of SIUK Capital Trust I's obligations under the 155 no later than January 1,2007. PPL and its subsidiaries are currently inthe preferred securities. SIUK Capital Trust I may, at the discretion of WPD LLP, process of performing a complete assessment of SFAS 155. However, since PPL redeem the preferred securities, inwhole or in part, at 104.115% of par begin-and its subsidiaries do not have any interests insecuritized financial assets or ning February 2007 and thereafter at an annually declining premium over par hybrid financial instruments with embedded derivatives that require bifurcation, through January 2017, after which time they are redeemable at par.

the impact from the adoption of SFAS 155 is not expected to be material.

FIN 47 See Note 21 for a discussion of FIN 47, "Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143," and the impact of its adoption.

PPL CORPORATION 2005 ANNUAL REPORT 97

RECONCILIATION OF FINANCIAL MEASURES (UNAUDITED)

Millions ofdollars, except per share data

'Net Income" isa financial measure determined inaccordance with generally 'Earnings from Ongoing Operations" excludes the impact of unusual items.

accepted accounting principles (GAAP). "Earnings from Ongoing Operations" as Earnings from ongoing operations should not be considered as an alternative referenced in this Annual Report, is a non-GAAP financial measure. However, to net income, which isan indicator of operating performance determined in PPL's management believes that it provides useful information to investors, as a accordance with GAAP. PPL believes that earnings from ongoing operations, supplement to the comparable GAAP financial measure. Following is additional although a non-GAAP measure, is also useful and meaningful to investors information on this non-GAAP financial measure, including a reconciliation to because it provides them with PPLs underlying earnings performance as Net Income. another criterion inmaking their investment decisions. PPL's 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*

(Millionsof Dollars) (PerShare - Diluled) 2005 2004 2005 2004 Earnings from Ongoing Operations $ 798 $690 $ 2.08 $1.87 Unusual Items (net of tax):

PJM billing dispute (27) (0.07)

NorthWestern litigation (6) (0.02)

Sale of Sundance plant (47) (0.12)

Stock-based compensation adjustment (5) (0.01)

Ott-site remediation of ash basin leak (27) (0.07)

Conditional asset retirement obligation (8) (0.02)

Impairment of investment in lechnology supplier (6) (0.02)

Sale of CGE (7) (0.02)

Sale of CEMAR 23 0.06 Discontinued operations (2)

Total Unusual Items (120) 8 (0.31) 0.02 Net Income $678 $698 $1.77 $1.89 Reconciliation of Business Segment Earnings from Ongoing Operations and Net Income*

International Pennsylvania For the year endedDecember31, 2005 Supply Delivery Delivery Total Earnings from Ongoing Operations $402 $215 $181 $ 798 Unusual Items (91) (29) (120)

Net Income $311 $215 $152 $678

• See pages 25, 26 and 27 in Management's Discussion and Analysis for financial statement note references for each ot these unusual items for 2005 and 2004.

Key Earnings Forecast Assumptions For 2006 forecast: For 2010 CAGR forecast:

• Increased generation prices under the Pennsylvania PLR contract.

• Expiring wholesale energy contracts replaced by new contracts at current

" Higher generation output. forward prices, most importantly the Pennsylvania PLR contract expiring at

" Expiring wholesale energy contracts replaced by new contracts at current the end of 2009.

forward prices. " Current projections of fuel and emission allowance prices, fuel transportation

" Lower purchased power costs. costs and other costs of operating the business.

" Increased fuel and fuel transportation costs. " Annual increases inthe generation prices under the Pennsylvania

" Higher operation and maintenance expenses. PLR contract.

" Reduced synfuel earnings due to oil prices. " Incremental capacity increases of about 260 megawatts at several existing

" Flat Pennsylvania delivery revenues. generating facilities

" Higher U.S. taxes on foreign earnings.

• Net economic benefits from the installation of scrubbers at the Montour

• Unfavorable foreign currency effects. and Brunner Island generating plants.

" Reduced synfuel earnings due to oil prices and the expiration of synfuel tax credits after 2007.

" Higher fuel costs and operation and maintenance expenses.

98 PPL CORPORATION 2005 ANNUAL REPORT

Glossary of Terms and Abbreviations PPL Corporation and its current and former subsidiaries PPLGas Utilities - PPL Gas Utilities Corporation, a regulated utility subsidiary of PPL that specializes in natural gas distribution, CEMAR- Companhia Energ(tica do Maranhao, a Brazilian transmission and storage services, and the competitive sale of electric distribution company in which PPL Global had a majority propane.

ownership interest until the transfer of this interest in April 2004.

PPL Generation - PPL Generation, LLC, a subsidiary of PPL Energy CGE- Compariia General (ie Electricidad, S.A., a distributor of Supply that owns and operates U.S. generating facilities through electricity and natural gas with other indUstrial segments in Chile various subsidiaries.

and Argentina in which PPL Global had an 8.7% ldirect and indirect minority ownership interest until the sale of this interest in PPL Global- PPL Global, LLC, a stubsidiary of PPL Energy Supply that March 2004. owns and operates international energy businesses that are focused on the regulated distribution of electricity.

DelSur- Distribuidora (Ie Electricidad Del Sur, S.A. (IeC.V, an electric distribution company in El Salvador, a majority of which PPL Maine- PI'L Maine, LLC, a subsidiary of PPL Generation that is owned 1)), EC. owns generating operations in Maine.

EC-Electricidad de Centroamerica, S.A. de C.V, an El Salvadoran PPL Martins Creek- PPL Martins Creek, LLC, a generating subsidiary holding company and the majority owner of DelSur. EC was also of PPL Generation that owns generating operations in Pennsylvania.

the majority owner of El Salvador Telecom, S.A. (Ie CM. until the sale of this company in June 2004. PPL Global has 100% ownership PPLMontana - PPL Montana, LLC, an indirect stubsidiary of PPL of EC. Generation that generates electricity for wholesale sales in Montana and the Pacific Northwest.

Elfec- Empresa de Luz y Fuerza Electrica Cochabamba S.A., a Bolivian electric distribution company in which PPL Global has PPLMontour- PPL Montour, LLC, a generating subsidiary of PPL a majority ownership interest. Generation that owns generating operations in Pennsyl'ania.

Emel - Empresas Emel S.A., a Chilean electric distribution holding PPL Services - PPL Services Corporation, a subsidiary of PPL company in which PPL Global has a majority ownership interest. that provides shared services for PPL and its subsidiaries.

Griffith- a 600 MW gas-fired station in Kingman, Arizona, that is PPL Susquehanna- PPL Susquehanna, LLC, the nuclear generating jointly owned by indirect subsidiaries of PPL Generation and stubsidiary of PPL Generation.

Duke Energy Corporation.

PPLTelcom- PPLTelcom, LLC, an indirect subsidiary of PPL Energy Hyder- Ilyder Limited, a subsidiary of WPDL that was the previous Funding that delivers high bandwidth telecommunication services owner of South Wales Electricity pic. In March 2001, South Wales in the Northeast corridor from Washington, D.C., to New York City Electricity plc was acquired by \VI'DII Limited and renamed WPD and to six metropolitan areas in central and eastern Pennsylvania.

(South Wales).

PPL Transition Bond Company - PPL Transition Bond Company, LLC, Integra - Empresa de Ingenieria y Servicios Integrales Cochabamba a subsidiary of PPL Electric that was formed to issue transition S.A., a Bolivian construction and engineering services company bonds under the Customer Choice Act.

in which PPL Global has a majority ownership interest.

SIUK Capital Trust I - a business trust created to issue preferred PPL-PPL Corporation, the parent holding company of PPL Electric, securities and whose common securities are held by WPD LLP.

PPL Energy Funding and other subsidiaries.

SIUK Limited- was an intermediate holding company within the PPLCapital Funding- PPL Capital Funding, Inc., a wholly owned WPDII Limited group. In January 2003, SIUK Limited transferred financing subsidiary of PPL. its assets and liabilities to WVPD LLP.

PPL Capital Funding Trust I- a Delaware statutory business trust WPD- refers collectively to WVPDII Limited and W,'PDL.

created to issue the Preferred Security component of the PEPS Units. This trust was terminated in June 2004. WPD LLP- Western Power Distribution LLP, a wholly owned subsidiary of WPDII Limited, which owns WPD (South lVest) and PPL Development Company- PPL Development Company, LLC, WPD (South Wales).

a subsidiary of PPL Services that has responsibility for PlL's acquisition, divestiture and development activities. WPD (South Wales)- Western Power Distribution (South Wales) plc, a British regional electric utility company.

PPL Electric- PPL Electric Utilities Corporation, a regulated utility subsidiary of PPL that transmits and distributes electricity in its WPD (South West)- Western Power Distribution (South West) pIC, service territory and provides electric supply to retail customers a British regional electric utility company.

in this territory as a PLR.

WPDH Limited- Western Power Distribution Holdings Limited, an PPL Energy Funding- PPL Energy Funding Corporation, a subsidiary indirect, wholly owned subsidiary of PPL Global. WPDII Limited of PPL and the parent company of PPL Energy Supply. owns WPD LLR PPL EnergyPlus- PPL EnergyPlus, LLC, a subsidiary of PPL Energy WPDL- WPD Investment Iloldings Limited, an indirect wholly Supply that markets wholesale and retail electricity, and supplies owned subsidiary of PPL Global. IVPDL owns 100% of the common energy and energy services in deregulated markets. shares of I lyder.

PPL Energy Supply- PPL Energy Supply, LLC, a subsidiary of PPL Energy Funding and the parent company of PPL Generation, PPL EnergyPlus, PPL Global and other subsidiaries.

PPL CORPORATION 2005 ANNUAL REPORT 99

Other terms and abbreviations EMF- electric and magnetic fields.

£ - British pounds sterling. Enrichment- the concentration of fissionable isotopes to produce a fuel suitable for use in a nuclear reactor.

1945 First Mortgage Bond Indenture - PPL Electric's Mortgage and Deed of Trust, dated as of October 1, 1945, to Deutsche Bank EPA- Environmental Protection Agenc)y a U.S. government agency.

Trust Company Americas, as trustee, as supplemented.

EPS - earnings per share.

2001 Senior Secured Bond Indenture - PPL Electric's Indenture, dated as of August 1, 2001, to JPMorgan Chase Bank, as trustee, ESOP- Employee Stock Ownership Plan.

as supplemented.

Fabrication- the process that manufactures nuclear fuel assemblies AFUDC (Allowance for Funds Used During Construction) - the cost for insertion into the reactor.

of equity and debt funds used to finance construction projects of regulated businesses, which is capitalized as part of construction FASB- Financial Accounting Standards Board, a rulemaking cost. organization that establishes financial accounting and reporting standards.

APA-Asset Purchase Agreement.

FERC- Federal Energy Regulatory Commission, the federal agency APB- Accounting Principles Board. that regulates interstate transmission and wholesale sales of electricity and related matters.

ARB- Accounting Research Bulletin.

FIN- FASB Interpretation.

ARO- asset retirement obligation.

Fitch- Fitch, Inc.

Bcf- billion cubic feet.

FSP- FASB Staff Position.

Clean AirAct- federal legislation enacted to address certain environmental issues related to air emissions including acid rain, FTR- financial transmission rights, which are financial instruments ozone and toxic air emissions. established to manage price risk related to electricity transmission congestion. They entitle the holder to receive compensation or CTC- competitive transition charge on customer bills to recover remit payment for certain congestion-related transmission charges allowable transition costs under the Customer Choice Act. that arise when the transmission grid is congested.

Customer Choice Act - the Pennsylvania Electricity Generation GAAP - generally accepted accounting principles.

Customer Choice and Competition Act, legislation enacted to restructure the state's electric utility industry to create retail access GWh - gigawatt-hour, one million kilowatt-hours.

to a competitive market for generation of electricity.

ICP - Incentive Compensation Plan.

DEP- Department of Environmental Protection, a state government agency. ICPKE- Incentive Compensation Plan for Key Employees.

Derivative- a financial instrument or other contract with all IRS - Internal Revenue Service, a U.S. government agency.

three of the following characteristics:

a. It has (1) one or more underl)'ings and (2) one or more notional ISO- Independent System Operator.

amounts or payment provisions or both. Those terms determine the amount of the settlement or settlements, and, in some cases, ITC- intangible transition charge on customer bills to recover whether or not a settlement is required. intangible transition costs associated with securitizing stranded

b. It requires no initial net investment or an initial net investment costs under the Customer Choice Act.

that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in kWh- kilowatt-hour, basic unit of electrical energy.

market factors.

LIBOR- London Interbank Offered Rate.

c, Its terms require or permit net settlement, it can readily be settled net by a means outside the contract, or it provides for Montana Power- The Montana Power Company, a Montana-based delivery of an asset that puts the recipient in a position not company that sold its generating assets to PPL Montana in December substantially different from net settlement. 1999. Through a series of transactions consummated during the first quarter of 2002, Montana Power sold its electricity delivery DIG - Derivatives Implementation Group. business to NorthWestern.

DOE- Department of Energy a U.S. government agency. Moody's- Moody's Investors Service, Inc.

DRIP- Dividend Reinvestment Plan. MW- megawatt, one thousand kilowatts.

EITF - Emerging Issues Task Force, an organization that assists the MWh- megawatt-hour, one thousand kilowatt-hours.

FASB in improving financial reporting through the identification, discussion and resolution of financial accounting issues within the framework of existing authoritative literature.

100 PPL CORPORATION 2005 ANNUAL REPORT

NorthWestern - NorthlXestern Energy Division, a Delaware PURTA- the Pennsylvania Public Utility Realty Tax Act.

corporation and a subsidiary of NorthWestern Corporation and successor in interest to Montana Power's electricity delivery Regulation S-X- SEC regulation governing the form and content business, including Montana Power's rights and obligations of and requirements for financial statements required to be filed under contracts with PPL Montana. pursuant to the federal securities laws.

NPDES- National Pollutant Discharge Elimination System. RMC- Risk Management Committee.

NRC- Nuclear Regulatory Commission, the federal agency that RTO- Regional Transmission Organization.

regulates the operation of nuclear power facilities.

Sarbanes-Oxley404- Section 404 of the Sarbanes-Oxley Act NUGs (Non-Utility Generators)- generating plants not owned by of 2002, which sets requirements for management assessment public utilities, whose electrical output must be purchased by of internal controls for financial reporting. It also requires an utilities under the PURPA if the plant meets certain criteria. independent auditor to attest to and report on management's assessment and make its own assessment.

NYMEX - New York Mercantile Exchange.

SCR- selective catalytic reduction, a pollution control process.

Ofgem- Office of Gas and Electricity Markets, the British agency that regulates transmission, distribution and wholesale sales of SEC- Securities and Exchange Commission, a U.S. government electricity and related matters. agency whose primary mission is to protect investors and maintain the integrity of the securities markets.

PCB- polychlorinated biphenyl, an oil additive used in certain electrical equipment up to the late 1970s. It is now%classified as SFAS - Statement of Financial Accounting Standards, the accounting a hazardous chemical. and financial reporting rules issued by the FASI.

M PEPS Units (Premium Equity Participating Security Units, or PEPS" S&P- Standard & Poor's Ratings Services.

Units)- securities issued by PPL and PPL Capital Funding Trust I that consisted of a lPreferred Security and a forward contract SPE- special purpose entity.

10 purchase PPL common stock, which settled in May 2004.

Superfund - federal environmental legislation that addresses PEPS Units, Series B (Premium Equity Participating Security Units, remeediation of contaminated sites; states also have similar statutes.

or PEPS'M Units, Series B)- securities issued by PPL and PPL Capital Funding that consisted of an undivided interest in a debt security Synfuel projects - production facilities that manufacture synthetic issued by PPL Capital Funding and guaranteed by PPL, and a forward fuel from coal or coal byproducts. Favorable federal tax credits contract to purchase PPL common stock, which settled in May 2004. are available on qualified synthetic fuel products.

PJM (PJM Interconnection, L.L.C.) - operator of the electric Tolling agreement- agreement whereby the owner of an electric transmission network and(electric energy market in all or parts of generating facility agrees to use that facility to convert fuel Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New provided by) a third part)y into electric energy for delivery back Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, to the third part)'.

West Virginia and the District of Columbia.

UF- inflation-indexed Chilean peso-denominated unit.

PLR (Provider of Last Resort) - The role of PPL Electric in providing electricity to retail customers within its deliver), territory who VEBA-Voluntary Employee Benefit Association Trust, trust have not chosen to select an alternative electricity supplier accounts for health and welfare plans for future benefit payments under the Customer Choice Act. for employees, retirees or their beneficiaries.

PP&E- property, plant and equipment.

Preferred Securities - company-obligated manclatorily redeemable preferred securities issued by PPL Capital Funding Trust I, which solely held debentures of PPL Capital Funding, and by SIUK Capital Trust I, which solely holds debentures of 1VPD LLP.

PUC- Pennsylvania Public Utility Commission, the state agency that regulates certain ratemaking, services, accounting and operations of Pennsylvania utilities.

PUC Final Order- final order issued by the PUC on August 27, 1998, approving the settlement of PPL Electric's restructuring proceeding.

PUHCA- Public Utility I lolding Company Act of 1935, legislation passed by the U.S. Congress. Repealed effective February 2006 by the Energy Policy Act of 2005.

PURPA- Public Utility Regulatory Policies Act of 1978, legislation passed by the U.S. Congress to encourage energy conservation, efficient use of resources and equitable rates.

PPL CORPORATION 2005 ANNUAL REPORT 101

FrederickM.Bernthal JohnR. Biggar John W. Conway E.Allen Deaver Louise K. Goeser William F. Hecht Washington, D.C. Allentown, Pa. Philadelphia,Pa. Lancaster,Pa. Mexico City,Mexico Allentown, Pa.

President Executive Vice President Chairmanof the Board, FormerExecutive Vice Presidentand Chief ChairmanandChief Universities Research and Chief FinancialOfficer President Presidentand Director Executive Officer Executive Officer Association PPL Corporation and ChiefExecutive Officer Armstrong World Fordof Mexico PPL Corporation A consortiumof 90 Age 61 Crown Holdings,Inc. Industries,Inc. Manufacturerof cars, Age 63 universitiesengaged Directorsince2001 A leadinginternational Manufacturerof intedor trucks and relatedparts Directorsince 1990 In the constructionand manufacturerof packaging furnishingsand andaccessories operation of major Mr. Biggar has served as products for consumergoods specialty products i Age 52 Mr. Hecht has served as researchfacilities executive vice president and Age 60 Age 70 Directorsince2003 PPis top executive since Age 63 chief financial officer of PPL Directorsince 2000 Directorsince 1991 1993. Prior to that, he Directorsince1997 Corporation since 2001. Ms. Goeser served as vice served as president and lHealso serves as a director Mr. Conway has served Mr. Deaver retired from president, Global Quality, at chief operating officer for Dr. Bernthal has served as of PPL Electric Utilities as Crown's lop executive Armstrong in1998, after a Ford Motor Company for five two years. He also serves president of URA since 1994. Corporation, a manager of since 2001. Prior to that, career of 37 years, spanning years before being named as a director of PPL Electric Prior to joining that organiza- PPL Energy Supply, LLC he had been president and anumber of key management to her present position with Utilities Corporation, tion, he was deputy director and PPL Transition Bond chief operating officer of the positions. He also serves as Ford's Mexican subsidiary in DENTSPLY International Inc.,

of the National Science Company, LLC, and as a company, Mr. Conway joined adirector of the Geisinger 2005. Previously, she headed the Federal Reserve Bank Foundation. He also has trustee of Lycoming College. Crown, Cork &Seal in1991 Health System. He earned a Whirlpool Corporation's of Philadelphia and Renais-served as amember of the He began his career with PPL as a result of its acquisition of Bachelor of Science degree in quality and refrigeration units. sanceRe Holdings Ltd.

U.S. Nuclear Regulatory In 1969. Prior to being named Continental Can International mechanical engineering from Ms. Goeser started her career

• Mr. Hecht, who earned bach-Commission and as assistant to his current position, Corporation, where he served the University of Tennessee. with Westinghouse Electric elor's and master's degrees secretary of state for Oceans, Mr. Biggar served as senior as president and invarious Corporation, where - over inelectrical engineering from Environment and Science. vice president and chief management positions. He a 20-year period - she held Lehigh University, joined Dr. Bernthal earned a financial officer as well as earned aBachelor of Arts a variety of key positions PPL in 1964.

Bachelor of Science degree vice president-Finance. degree ineconomics from inthe Energy Systems and inchemistry from Valparaiso Mr. Biggar earned a bachelor's the University of Virginia and Environmental businesses.

University and a Ph.D. in degree inpolitical science alaw degree from Columbia She earned a bachelor's nuclear chemistry from the from Lycoming College and Law School. degree inmathematics from University of California at a Juris Doctor degree from Pennsylvania State University Berkeley. Syracuse University. and a Master of Business Administration degree from the University of Pittsburgh.

102 PPL CORPORATION 2005 ANNUAL REPORT

Stuart Heydt James H. Miller Craig A. Rogerson W. Keith Smith Susan M. Stalnecker Keith H. Williamson Hershey, Pa. Allentown, Pa. Wilmington, Del. Pittsburgh,Pa. Wilmington, Del. Stamford, Conn.

FormerChief Executive Officer PresidentandChief Presidentand Chief FormerVice Chairman Vice President President GeisingerHealth System OperatingOfficer Executive Officer Mellon Financial Corporation Risk Management CapitalServicesDivision A nonprofithealthcare PPL Corporation Hercules Incorporated Major financialservices El. du Pontde Nemours PitneyBowes Inc.

provider Age 57 Manufacturerand marketer company andCompany Globalproviderof integrated Age 66 Directorsince 2005 of specialtychemicals Age 71 Manufacturerof pharmaceu- mail,messaging anddocu-Directorsince 1991 and relatedservices Directorsince2000 ticals,specialty chemicals, ment managementsolutions Mr. Miller served as executive Age 49 biotechnologyand high- Age 53 Dr. Heydt retired in2000 as vice president and chief Directorsince2005 Mr. Smith served as vice performance materials Directorsince2005 chief executive officer of the operating officer before being chairman of Mellon Financial Age 53 Geisinger Health System, an named to his current position Mr. Rogerson has served as Corporation and senior vice Directorsince2001 Mr. Williamson has served Institution that he directed InAugust 2005. He also the top executive at Hercules chairman of Mellon Bank, as president of the Capital for eight years. He Ispast serves as adirector of PPL since 2003. He joined N.A., before his retirement Ms. Stalnecker served as vice Services Division of Pitney president and aDistinguished Electric Utilities Corporation Hercules in1979 and served in1998. He also isadirector president-Government and Bowes Inc., since 1999. He Fellow of the American and as amanager of PPL ina number of management of DENTSPLY International Consumer Markets, DuPont joined Pitney Bowes in 1988 College of Physician Energy Supply, LLC. ' positions, Including president Inc., West Penn Allegheny Safety &Protection for over and held a series of positions Executives. Dr. Heydt attended Mr. Miller joined PPL in of several Hercules subsidiar- Health System, Invesmart, two years, and as vice presi-

• inthe company's lax, finance Dartmouth College and February 2001 as president - ies, before being named to ' Inc., Baytree Bancorp, Inc., dent-Finance and treasurer for and legal operations, including received an M.D. from the of PPL Generation and his current position. From Baytree National Bank and over four years before being oversight of the treasury University of Nebraska. was named executive vice 1997 to 2000, he served as Trust Co. and Robert Morris named to her current position function and rating agency president of PPL Corporation president and chief executive University, and serves as, inJune 2005. She also activity. Mr. Williamson earned inJanuary 2004 and chief officer of Wacker Silicones the Chairman of the Board serves on the board of Duke a Bachelor of Arts degree operating officer inAugust Corporation. He also serves , of Allegheny General University and Ispresident of from Brown University, Juris 2004. He earned abachelor's as a director of Hercules, and Hospital. Mr. Smith earned the Board of Trustees of the Doctor and Master of Busi-degree inelectrical engineer- serves on the board of the aBachelor of Commerce Delaware Art Museum. ness Administration degrees ing from the Universily of American Chemistry Council. degree from the University of Ms. Stalnecker earned a from Harvard University, Delaware and served inthe Mr. Rogerson earned a chemi- Saskatchewan and a Master bachelor's degree from Duke and a Master of Law degree U.S. Navy nuclear submarine cal engineering degree from of Business Administration University and a Master of in taxation from New York program. Michigan State University. degree from the University Business Administration de- University Law School.

of Western Ontario, and is gree from the Wharton School a Chartered Accountant. of Graduate Business at the University of Pennsylvania.

Board Committees Executive Committee Audit Committee Compensation and Finance Committee Nuclear Oversight Corporate Governance Committee William F.Hecht, Chair Stuart Heydt, Chair Committee W.Keith Smith, Chair Frederick M.Bernthal Frederick M.Bernthal John W.Conway Frederick M.Bernthal, Chair E.Allen Deaver W.Keith Smith E.Allen Deaver, Chair E.Allen Deaver E.Allen Deaver Stuart Heydt Susan M.Stalnecker John W.Conway Susan M.Stalnecker Stuart Heydt Louise K.Goeser Keith H.Williamson Craig A.Rogerson Stuart Heydt PPL CORPORATION 2005 ANNUAL REPORT 103

Management and Officers

,CORPORATE LEADERSHIP COUNCIL OFFICERS William F.Hecht James E. Abel Dennis J. Murphy Chairman and CEO VP-Finance and Treasurer VP and COO-Eastern Fossil PPL Corporation PPL Corporation and Hydro PPL Generation James H. Miller Robert W. Burke, Jr.

President and COO VP and Chief Counsel Edward T. Novak PPL Corporation PPL Global VP-Corporate Information Officer

• PPL Services John R. Biggar Ivan Diaz-Molina Executive VP and CFO VP-Latin America Joanne H. Raphael PPL Corporation PPL Global VP-External Affairs PPL Services RobertJ. Grey Paul A. Farr Senior VP, Gen'eral Counsel Senior VP-Financial Robert A. Saccone and Secretary ' PPL Corporation VP-Nuclear Operations PPL Corporation PPL Susquehanna Robert M. Geneczko VP-Customer Services Ronald Schwarz MAJOR SUBSIDIARY PRESIDENTS VP-lluman Resources PPL Electric Utilities PPL Services President Paul T. Champagne PPL Gas Utilities Matt Simmons PPL EnergyPlus VP and Controller C.Joseph Hopf, Jr. PPL Corporation Rick L.Klingensmith Senior VP-Energy Marketing PPL Global PPL EnergyPlus Vijay Singh Roger L.Petersen, VP-Risk Management PPL Development .Company George T.Jones PPL Services VP-Special Projects PPL Susquehanna Bradley E.Spencer Bryce L. Shriver PPL Generation VP and COO-Western Fossil David H. Kelley and Ilydro President PPL Generation John F. Sipics PPL Telcom PPL Electric Utilities Robert A. Symons Michael E. Kroboth Chief Executive VP-Energy Services Western Power Distribution PPL EnergyPlus VP-United Kingdom Britt T. McKinney PPL Global Senior VP and CNO PPL Generation

• I 104 PPL CORPORATION 2005 ANNUAL REPORT

T AI L E F C 0 NT E N T S

/0 A MESSAGE FROM THE BOARD CHAIRMAN AND PRESIDENT 8 CEO ................................... 4 8 5 YEA R IN R EV IEW .................................................................................................................................................. 6 G 7 ALLEGHENY ELECTRIC COOPERATIVE, INC. AT A GLANCE ..................................................... 8 C 9 ALLEGHENY ELECTRIC COOPERATIVE, INC. BOARD OF DIRECTORS ........................................... 10 FINANCIAL SECTION TABLE OF CONTENTS .......................................................................................... 12 2005 ALLEGHENY ELECTRIC COOPERATIVE. INC. FINANCIAL REVIEW .................... 13-38 2005 ANNU AL RE PORT R- T:

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./1 5SUS6196/C A MESSAGE FROM THE BOARD u CHAIRMAN NND PRESIDENT 3 CEO U While pressures from high fossil fuel prices, environmental regulation, and electric competition are forcing most electric utilities to forecast an uninterrupted stream of rate increases for years to come, Allegheny Electric Cooperative, Inc.

(Allegheny) and its 14 member electric distribution cooperatives in Pennsylvania and New Jersey remain "significantly protected" from market volatility. U Decisions made by Allegheny leaders more than a quarter-century ago to invest in nuclear and hydropower plants continue to bear fruit. In 2005, 70 percent of Allegheny's energy supply came from low-cost nuclear and hydropower resources that are either owned or under long-term contract. Because of this, Allegheny and its members remain largely shielded from price L shocks facing utilities that receive most of their power from fossil fuel-burning facilities, or that buy large amounts off the wholesale market. And since nuclear and hydropower generating sources do not pollute the air, we are not impacted by Li federal clean air requirements in the same way as utilities that substantially depend on coal-fired power plants.

As 2006 dawned, Allegheny continued to evaluate options to secure its power supply future. Thanks to our existing favorable power purchase contracts, we will not need capacity until 2009 - giving us sufficient time to fully study and analyze market trends.

Our Coordinated Load Management System (CLMS) - which essentially works like a power plant in reverse - once again provided both economic and political benefits. Recognizing that the cheapest and cleanest kilowatt-hour is the one not produced at all, Pennsylvania legislators, in adopting Act 213 - a law that forces private power companies and competitive electric generation suppliers to include increasing amounts of clean energy in their generation mix, up to 18 percent by 2020

- required Allegheny and its member electric cooperatives to comply by offering a voluntary program of energy efficiency and demand-side management. We are accomplishing this legislative mandate through use of the CLMS network.

On a related note, Allegheny created a Renewable Energy Assistance Program (REAP) during 2005 to support efforts by Pennsylvania and New Jersey electric cooperative residential consumers - especially farmers - to develop clean energy projects. REAP will provide grants to cover some electric distribution cooperative costs associated with the installation and operation of alternative energy generation systems connected to their lines. The program provides another way for Allegheny to promote environmentally friendly power sources and wise energy use.

We also expect to see continuing improvements in the reliability of transmission service provided by private power companies to Allegheny, which in turn benefits our member electric distribution cooperatives. During 2005, companies affiliated with FirstEnergy Corporation agreed to adopt more aggressive pole inspection and replacement schedules and tighten the standard for outage frequency related to electric cooperative delivery points. Through all of this, our 1998 reliability settlement that obligates FirstEnergy to spend $4 million per year through 2009 to upgrade lines and equipment that feed electric cooperative delivery points remains in place.

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On a bittersweet note' the board ended 2005 by analyzing approaches to constructively dissolve the five-year-old Continental Cooperative Services (CCS) alliance. The move follows discussion that took place during various strategic U planning meetings. The Allegheny board - much like the board of its CCS partner, Illinois' Soyland Power Cooperative, Inc. (Soyland) - has concluded that CCS no longer provides the structure needed to achieve long-term objectives. While most of the original goals behind the creation of CCS have been met, changes in the electric utility environment, notably the demise of retail choice, suggest that the two generation and transmission cooperatives will better serve their member L.

cooperatives as separate entities. While it's always a sad day when any joint effort comes to an end, Allegheny learned a great deal from working with Soyland.

IZ I3

ALLEGHENY ELEcTRIC COOPERATIVE, INC. BoARD CHAIRMAN LOWELL FRIEDLINE. RIGHT. AND PRESIDENT , CEO FRANK BETLEY.A, Overall, Allegheny's financial outlook remains positive. Our wholesale rates are lower than they have been at any point since 1987 and our stranded costs will be paid off at the end of 2007. Over coming years, rate stability should continue and debt will likely be reduced even further. All of this should leave the organization with substantial flexibility to meet the challenges of the deregulated utility environment.

In the end, we feel Allegheny stands very well positioned to meet its primary goal - providing electric cooperative consumers in Pennsylvania and New Jersey with an adequate and reliable supply of energy at a competitive price.

j

U IE W U Y EAR 7"N R:E V A diverse mix of self-owned generation coupled with New York Power Authority- Since 1966, Allegheny has

'demand-side management capabilities provide the purchased power generated at two hydroelectric projects cornerstone for Allegheny to fulfill its core mission located along the Niagara and St. Lawrence rivers in upstate achieving stable and affordable wholesale power rates for New York. The New York Power Authority (NYPA) operates member electric distribution cooperatives in Pennsylvania both facilities.

and New Jersey.

In 2005, Allegheny received an allocation of approximately "Fuel diversity" affords Allegheny better balance and 31 megawatts (MW) from the 2,280-MW Niagara Power increased leverage in a competitive energy market easily Project (Niagara) and 0.5 MW from the 912-MW St.

shaped by national and global events. Crude oil prices, Lawrence Power Project. An additional 2 MW from both natural gas supplies, drought, even market jitters over projects was allocated to Sussex Rural Electric Cooperative, regional power crises all affect how electricity markets an Allegheny member electric distribution cooperative in operate and significantly impact power prices. New Jersey.

Allegheny's diversified generation portfolio played a key role Also during the year, Allegheny signed a settlement in helping the organization negotiate, in 2001, an attractive agreement that will lead to a new 18-year contract with wholesale power supply contract with Williams Power NYPA regarding allocations of low-cost electricity produced Company. The agreement runs through the end of 2008. at Niagara. The revised allocations will take effect in September 2007 following approval of the settlement Following is a rundown on how Allegheny power supply agreement and contracts by the Federal Energy Regulatory resources performed in 2005: Commission and the Governor of New York. Overall, the new allocations should not significantly change Allegheny or Raystown Hydroelectric Project: Allegheny's Raystown Sussex REC's share of Niagara output.

Hydroelectric Project, William E Matson Generating Station (Raystown) is a two-unit, 21-megawatt,,run-of-river Over the years, NYPA generation has saved Pennsylvania hydropower facility located at Raystown Lake and Dam in electric distribution cooperatives approximately $300 million Huntingdon County, Pa. In 2005, Raystown provided compared to the cost of buying the same amount of 66.8 million kilowatt-hours at delivery. power elsewhere.

Allegheny staff operates the hydro project in close Load Management: In December 1986, Allegheny and its Ui cooperation with the Baltimore District of the U.S. Army member electric distribution cooperatives in Pennsylvania Corps of Engineers. The Corps controls water releases and New Jersey launched the Coordinated Load from Raystown Lake, the largest man-made body of water Management System (CLMS) to reduce electricity in Pennsylvania. consumption during peak demand periods.

Susquehanna Steam Electric Station: Allegheny owns 10 By shifting use of residential electric water heaters, electric percent of the Susquehanna Steam Electric Station (SSES), a thermal storage units, dual fuel home heating systems, 2,360-megawatt, two-unit nuclear power plant located in and other special equipment in the homes of volunteer Luzerne County, Pa. PPL Susquehanna, a division of cooperative consumers to off-peak hours, CLMS improves Allentown, Pa.-based PPL Corporation, owns the remaining system efficiency, cuts costly demand charges cooperatives 90 percent and operates the boiling water reactor facility. must pay for purchased power, and reduces the need for new generating capacity. CLMS is also used during In 2005, this 10 percent share of SSES provided a record summer peaks to reduce Allegheny capacity obligations 1.83 billion kilowatt-hours of electricity at delivery to under procedures established by Valley Forge, Pa.-based Pennsylvania and New Jersey electric cooperatives. The PJM Interconnection.

capacity factor of SSES Unit I was 91.7 percent; Unit 2 was 85.9 percent. This works out to an average annual In 2005, CLMS reduced cooperative purchased power costs composite capacity factor for the facility of 88.8 percent. by $4.4 million, bringing total net power cost savings achieved over the past 19 years to more than $77.6 million.

Both Unit I and Unit 2 run on a 24-month refueling cycle. Currently, 198 substations are being utilized for load control LI During 2005, Unit 2 underwent its 12th planned refueling with more than 46,700 load control receivers installed on and inspection outage. The 26-day outage (shortest in SSES appliances, mostly electric water heaters, in the homes of history) ended a record 677 consecutive days of operation, electric cooperative consumers. The network currently boasts the first time in the unit's 20-year history that it ran non- demand-side'reduction capabilities of 50 megawatts -

stop between refueling outages. roughly 8 percent of the cooperatives' peak load.

1, :

COMMITMENT TO A BETTER TOMORROW For four decades, Allegheny Electric Cooperative, Inc. (Allegheny) has remained a recognized leader in developing environmentally friendly power sources and promoting energy efficiency. Allegheny has long held that renewable energy generation and wise electricity use not only produce a cleaner environment for everyone, but better secure our nation's energy future.

Since 1966, Allegheny has purchased hydropower from the Niagara and St.

Lawrence Power Projects located in upstate New York. This generation accounts for approximately 6 percent of Allegheny's energy needs annually.

Holding that the cheapest kilowatt-hour, and cleanest in terms of environmental I - ,

impact, is the one never generated, Allegheny and its member electric cooperatives launched the Coordinated Load Management System (CLMS) in December 1986.

CLMS works by controlling electric hot water heaters and other special equipment (in the homes and businesses of volunteer cooperative consumers) during times of peak electricity consumption. The load control network currently boasts demand-side reduction capabilities of 50 megawatts - roughly 8 percent of the cooperatives' peak load.

In June 1988, Allegheny placed the Raystown Hydroelectric Project (Raystown) into commercial operation. Located at the base of Raystown Dam in Huntingdon County, Pa., the 21-megawatt facility - in an average water year - supplies roughly 4 percent of the energy delivered by electric cooperatives, enough to power about 8,500 average rural homes.

The Pennsylvania General Assembly recognized the renewable energy commitment shown by Allegheny and its electriccooperatives when it passed the Alternative Energy Portfolio Standards Act of 2004 (Act 213). Pennsylvania electric cooperatives comply with the law by offering voluntary energy efficiency and demand-side load management programs - a mandate met through CLMS.

A New Way To Boost Clean Energy Sources - REAP Adding renewable generation to the electric cooperative power supply mix means a cleaner environment for everyone. Anaerobic digesters reduce the environmental impact of agricultural wastes, while small wind and solar systems do not produce emissions that pollute the air.

As a positive partner in the Commonwealth's alternative energy initiatives, Allegheny in 2005 created a program to assist cooperative consumer-members who want to install a clean energy generation system at their home or farm.

The Renewable Energy Assistance Program (REAP) provides grants to electric distribution cooperatives to help cover various interconnection costs, such as metering equipment and distribution transformers. It also pays for certain transitional costs to help ensure that other electric cooperative consumer-members are not required to subsidize the operation or installation of a small renewable energy generation system - whether it is an anaerobic digester, windmill, or solar unit.

To qualify for REAP grants, a renewable energy system can be no larger than 200 kilowatts and must meet thedefinition of a "qualified facility" under the federal Public Utility Regulatory Policies Act of 1978 or as a "distributed resource" under Act 213.

Energy produced by REAP-assisted systems can offset a consumer-member's cost of electricity, with any excess sold to Allegheny, at its avoided cost. By purchasing this power, Allegheny receives title to renewable energy certificates credited to the generation project and will use any revenue from the certificates to make more grants available for other renewable energy projects.

In many ways, REAP reflects the electric cooperative tradition of members helping members and adds a new chapter to Allegheny's history of addressing environmental and energy challenges in a cost-effective and fair way.

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ALLEGHENY AT A GLANC E U

U 2005 FACT SHEET HISTORIC ENERGY SALES 2001-2005 4,500,000 U 4,020,000 04 P D23,500,0002 U Energy Sales ................................ 2,975,112 MWh U

Total Operating Revenue .......... $173,962,000

,10000 0 U

500,000-

-2100,0000 U Net Margins ................................ $32,284,000 'Fog 1,500,000 U U

Total Assets ................................ $348,234,000 U

- 1000.

U Budgeted System Rate ................ 57.4 mills per kWh 0 800. L -~YEAR U

• 500.00 Total Retail Consumers .............. 222,104 U

• 40011 U

2005 Peak Demand .................. 655 MW U 2001 22005 U Miles of Transmission Line ........ 85 U

U U

ALLEGHENY 2005 OPERATING EXPENSES ALLEGHENY SOURCES OF ENERGY 2005 m

3 1%- r- %

U 14 Energy N Generation N Susquehanna U

Transmission 21% - L3 Distribution 0 Depreciation 29.9%- Steam Electric Station Raystown U]

N Amortization Hydroelectric 0 AN Expenses 8, Taxes Project 0 Purchased Power U

0 Interest

• New York Power 0 Decommissioning I61I% Authority U

23% U m

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• ABOUT ALLEGHENY ELECTRIC COOPERATIVE, INC.

Electricity - powering our lives each day with heat, light, sound, and motion. At Allegheny Electric Cooperative, Inc.

U (Allegheny), a dedicated and experienced team of board members, management, and employees makes certain that wholesale electricity is provided round-the-clock to 14 member electric distribution cooperatives in Pennsylvania and New Jersey. In

• turn, those 14 member distribution cooperatives own and control Allegheny.

m The cooperative electric systems comprising the Allegheny "family" maintain approximately 12.5 percent of all electric distribution lines in Pennsylvania, spanning one-third of the Commonwealth in 41 counties. New Jersey's lone electric cooperative maintains roughly 1 percent of the Garden State's total miles of line. Through these facilities, Allegheny member cooperatives deliver electricity to more than 220,000 homes, farms, small businesses, and industries with a combination of m integrity, accountability, innovation, and commitment to community.

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E L /EcC ELECTRIC T RIYC A LL EGHtE Y COOPERAiA SIV E, INC.

B 0OA R D*_0 I D IRECTORS Lowell Friedline C. Robert Koontz Curtin Rakestraw II Chairman Bedford REC Sullivan County REC Director Director Director Somerset REC Kathryn Cooper-Winters Richard Weaver Thomas Webb Vice Chairman Central Electric Sussex REC Director Director Director Northwestern REC L]

Robert Holmes John McNamara Dr. James Davis Secretary Claverack REC Tri-County Director Director Rural Electric Valley REC Director 0

13 Dave Turner Robert Guyer .Stephen Marshall 13 Treasurer New Enterprise REC United Electric Warren Electric Director Director Director 131 David Cowan Herman Blaldey Adams Electric REA Energy Director Director 511 oV2 ANN LR 20 5UA.L RE ý'O ,-'R, -T,

ALLEGHENY ELECTRIC COOPERATIVE, INC.

ACCOUNTANTS' REPORT AND FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 INDEPENDENT ACCOUNTANTS' REPORT .......................................................................................... 13

£wieI¢S&uCe,,,wedIs BA LA N C E SH EETS ................................................................................................................... 14 15 STATEM ENTS O F M ARGIN ....................................................................................................... 16 STATEMENTS OF MEMBERS' EQUITIES (DEFICITS) .............................................. 18 8 19 STATEM ENTS OF CASH FLOW S .............................................................................................. 20 NOTES TO FINANCIAL STATEM ENTS ......................... :........................................................... 21-38 K- _____ U'

Q UIQU W

Independent Accountants' Report Board of Directors Allegheny Electric Cooperative, Inc.

Harrisburg, Pennsylvania We have audited the accompanying balance sheets of Allegheny Electric Cooperative, Inc.

(Cooperative) as of December 31, 2005 and 2004, and the related statements of margin, members' equities (deficits), and cash flows for the years then ended. These financial statements are the U responsibility of the Cooperative's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States W of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, LI on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, iU as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

L In our opinion, the financial statements referred to above present fairly, in all material respects, the Ufinancial position of Allegheny Electric Cooperative, Inc. as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended in conformity with accounting Uprinciples generally accepted in the United States of America.

March 3, 2006 Q

r"1 225NoMWaterSt"eSd'aite4tx3 P.O. Box 1560 DecsturL6Ma525-15W0 217429-2411 Fax 217 429-6109

. bkd.com Beyond Your Numbers 0: 2 ANNU A. LA, R" E P 0-R, O TT

ALLEGHENY ELECTRIC COOPERATIVE, INC. u BALANCE SHEETS DECEMBER 31, 2005 AND 2004 1(IN THOUSANDS) [l U

Assets 2004 0

2005 U

Electric Utility Plant, at cost In service (see Note 2) 780,221

- Less accumulated depreciati on (674,581)

$ 781,139 (673,172)

Q 105,640 107,967 Construction work in progr'ess 7,087 2,862 L3 Nuclear fuel in process (see Note I and 3) 15,841 15,334 01 Net electric utility plan t (see Note 1, 2 and 3) 128,568 126,163 Investments and Other Asset Investments in associated ocrganizations (see Note 4) 764 739 Other investments (see Not eland6) ' 50,873 47,828 Notes receivable, members, less current portion (see Note 5) 46 68 Non-utility property, at cosit (net of accumulated depreciation of

$5,025 in 2005 and $4,754 in 2004) 3,845 4,150 Other noncurrent assets 343 126 55,871 52,911 02 Current Assets Cash and cash equivalents 38,169 35,781 0 Derivative investment (see Note 7) 283 Accounts receivable, membeers (see Note 1) 16,395 14,030 58 0

Accounts receivable, affiliateed organizations 148 Other receivables 20,388 6,748 2,882 6,350 U

Inventories (see Note 1)

Other current assets 1,280 1,397 0 Total current assets 83,411 60,498 Restricted Investments (see I*Tote 1) 16,219 15,837 Deferred Charges Capital retirement asset 63,529 98,953 LU)

Other r 636 963 64,165 99,916

$ 348,234 $ 355,325 See Notes to FinancialStatements

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Members' Equities (Deficits) and Liabilities 2005 2004 Members' Equities (Deficits) (see Note 1)

Membership fees $ 3 $ . 3 Patronage capital 34,122 34,122 Donated capital 38 38 Retained deficits (20,627) (52,911)

Members' equities (deficits) 13,536 (18,748)

Accumulated other comprehensive income 3,370 2,905 Total equities (deficits) 16,906 (15,843)

Asset Retirement Obligation (see Note 9) 117,006 112,505 Long-Term Debt (see Note 10) 159,973 196,904 Current Liabilities Current installments of long-term debt 37,023 38,833 Accounts payable and accrued expenses 12,074 17,307 Total current liabilities 49,097 56,140 Lj Other Liabilities and Deferred Revenue 308 Accrued decontamination and decommissioningof nuclear fuel Deferred income tax obligation from safe harbor lease (see Note 14) 2,160 2,423 Financial transmission rights (see Note 7) 283 Other deferred revenue (see Note 15) 2,809 2,888 5,252 5,619

$ 348,234 $ 355,325 15

ý7

I',S ALLEGH ENY ELECTRIC 1 COOPERATIVEý INC.

STATE MENTS OFFMARGIN YEARS ENDED DECEMBER 31, 2005 AND 2004 (IN THOUSANDS) 2005 2004 [I Operating Revenues $ 173,962 $ 166,197 .[

Operating Expenses Operations Ll Purchased capacity and energy costs Transmission 57,119 44,128 U Operation 16,720 19,427 Maintenance 134 126 L*

Production Operation 19,500 21,050 Maintenance

• 9,644 8,837 Fuel 7,870 7,584 110,987 101,152 L

Depreciation 6,245 5,066 LI Accretion of asset retirement obligation 4,501 4,327 Amortization of capital retirement asset 35,424 36,469 U Administrative and general 5,663 5,286 Property and other taxes 505 457 L]

163,325 152,757 E3 10,637 13,440 Operating Margin Before Interest and Other Expenses Q Other Revenues and (Expenses)

PURTA refund (see Note 12) 16,001 - o Interest expense (1,485) (966)

Other deductions, net (1,368) (1,265) 13,148 (2,231)

Operating Margin 23,785 .U Non-operating Margins Net non-operating rental income 1,333 1,275 Interest income 8,299 2,294 LI Other income (expense) (1,133) 99 8,499 3,668 Net Margin ( 32,284 14,877 LI

.Other Comprehensive Margin Unrealized appreciation in investments 465 500 Comprehensive Margin $ 32,749 $ 15,377 See Notes to FinancialStatements 6

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ALLEGHENY ELECTRIGo COOPE RATIVE, INC. '

STATEMENTS O*F ,MEM BERS' o EQUITIES (D¶ETICITS) 03 YEARS ENDED DECEMBER 31. 2005 AND 2004 (INTHO USANDS) 0 0

Membership Donated Patronage 0 Fees Capital Capita l Q

Balance, January 1, 2004 $ 3 $ 38 $ 34,122 13 Comprehensive margin Net margin -- 0 Change in unrealized appreciation on investments Balance, December 31. 2004 3 38 34,122 0 Comprehensive margin Net margin

-0 0 Change in unrealized appreciation on investments Balance, December 31, 2005 $ 3 $ 38 $ 34,122 13 0

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Total Accumulated Members' Other Total Retained Equities Comprehensive Equities Deficits (Deficits) Margin (Deficits)

$ (67,788) $ (33,625) $ 2,405 $ (31,220) 14,877 14,877 14,877 500 500 (52,911) (18,748) 2,905 (15,843) 32,284 32,284 32,284 465 465

$ (20,627) $ 13,536 $ 3,370 $ 16,906 I

U ALLEGHENY ELECTRIJC COOPERATIVE, INC. H STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31,2005 AND 2004 (IN THOUSANDS) U U]

Q 2005 2004 U

Operating Activities Net margin $ 32,284 $ 14,877 LJ Items not requiring cash Depreciation and fuel amortization 11,376 9,840 QJ Amortization of capital asset retirement 35,424 36,469 Accretion of asset retirement obligation 4,501 4,327 [I Change in Accounts receivable, members (2,365) (591)

Other receivables (17,506) (2,524)

EU Inventories (398) (485)

Derivative investment (283) U Other current and non-current assets (121) 1,336 Accounts payable and accrued expenses (5,233) (3,790) 1U Accounts (receivable) payable, affiliated organizations (90) (368)

Other liabilities and deferred credits (40) 1,031 U]

Net cash provided by operating activities 57,549 60,122 Ul Investing Activities Additions to electric utility plant and non-utility property, net (13,476) (12,362)

Payments received on notes receivable, members 18 15 Purchase of restricted investments (382) (60)

Purchase of other investments (2,580) (3,263)

Net cash used in investing activities (16,420) (15,670) 121 Financing Activity Q Principal payments on long-term debt (38,741) (26,560) U3 Net cash used in financing activity (38,741) (26,560)

Net Increase in Cash and Cash Equivalents 2,388 17,892 U Cash and Cash Equivalents, Beginning of Year 35,781 17,889 U Cash and Cash Equivalents, End of Year $ 38,169 $ 35,781 Supplemental Cash Flows Information Interest paid $ 1,241 $ 941 Income tax paid 225 354 U U]

U See Notes to FinancialStatements U..

Li

ALLEGHENY A ELECTRIC COOPERATIVE, INC.

NOTES TO FINANCIAL

• STATEMENTS Q DECEMBER 31. 2005 AND 2004 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Allegheny Electric Cooperative, Inc. (Cooperative) is a rural electric cooperative corporation established under the laws of the Commonwealth of Pennsylvania. Financing assistance has been provided by the U.S. Department of Agriculture, Rural Utilities Service (RUS) formerly known as the Rural Electrification Administration (REA) and, therefore, the Cooperative is subject to certain rules and regulations promulgated for rural electric borrowers by RUS. The Cooperative is a generation and transmission cooperative. The member cooperatives' primary service areas are rural areas throughout much of rural Pennsylvania and a portion of New Jersey. The Cooperative extends unsecured credit to its members. The Cooperatives primary operating asset is its 10% undivided interest in the Susquehanna Steam Electric Station (SSES), a 2,250-megawatt, two-unit nuclear power plant, co-owned by a subsidiary of PPL Corporation (PPL).

LU The Board of Directors of the Cooperative, appointed by its members, has full authority to establish electric rates on a cost of service basis.

U subject to approval by RUS. Rates are established Basis of Accounting The Cooperative maintains its accounting records in accordance with the Federal Energy Regulatory Commission's U (FERC) uniform system of accounts as modified and adopted by RUS.

LU In accordance with FERC guidelines, the Cooperative also maintains its accounts in accordance with Statement of Financial Accounting Standards Board (FASB) No. 71, Accountingfor the Effects of Certain Types ofRegulations.

U Deregulation Pennsylvania retail electric customers have the choice of selecting the power supplier, or generator, from which they buy electricity. The ability to choose alternative energy suppliers has not significantly affected the Cooperative's operations or ability to recover its costs through future rates charged to members.

On a regular basis, the Cooperative reevaluates its application of FASB Statement No. 71, Accountingfor the Effects of Certain Types ofRegulation, and No. 101, Regulated Enterprises- Accountingfor the DiscontinuationofApplication of FASB Statement No. 71. The Cooperative has determined that regulatory assets and liabilities should continue to be accounted for under the provisions of FASB No. 71 because it is reasonable to assume that the Cooperative will continue to be able to charge and collect its cost of service-based rates.

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QI L3 AILLEGHENY ELECTRIC COOPERATIVE, INC. E3 NOTES TO FINANCIAL L3 STATEMENTS Lj DECEMBER 31. 2005 AND 2004 LI Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial report and the reported amounts of L3 revenues and expenses during the years then ended. Actual results could differ from those estimates.

0I Electric Utility Plant Electric utility plant is carried at cost. Depreciation of electric utility plant is provided over the estimated useful lives of LI the respective assets on the straight-line basis, except for nuclear fuel, as follows:

'L3 Nuclear Utility Plant Production Transmission 39 years 2.75%

LI General plant 3%-12.5%

Nuclear fuel Units of heat production Non-Nuclear Utility Plant 3% - 33%

L3 Maintenance and repairs of property and replacements and renewals of items determined to be less than units of property are chargedto expense. Replacements and renewals of items considered to be units of property are charged to LI the property accounts. At the time properties are disposed of, the original cost, plus cost of removal less salvage of such property, is charged to accumulated depreciation.

LI Nuclear Fuel Nuclear fuel is charged to fuel expense based on the quantity of heat produced for electric generation. Under the LI Nuclear Waste Policy Act of 1982, the U.S. Department of Energy (DOE) is responsible for the permanent storage and disposal of spent nuclear fuel removed from nuclear reactors. The Cooperative currently pays to PPL its portion of DOE fees for such future disposal services.

Ll 0

Other Investments Debt and equity securities for which the Cooperative has no immediate plan to sell but that may be sold in the future U are classified as available for sale and carried at fair value. Unrealized gains and losses are recorded in members' equities (deficits). LI LI U

Realized gains and losses, based on the specifically identified cost of the security, are included in net income. Ll LI LI LI LI LI LI

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Cash Equivalents Cash and cash equivalents consist of bank deposits in federally insured accounts and temporary investments.

The Cooperative places its cash and temporary investments with high quality financial institutions. Such cash and r-1 temporary investments may be in excess of FDIC insurance limits. For purposes of the statements of cash flows, the Cooperative considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents are carried at cost.

The Cooperative's cash and investments are in a variety of financial instruments. The related values as presented in the financial statements are subject to various market fluctuations, which include changes in the equity markets, linterest rate environment and the general economic conditions. The Cooperative's credit losses have historically been minimal and within management's expectations.

Accounts Receivable and Notes Receivable Li Accounts receivable are stated at the amount billed to members. Accounts receivable are due in accordance with approved policies. An allowance for doubtful accounts has not been recorded because all accounts receivable are considered fully collectible.

UL Notes receivable are stated at their outstanding principal amount. An allowance for uncollectible notes has not been recorded because all notes receivable are considered fully collectible.

Inventories La The Cooperative accounts for certain power plant spare parts using a deferred inventory method. Under this method, U purchases of spare parts under inventory control are included in an inventory account and then charged to the appropriate capital or expense accounts when the parts are used or consumed. Inventories are carried at cost, with cost determined on the average cost method.

bd Restricted Investments The Cooperative was required by RUS to establish a trust account for the proceeds from the settlement of litigation with a former power supply provider. RUS is a named beneficiary of the trust fund and RUS requires that the Cooperative seek prior approval to utilize any of the amounts from this account. Such uses to date have consisted of providing collateral for financial obligations and for capital expenditures. Restricted investments consist of interest bearing sweep accounts and are stated at market.

23t

AU ALLEGHENY ELECTRIC COOPERATIVE, INC. [

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 ul U

PatronageCapitaland Other Marginsand Equities (Deficiencies)

The Cooperative has established an unallocated equity account, Retained Deficits, as a result of charges against income.

These charges against income were recorded as deficits in an unallocated equity account because the amount is not UL allocable to the Cooperative's members. RUS requires that subsequent net income recognized by the Cooperative must be used to reduce the deficits: []

Income Taxes L3 Deferred tax assets and liabilities are recognized for the tax effects of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than L3 not that a deferred tax asset will not be realized. u Revenue Recognition Revenue from the sale of electricity to members is recorded based on contracted power usage.

Impairment of Long-Lived Assets "

The Cooperative reviews the carrying amount of an asset for possible impairment whenever events or changes in circumstances indicate that such amount may not be recoverable. For the years ended 2005 and 2004, no such L3 circumstances were noted.

Note 2: Electric Utility Plant in Service 0 2005 2004 (In thousands)

Nuclear Utility Plant Production $ 567,720 $ 577,381 Transmission 41,232 41,589 General plant 3,139 580 Nuclear fuel 155,115 148,636 767,206 768,186 Non-Nuclear Utility Plant 13,015 12,953 Total $ 780,221 $ 781,139 I ýJ.

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Note 3: Susquehanna Steam Electric Station The Cooperative owns a 10% undivided interest in SSES. PPL owns the remaining 90%. Both participants provide their own financing. The Cooperative's portion of SSES's gross assets, which includes electric utility plant in service, construction and nuclear fuel in progress, totaled $590 million and $592 million as of December 31, 2005 and 2004, respectively. The Cooperative's share of anticipated costs for ongoing construction and nuclear fuel for SSES is estimated to be approximately $85.3 million over the next five years. The Cooperative receives a portion of the total SSES output equal to its percentage ownership. SSES accounted for approximately 61% and 62% of the total kilowatt hours sold by the Cooperative during the years ended December 31, 2005 and 2004, respectively. The balance sheets and statements of income reflect the Cooperative's respective share of assets, liabilities and operations associated with SSES.

Note 4: Investments in Associated Organizations 2005 2004 (In thousands)

National Rural Utilities Cooperative Finance Corporation (CFC) Subordinated Term Certificates, bearing interest from 0% to 5%, maturing January 1, 2014 $ 386 $ 427 Other 378 312

$ 764 $ 739 The Cooperative is required to maintain these investments pursuant to certain loan and guarantee agreements.

U Such investments are carried at cost.

Note 5:. Notes Receivable from Members Notes receivable from members arise from the lease of load management equipment to the member cooperatives. Such notes bear interest at a variable rate (4.35% and 2.60% as of December 31, 2005 and 2004, respectively) and mature on March 31, 2009. Notes receivable from members were $72,000 and $90,000 as of December 31, 2005 and 2004, respectively.

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• ALLEGHENY ELECTRIC COOPERATIVE, INC.

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 Note 6: Other Investments Other investments consist of the following as of December 31, 2005 and 2004:

December 31, 2005 Gross Gross Unrealized Unrealized Fair Cost , Gains Losses Value (In thousands)

Decommissioning Trust Fund A: ",

Cash $ 264 $ $ - $ 264 U.S. Government U securities 10,014 11 (181) 9,844 Corporate bonds 5,397 95 (56) 5,436 Other obligations 1,002 (36) 966 Corporate stocks 2,938 1,215 (66) 4,087 19,615 1,321 (339) 20,597 NRC mandated Decommissioning Trust Fund B:

Cash 359 359 U.S. Government securities 13,396 16 (168) 13,244 Corporate bonds 5,764 29 (87) 5,706 Other obligations 625 (14) 611 Common stocks 5,909 2,782 (170) 8,521 26,053 2,827 (439) 28,441 Debt Service Reserve Fund -

U.S. Government securities 1,835 -- 1,835

$ 47,503 $ 4,148 $ (778) $ 50,873 U

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December 31, 2004 Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value (In thousands)

Decommissioning Trust Fund A:

Cash $ 246 $ -- $ - $ 246 U.S. Government securities 9,229 19 (114) 9,134 Corporate bonds 5,974 149 (42) 6,081 Other obligations 740 2 (4) 738 Corporate stocks 3,145 1,002 (275) 3,872 19,334 1,172 (435) 20,071 NRC mandated Decommissioning Trust Fund B:

Cash 380 380 U.S. Government securities 10,421 19 (174) 10,266 Corporate bonds 6,706 109 (40) 6,775 Other obligations 791 9 (9) 791 Common stocks 5,454 2,441 (187) 7,708 23,752 2,578 (410) 25,920 Debt Service Reserve Fund -

U.S. Government securities 1,837 S- 1,837

$ 44,923 $ 3,750 $ (845) $ 47,828

13' LI' ALLEGHENY ELECTRIC COOPERATIVE, IN C. LT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 Certain investments in debt and equity securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2005 and 2004, was $25.4 million and $22.9 million, respectively. These declines primarily resulted from increases in market interest rates prior to the balance sheet Ui date and the failure of certain investments to meet projected earnings targets, which management believes is temporary.

The gross unrealized losses at December 31, 2005 for a period of less than 12 months was $332,000 and for a period Ls greater than 12 months was $465,000. The gross unrealized losses at December 31, 2004 for a period of less than 12 months was $250,000 and for a period greater than 12 months was $595,000. LI Ui Note 7: Financial Transmission Rights In 1998, the FASB Issued Statement No. 133, 2Accountingfor DerivativeInstruments and HedgingActivities" Subsequent to the issuance of Statement No. 133, the Cooperative was issued Financial Transmission Rights (FTRs) by PJM Interconnection LLC, (PJM). These FTRs have been found to meet Statement No. 133 definition of a derivative, and therefore must have special derivative accounting procedures applied to them.

The Cooperative received an entitlement of FTRs. FTRs are defined from a "Source" node to a "sink" node (path) for a specific amount of megawatts of electric power. The holder of an FTR is entitled to receive whole or partial offsets of Ul transmission congestion charges that arise when that specific path is congested. The purpose of the FTR 'Mechanism is to act as a hedge from volatile congestion charges.

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Market values of FT~s are only observable based on the clearing prices of the FTRs in annual and monthly auctions.

U The expected value of FTRs fluctuates based on seasonal expectations of the supply and demand of energy for each specific path. Significant assumptions and modeling projections are necessary to value FTRs. The expected FTR values U

are considered in the rate-making process and therefore the fair value of FTRs are recognized on the balance sheet and recorded as deferred income under FASB Statement No. 71, Accountingfor the Effects of Certain Types ofRegulation: 0 The fair value of FTRs was $283,000 as of December 31, 2005 for the remainder of the current PJM planning period that ends May 31, 2006. U U-~

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Note 8: Deferred Charges W

Deferred charges consist of the following regulatory assets as of December 31, 2005 and 2004.

Q 2005 2004 (In thousands)

U Capital retirement asset $ 63,529 $ 98,953 Accrued decontamination and decommissioning of nuclear fuel 551 867 Safe harbor lease closing costs 85 96

$ 64,165 $ 99,916 Based on membership agreements signed by the 14 member distribution cooperatives on March 29, 1999, with an effective date of January 1, 1999, a portion of the SSES impairment writedown, which took place in 1998, has been recognized as a regulatory asset, referred to as the capital retirement asset. Under this agreement, the Cooperative will recover from members certain financing costs related primarily to the Cooperative's investment in SSES in the amount of $311 million over a nine-year period.

Note 9: Asset Retirement Obligation Amounts collected from the Cooperative's members for decommissioning, less applicable taxes, are deposited in external trust funds for investment and can only be used for future decommissioning costs. The fair value of the nuclear decommissioning trust was $49.0 million and $46.0 million for the years ended December 31, 2005 and 2004, respectively.

The changes in the carrying amounts of asset retirement obligations were as follows (in thousands):

2005 2004 (In thousands)

Beginning balance $ 112,505 $ 108,178 Accretion expense 4,501 4,327 Ending balance $ 117,006 $ 112,505 The amount of actual obligation could differ materially from the estimates reflected in these financial statements.

U r =7 2005 ANNU L. REPO

U2 LT ALLEGHENY ELECTRIC COOPERATIVE, INC.

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 Note 10: Long-Term Debt 2005 2004 (In thousands)

Debt settlement note payable to RUS at an interest rate varying from 0.0% to 7.18%, due in varying amounts L3 through 2008 $ 174,665 $ 211,663 U 6.00% replacement notes payable to RUS due in varying amounts through 2007 1,102 1,439 L3 Pollution Control Revenue Bonds, payable semiannually, including interest through 2014.

Variable rates ranged from 1.48% to 3.10% in 2005 3 and 0.9% to 2.18% in 2004 16,800 18,000 5.00% mortgage notes payable to RUS due in varying amounts through 2019 4,429 4,635 fI 196,996 235,737 Less current installments 37,023 38,833

$ 159,973 $ 196,904 U 11 Long-term debt consisted principally of advances under mortgage notes payable for electric utility plant to RUS and to the United States of America acting through the Federal Financing Bank (FFB) and guaranteed by RUS. Substantially all of the assets of the Cooperative are pledged as collateral.

Pursuant to the provisions set forth in 7 CFR Part 1717, Settlement of Debt Owed by Electric Borrowers, the Cooperative entered into a restructuring agreement with RUS on March 29, 1999, with an effective date of January 1, 1999. Under the restructuring, the original advances under the mortgage notes to FFB were replaced with a new RUS note in the amount of $406 million. The new note has a final maturity date on January 1, 2008, with an option for early termination on January 1, 2006 and January 1, 2007. Interest on the new note is 7.18%. The Cooperative, however, can receive an interest credit up to the amount of total interest expense based on the number of participating members.

All of the Cooperative's members are currently participating.

Pollution Control Revenue Bonds (Bonds) were issued by an industrial development authority on the Cooperative's behalf. The Bonds are subject to purchase on demand of the holder and remarketing on a "best efforts" basis until the Bonds are converted to a fixed interest rate at the Cooperative's option. If a fixed interest rate is established for the 1)

Bonds, the Bonds will cease to be subject to purchase by the remarketing agent or the trustee. The indenture agreement contains various redemption provisions with redemption prices ranging from 100% to 103%. Included in other U

investments, at December 31, 2005 and 2004, respectively, are $1,835,000 and $1,837,000 of investments which relate to a debt service reserve fund required under the Bond Indenture.

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In the event that the Bonds are called and cannot be remarketed, the Bonds are collateralized by irrevocable letters of credit from Rabobank Nederland (Rabobank). The trustee may draw on the letters of credit to make required payments to the bondholders. If Rabobank draws on such letters of credit and the Cooperative does not reimburse Rabobank for Q] such draws under the terms of the agreements, the letters of credit are converted into a one-year term loan, with payments of principal and interest due quarterly.

The letters of credit and respective reimbursement agreements were amended as of July 21, 2003 and the stated 31, 2006 or such later date as may be determined by L] termination date of each of the agreements is on October Rabobank.

ImFuture maturities of all long-term debt are as follows (in thousands):

2006 $ 37,023 2007 36,804

"* 2008 106,570 2009 1,832 2010 1,944 Thereafter 12,823 The Cooperative is required by mortgage covenants to maintain certain levels of interest coverage and annual debt service coverage. The Cooperative represents that it was in compliance with the applicable mortgage covenants as of December 31, 2005 and 2004.

Certain of the Cooperative's long-term debt is at variable interest rates and is therefore subject to various market and interest rate fluctuations.

During 2005 and 2004, the Cooperative incurred interest costs of $1,485,000 and $966,000, respectively.

Note 11: Income Taxes There was no provision for federal income taxes at December 31, 2005 and 2004. The Cooperative is not subject to state income taxes.

At December 31, 2005, the Cooperative had available nonmember net operating loss carryforwards of approximately $62 million for tax reporting purposes expiring in 2006 through 2021, and alternative minimum tax credit carryforwards of approximately $1 million which carry forward indefinitely.

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'ALLEGHENY ELECTRIC COOPERATIVE, INC. U]

NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 AND 2004 U

Temporary differences that give rise to deferred tax balances are principally attributable to fixed asset basis, safe harbor lease treatment, gain on installment sale, and financial statement accruals. Deferred tax assets also include the effect of []

net operating loss carryforwards. The temporary differences and the carryforward items produce a net deferred tax asset at year end. Realization of the net deferred tax asset is contingent upon the Cooperative's future earnings. A valuation .

allowance had been established against the asset since it has been determined that it is more likely than not that the net deferred tax asset will not be realized.

Note 12: Pennsylvania Public Utility Realty Taxes 1U In December of 1998, the Pennsylvania Department of Revenue issued, pursuant to the Pennsylvania Public Utility U]

Realty Tax Act (PURTA), additional assessments to PURTA taxpayers in order to cover the shortfall between PURTA tax revenues and the distributions. The Cooperative's additional assessment was $1,868,000, which was recorded as of []

October 1998. .The Cooperative satisfied the 1997 reassessment by applying 1998 prepaid taxes against the assessment. []

In 1999, approximately 20 utilities and the Cooperative filed suits against the Commonwealth of Pennsylvania challenging provisions of PURTA. The state later amended the PURTA statute and the way in which the tax is 1.

calculated retroactive to 1998. The Cooperative subsequently received and paid a 1998 PURTA tax bill of approximately

$380,000. U_

In 2000, the Commonwealth removed electric generation assets from the PURTA tax base and effectively returned those U1 assets to local real estate tax jurisdiction with liability calculations based on assessed values. During 2001, PPL settled the 2000 liability for county, municipality, and school district real estate taxes on the full value of the jointly owned SSES U property. Also during 2001, the Cooperative's portion of these real estate taxes was billed by and paid to PPL.

DU In November 2005, the Pennsylvania Supreme Court, by way of order, affirmed that electric cooperatives are not subject to PURTA. As a result of this order, the Cooperative is due certain refunds, plus interest thereon, of PURTA taxes previously paid to the Commonwealth of Pennsylvania. The Cooperative has recorded income of $16,000,724 plus interest of $5,183,054 related to this matter. U Note 13: Related Party Transactions U The Cooperative has arrangements with two affiliated organizations, the Pennsylvania Rural Electric Association (PREA) cc'"

and Continental Cooperative Services (CCS). Both organizations have provided the Cooperative with certain management, general, and administrative services on a cost reimbursement basis. The costs for the services provided by PREA were $649,181 and $510,541 for the years ended December 31,.2005 and 2004, respectively. 'The costs for services provided by CCS were $5,437,000 and $5,408,307 for the same two comparative periods, respectively. L3 U.

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CCS was incorporated in March 2000, the result of a strategic alliance between the Cooperative, based in Harrisburg, LPennsylvania, and Soyland Power Cooperative, Inc. (Soyland), formerly based in Decatur, Illinois. CCS is organized as a Non-profit Electric Cooperative Corporation in the Commonwealth of Pennsylvania.

CCS is governed by a board of directors, composed of one representative from each affiliated distribution cooperative in U Pennsylvania, NewJersey, and Illinois. Included in the Cooperative's investment in associated organizations is $100,000 for its membership in CCS.

The Cooperative has been officially notified through CCS, that Soyland will withdraw from the strategic alliance. The withdrawal will be completed by May 13, 2006 leaving the Cooperative as sole member of CCS.

Note 14: Commitments and Contingencies Power Supply and TransmissionAgreements The Cooperative has entered into power supply and transmission agreements with approximately 45 service providers. A significant amount of these agreements areumbrella type agreements and do not bind the Cooperative to enter into any type of transaction. As of December 31, 2005, there were no significant transactions under these agreements.

The Cooperative has a number of power supply agreements under which it currently purchases capacity and power.

U These agreements contain no minimum purchase or take-or-pay provisions. Power supply agreements are as follows:

U New York Power Authority U This contract meets a portion of the Cooperative's base load requirements and its delivered cost to the Cooperative's members is below market. The current contract terminates in August 2025 for the Niagara Project. The current contract for the St. Lawrence Project expires in 2017.

Williams Energy Marketing & Trading, Inc.

Effective on April 1, 2001, the Cooperative entered into an arrangement with Williams Energy Marketing & Trading, Inc. (Williams). The arrangement provides that Williams receives the output of all power from the Cooperatives' owned and controlled resources and in turn supplies all of the Cooperatives' load requirements in certain geographic areas. The agreement with Williams is scheduled to terminate on December 31, 2008.

The Williams agreement contains certain hourly and monthly energy caps. Energy provided above these thresholds is purchased at market prices. The Williams agreement also contains thresholds related to output from the Cooperative's resources. If the Cooperative fails to provide energy sufficient to meet the thresholds, the balance is purchased from Williams at market prices. Transmission service for this load is provided under the appropriate PJM Open Access Transmission Tariff (OA'T) or the GPU WASP agreement as explained below.

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-2005o -A:"N `N, ýU AL E0R ý33J

ALLEGHENY ELECTRIC COOPERATIVE, INC. U NOTES TO FINANCIAL []

STATEMENTS DECEMBER 31. 2005 AND 2004 u Ll The Williams Agreement requires the Cooperative to provide credit support in the amount of $9 million. The National Rural Utilities Cooperative Finance Corporation (CFC) issued an irrevocable standby letter of credit on behalf of the ,[]

Cooperative in the amount of $9 million in favor of Williams. The letter of credit is valid until June 1, 2006. In a related agreement to facilitate the transmission of power received from Williams, the Cooperative executed a Load []

Serving Entity Agreement with PJM LLC (PJM). The terms of the agreement required the Cooperative to provide $2 million of credit support for activities with PJM. To provide for the credit support, the Cooperative has an irrevocable L3 standby letter of credit from CFC for $2 million in favor of PJM. This standby letter of credit is also valid until June 1, 2006. ,I SSES Replacement Power Insurance Policy U The Cooperative mitigated a portion of the economic risk of an outage by purchasing a Replacement Power Insurance Policy from XL Specialty Insurance Company. Under the terms of the policy, if SSES had a forced outage event, the Cooperative would have been reimbursed the cost of replacement power for the insured quantity of 230 MW Replacement power cost is the total of the loss, in dollars, as calculated by subtracting the insured price of $50/MWh Li from the market price index (PJM Western Hub LMP) and multiplying that difference by the insured quantity. The policy stipulates that the outage limit for each such forced outage is 90 consecutive days, and the aggregate coverage limit []

is $25 million. For this coverage, the Cooperative paid XL a total premium of $926,400 and $861,000 for 2005 and 2004, respectively. Effective on January 1, 2006, the Cooperative entered into a similar insurance arrangement. Under Ci the new policy, the Cooperative will pay a total premium of $889,000 for the policy period ending on December 31, 2006. Ll Pennsylvania Electric Company L3 The Cooperative terminated its supplemental generation portion of its Wheeling and Supplemental Power (WASP) Qi agreement with Pennsylvania Electric Company (Penelec) on March 31, 2001. However, the Cooperative continues to purchase transmission service in the Penelec, Metropolitan Edison Company (Met-Ed), and Jersey Central Power & Light Q (JCP & L) zones from Penelec under the WASP agreement and the PJM OATT. Beginning April 1, 2001, the Cooperative became the sole Load Serving Entity (LSE) for the Cooperatives' load in the Penelec, Met-Ed, and JCP & L zones. Consequently, the Cooperative executed a LSE agreement with PJM, which outlines the responsibilities of each party with respect to the revised transmission and power supply arrangement. As part of its new LSE status, it was also necessary to take Network Integrated Transmission Service (NITS) under the PJM OATT. Penelec reimburses the Cooperative for most of the PJM NITS charges to prevent double billing for NITS.

Li Ll 2005~ANN AL REPOR Li[]

2-_

Insurance PPL, as the 90% owner and sole operator of SSES, and the Cooperative, as owner of a 10% undivided interest in SSES, are members of certain insurance programs which provide coverage for property damage to the SSES nuclear generation plant. Under these programs, the plant, as a whole, has property damage coverage for up to $2.75 billion. Additionally, there is coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specified conditions. Under the property and replacement power insurance programs, PPL and the Cooperative could be assessed retrospective premiums in the event the insurers' losses exceed their reserves. At December 31, 2005, the maximum amount PPL and the Cooperative could jointly be assessed under these programs ranged from $20 million to $40 million annually.

PPL and the Cooperative's public liability for claims resulting from a nuclear incident is currently limited to $10.8 billion under provisions of the Price-Anderson Amendment Acts of 1988.

In the event of a nuclear incident at any of the reactors covered by the Act, PPL and the Cooperative could be assessed up to $100.6 million per reactor per incident, payable at $30 million per year.

J* Safe HarborLease The Cooperative previously sold certain investment and energy tax credits and depreciation deductions pursuant to a safe Uharbor lease. The proceeds from the sale, including interest earned thereon, have been deferred and are being recognized on the statements of operations over the 30-year term lease. The deferred gain was $2.2 million and $2.4 million as of Q] December 31, 2005 and 2004, respectively. The net proceeds and related interest were required by RUS to be used to retire outstanding FFB debt.

Under the terms of the safe harbor lease, the Cooperative is contingently liable in varying amounts in the event the lessor's tax benefits are disallowed and in the event of certain other occurrences. The maximum amount for which the Cooperative was contingently liable as of December 31, 2005 was approximately $6.8 million. Payment of this contingent liability has been guaranteed by CFC.

• PurchasedPower For years preceding 2004, the Cooperative accrued amounts as a contingency for certain purchased power related costs.

In accordance with Financial Accounting Standard 5 (FAS 5), the contingency was reversed during 2004 after the Cooperative received additional information suggesting the imposition of such costs unlikely. Accordingly, the reversal was treated as a credit against purchased capacity and energy costs in the amount of $7.7 million.

i; fQr 10 W;

ALLEGHENY ELECTRIC COOPERATIVE, INC. ci NOTES TO FINANCIAL.

STATEMENTS DECEMBER 31. 2005 AND 2004 ci Q.

Litigation The Cooperative may be subject to claims and lawsuits that arise primarily in the ordinary course of business. ,]

At December 31, 2005, no such claims or lawsuits existed.

Note 15: Sale/Leaseback Arrangement ,i The Cooperative previously completed a sale and leaseback of its hydroelectric generation facility at the Raystown Dam (the Facility). The Facility was sold to a trustee bank representing Ford Motor Credit Company (Ford) for

$32.0 million in cash. During 1996, Ford transferred its interest'in the Facility to a third party. Under terms of the arrangement, the Cooperative is leasing the Facility for an initial term of 30 years. Payments under the lease are due in semi-annual installments which commenced January 10, 1989. At the end of the 30-year term, the Cooperative will have the option to purchase the Facility for an amount equal to the Facility's fair market value or for a certain LD amount fixed by the transaction documents. I The Cooperative also has the option to renew the lease for a five-year fixed rate renewal and three fair market renewal periods, each of which may not be for a term of less than two years. Payments during the fixed rate renewal \ U period are 30% of the average semi-annual installments during the initial lease term. The Cooperative will retain co-licensee status for the Facility throughout the term of the lease. The gain of $1.9 million related to the sale is being U recognized over the lease term. The unrecognized gain is recorded in other deferred revenue and was $1.03 and

$1.11 million as of December 31, 2005 and 2004, respectively. Li The payments by the Cooperative under this lease were determined in part on the assumption that Ford, or its 13 successor, will be entitled to certain income tax benefits as a result of the sale and leaseback of the Facility. In the event that Ford, or its successor, were to lose all or any portion of such tax benefits, the Cooperative would be LI required to indemnify Ford, or its successor, for the amount of the additional federal income tax payable to Ford, or its successor, as a result of any such loss. El The leaseback of the Facility is accounted for as an operating lease by the Cooperative. As of December 31, 2005,'

future minimum lease payments under this lease, which can vary based on the interest paid on the debt used to finance the transaction, are estimated as follows (in thousands):

2006 $ 1,932 2007 1,932 2008 1,932 2009 2,361 2010 .2,361 Thereafter 18,887 U Total minimum lease payments $ 29,405 U El Qi 0]

Li Lii

The future minimum lease payments shown above are for the initial lease term and the five-year renewal period. These

, *payments are based on an assumed interest rate of 8.8% and may fluctuate based on differences between the future interest rate and the assumed interest rate. Rental expense for this lease totaled $1.2 million and $1.4 million in years ended December 31, 2005 and 2004, respectively.

Note 16: Government Regulations The Energy Policy Act of 1992 established, among other things, a fund to pay for the decontamination and decommissioning of three nuclear enrichment facilities operated by DOE. A portion of the fund is to be collected from electric utilities that have purchased enrichment services from DOE and will be in the form of annual special assessments for a period not to exceed more than 15 years. The special assessments are based on a formula that takes into account the amount of enrichment services purchased by the utilities in past periods.

The Cooperative has previously recorded its share of the liability in connection with PPLs recognition of the liability in the accounts of SSES. The Cooperative's share of the liability is $4.4 million. The Cooperative recorded its share of the liability as a deferred charge which is being amortized to expense and paid over 15 years, consistent with the ratemaking treatment. The remaining liability to be amortized was $0.6 million and $0.9 million as of December 31, 2005 and 2004, respectively.

Note 17: Fair Value of Financial Instruments The estimated fair value amounts have been determined by the Cooperative using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value.

Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Cooperative could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Assets

• Cash and RestrictedInvestments - The carrying amounts of these items are a reasonable estimate of their fair value due to the short-term nature of the instruments.

- OtherInvestments and Investments in Associated Organizations- The fair value of other investments are estimated based on quoted market prices. Fair values of investments in associated organizations approximate their carrying amount.

2;:,0:0`15,, A 1N. R'` E` PORT-0

ALLEGHENY- ELECTRIC COOPERATIVE, INC. 10 NOTES TO FINANCIAL LI STATEMENTS DECEMBER 31, 2005 AND 2004 U Notes Receivablefrom Members -The carrying amount of the Cooperative's notes receivable from members, which primarily relate to sales-type leases, approximates fair value because the notes bear a variable rate of interest which is reset on a frequent basis.

Liabilities

• Long-term debt -The fair value of the Cooperative's fixed rate long-term debt is estimated using discounted cash fU flows based on current rates offered to the Cooperative for similar debt of the same remaining maturities.

The estimated fair values of the Cooperative's financial instruments at December 31, 2005 and 2004, are as follows (in thousands):

/ U 2005 2004 Carrying Estimated .Carrying Estimated Amount Fair Value Amount Fair Value&

Cash and cash equivalents $ 38,169 $ 38,169 $ 35,781 $ 35,781 Restricted investments 16,219 16,219 15,837 15,837 Other investments 50,873 50,873 47,828 47,828 Investment in associated 764 764 739 739 organizations Notes receivable from members 46 46 68 68 235,737 201,334 Long-term debt 196,996 177,231 12 Note 18: Subsequent Event Effective March 31, 2006, the Cooperative refinanced all of its debt and completed a buyout from Rural Utilities Services (RUS), eliminating all regulatory oversight from RUS. The new 100% lender, National Rural Utilities Cooperative Finance Corporation (CFC), extended nearly $300 million of financing including a $35 million unsecured line of credit.

The CFC loan commitment also provided for $40 million of financing for capital additions the Cooperative will be making in future years. The CFC long-term debt has fixed interest rates ranging from 6.8% to 7.0% and maturities extending through December 31, 2025. The refinancing allowed for the Cooperative to restructure its debt for longer terms and provided a mechanism to fund ongoing SSES operating efficiency and life extension capital improvements.

38-1 2,"0"0 5 ANN U A :L` RE.,TýP" 0&R'T