PLA-6402, Annual Financial Report

Annual Financial Report

ML082190715
Person / Time
Site:	Susquehanna
Issue date:	07/22/2008
From:	Mckinney B Susquehanna
To:	Document Control Desk, Office of Nuclear Reactor Regulation
References
PLA-6402
Download: ML082190715 (172)

Text

Britt T. McKInney PPL Susquehanna, LLC 769 Salem Boulevard Sr. Vice President & Chief Nuclear Offiicer Berwick, PA 18603 Tel. 570.542.3149 Fax 570.542.1504 PPI.

btmckinney@pplweb.com JUL 2 2 2008 U. S. Nuclear Regulatory Commission Attn: Document Control Desk Mail Stop O-P 1-17 Washington, DC 20555-0001 SUSQUEHANNA STEAM ELECTRIC STATION 2007 ANNUAL FINANCIAL REPORT Docket Nos. 50-387 PLA-6402 and 50-388 In accordance with 10 CFR 50.7 1(b), enclosed is the 2007 Annual Report for PPL Corporation, the parent company of PPL Susquehanna, LLC, and the 2007 Annual Report for Allegheny Electric Cooperative, Inc.

If you have any questions, please contact Mr. Michael H. Crowthers, Manager Nuclear Regulatory Affairs at (610) 774-7766.

Sincerely, B. T. McKinney Enclosure 1 - PPL Corporation 2007 Annual Report Enclosure 2 - Allegheny Electric Cooperative, Inc., 2007 Annual Report copy: NRC Region I R. Janati, DEP/BRP F. W. Jaxheimer, NRC Sr. Resident Inspector B. K. Vaidya, NRC Project Manager I

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p13 PPL Corporation, headquartered in Allentown, Pa., controls more than 11,000 megawatts of generating capacity in the United States, sells energy in key U.S. markets and delivers electricity to about 4 million customers in Pennsylvania and the United Kingdom.

More information is available at www.pplweb.com.

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Dear Shareowners,

James H. Miller As I meet with investors, employees and others, I'm frequently asked about PPL's long-Chairman,President term strategy for growth. The tone of those questions often implies that we have a secret and Chief Executive formula to ensure our success, a plan that will take the competition by surprise.

Officer There is, of course, no such magic plan.

Yes, we have a very solid strategy to grow your company. The strategy itself,;

however, is not unique. The approach we are pursuing could, potentially, be adopted by many companies in our sector.

What is it then, that sets PPL apart, that has allowed us to significantly outperform most of our peers in the electricity business and the major U.S. stock indices?

The essence of our success, I believe, is our unwavering, pervasive focus on executing the business plans that we put in place. Whether they are an executive, a power plant operator, a trader on our marketing floor or a lineman, PPL people are knowledgeable and dedicated, understanding that success is not guaranteed, it is earned every day.

For example, in our marketing and trading operation, PPL people have a superb understanding of energy markets, allowing us to maximize the value of our outstanding generating assets. This operation has significantly improved earnings over what we would have been able to achieve simply by selling our power plants' electricity at prevailing market prices. Because of its strategic importance to our ongoing success, we are continuing to expand both the size and the skills of our marketing and trading operation. As we do so, of course, we're continuing to appropriately manage our risks.

PPL Corporation 2007 Annual Report 3

Our marketing and trading successes clearly illustrate the advantages that exceptional people, high-performing assets and a clear understanding of markets can bring to the bottom line.

This attention-to-detail approach also serves us very well in operating more than 35 power plants at locations in six U.S. states. And PPL's electricity delivery businesses in the United States and the United Kingdom consistently earn the highest accolades for providing exceptional customer service.

PPL people have delivered on the promises we have made to you, our shareowners.

Our 2007 reported earnings were $3.35 per share, a 50 percent increase over 2006.

While 67 cents per share of that increase resulted from the sale of our Latin American electricity delivery businesses, earnings from ongoing operations also increased signifi-cantly, to a record $2.60 per share, a 16 percent increase over the prior year.

In 2007, earnings from ongoing operations in our U.S. generation and marketing business increased by 20 percent, to $1.42 per share. This unregulated part of our business accounted for 55 percent of our 2007 earnings from ongoing operations.

This kind of performance, combined with continued investor interest in our sector, resulted in an excellent total return for our shareowners in 2007: 49 percent. In the past five years, PPL's total return has been 254 percent, more than three times the return of the S&P 500 Index. Your company now is among the 10 largest electricity companies in the United States.

Even as we expand PPL, we also continue to grow your dividend. With our February announcement of a 10 percent increase, our annualized dividend now is $1.34 per share, a figure that is 74 percent higher than it was just five years ago.

The future looks bright as well. We are now forecasting 2010 earnings of $4.00 to

$4.60 per share, the midpoint of which would be a 65 percent increase over our 2007 per share earnings from ongoing operations.

Clearly, we are focused on execution so that we get the most out of the assets we currently have, but we also are actively positioning the company for expansions that will further grow value for shareowners.

In the evolving U.S. electricity business, no one can accurately predict the future.

It's impossible, for example, to precisely forecast the prices of various fuels, the impact of environmental regulations, actions that might alter competitive generation markets or technological advances in electricity generation.

Given the uncertainties in this sector, we think the wise course is to create a wide range of opportunities, so that we're ready to act when the time is right.

4 PPL Corporation 2007 Annual Report

Comparison of 5-year Cumulative Total Return*

PPL Corporation J Edison Electric Institute S&P 500 Index Index of Investor-owned Electric Utilities

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ý $354.08

$350

$325

$300

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$100 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 Assumes investing $100 on Dec. 31, 2002, and reinvesting dividends in PPL common stock, S&P 5001 Index, and EEI Index of Investor-owned Electric Utilities.

That's the reason we are pursuing a construction and operating license for a potential new nuclear unit in Pennsylvania. That's why we are seeking approvals to double our hydro-electric generating capacity in Pennsylvania. That's why we are planning to spend more than

$100 million to develop new renewable energy projects. And that's why we are continuing to enhance our marketing operation in anticipation of a wider retail market for electricity.

To be an industry leader, you need to be in the right place at the right time. But being in that right place doesn't happen by accident.

At PPL, we are committed to growing value for you today - and to ensuring that we are in the right place to take advantage of the opportunities that the future will bring.

On behalf of all the employees of PPL, I thank you for your investment in our company, and I pledge our continued commitment to growing value for you.

Sincerely, James H. Miller Chairman,Presidentand ChiefExecutive Officer April 4, 2008 PPL Corporation 2007 Annual Report

Exceptional No enterprise, no matter how brilliant its strategy and tactics, will succeed without knowledgeable, dedicated people. At PPL, more than 11,000 employees are focused each day on the execution of their varied roles and responsibilities and on ways to continue to improve and grow our business.

Whether they are increasing the electricity output at our power plants, capturing additional margins from the energy marketplace, or providing award-winning service to our electricity delivery customers on two continents, PPL people give us a competitive advantage.

PPL Corporation 2007 Annual Report 7

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Each day, PPL people exercise their education, practical experience and interpersonal skills to convert energy-related challenges into win-win opportunities among stakeholders with wide-ranging interests.

For nearly a decade, Dick Fennelly, manager-Generating Assets, and Scott Hall (at left), manager-Environmental Services, both of PPL Maine, have worked on an innovative river restoration project to reconcile PPL's interests with those of a local Native American tribe, industrialists, environmentalists, commercial fishermen, sportsmen and numerous government agencies.

Seeking Inn()vative The river inquestion is the Penobscot, Maine's largest internal waterway system and the backdrop for their professional Solut 1011 OS careers and their individual family lives.

The agreement facilitated by Scott and Dick calls for PPL Maine to sell three dams on the river to a coalition of government agencies, private groups and the Penobscot Indian Nation. When it has raised the necessary funds, the coalition plans to remove two of the dams and bypass a third to restore fish runs for the Atlantic salmon and other species of migratory fish, improving access to more than 500 miles of river habitat. The agreement also gives PPL the option to increase energy output at its remaining dams in Maine.

Dick and Scott's 30 years of experience, combined with their negotiating skills and varied degrees in mechanical engineering, wildlife management and public administration, make this team uniquely qualified to seek common ground along the banks of Maine's majestic Penobscot River.

PPL Corporation 2007 Annual Report 9

PPL believes in the inseparable link between world-class safety performance and world-class customer service.

Western Power Distribution, PPL's electricity delivery company in the United Kingdom, completed all of 2007 without a lost-time accident of any kind among its 2,300 employees. WPD employees also share their zeal for safety with their customers.

During the past year, WPD implemented a program of free videos and brochures to alert commercial and industrial customers to the potential dangers of coming into contact with overhead and underground power lines. The "Look up Look out" program, spearheaded by Steve Loveridge (at right), WPD's Empowering Customers Safety and Training manager, was so successful that the U.K. Energy Networks Association has adopted Resp onsibly it as a standard for other electricity distributors in the United Kingdom.

In keeping with this safety/service emphasis, WPD also earned the government's Charter Mark award for outstanding customer service in 2007 and has held the award continuously since it was started in 1992. No other electricity distribution company in the United Kingdom has ever earned the honor.

~ ... f7 In the United States, PPL Electric Utilities has won 15 J.D. Power and Associates awards for customer satisfaction with electric service in the eastern United States. No other utility in the country has earned more. The company also is responsibly empowering its customers to conserve energy through a new "e-power" educational campaign launched in 2007.

10 PPL Corporation 2007 Annual Report

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High-Performing Over the course of eight decades, our people have earned kudos for the safe and reliable operation of our power plants, transmission towers, electricity substations and other equipment. Operating these assets is a public trust, and we're committed to doing so in an environmentally responsible manner even as we meet growing customer demand. Significant investments in state-of-the-art pollution control equipment, such as the ongoing construction and commissioning of "scrubbers" at PPL's Brunner Island (at left) and Montour coal-fired power plants in Pennsylvania, are part of our environmental commitment.

We also expect every asset we own to contribute to growing share-owner value. In a rapidly changing business environment, we look to extract additional value from the assets we already own even as we scan the horizon for opportunities to acquire or build new assets.

PPL Corporation 2007 Annual Report 13

Bolstering the northeastern Pennsylvania economy, astride the mighty river that supplies its name, PPL's Susquehanna nuclear power plant already generates enough electricity for nearly 2 million homes.

Framing the plant's familiar cooling towers is the less recognized but essential switchyard, inspected by maintenance foreman Yiu Lee (at right). The switchyard serves as the "on ramp" for electricity flowing to the regional transmission grid.

The two-unit plant accounts for more than 20 percent of the entire electricity-producing capability of PPL's generation fleet across 36 locations in six states. It also accounts for about 25 percent of the total nuclear generation capability in the state of Pennsylvania.

Expanding an For more than 20 years, the facility has operated safely, reliably and economically. Lately, PPL has taken some strategic measures to ensure this solid record continues well into the future. The company is mapping out options for expansion and has already implemented some of them. They C o lo s s u s include extending the existing plant's operating license for another 20 years and increasing the plant's current output by an additional 9 percent.

The company also is exploring the option of adding another reactor. After having completed an extensive review of various nuclear reactor technologies, we have contracted with a proven supplier to prepare the application for the combined operating and construction license. The preparation to file this license application in late 2008 preserves the option to add the new unit. This activity surrounding the plant is just one element of PPL's comprehensive plan for the future growth of its generation fleet.

14 PPL Corporation 2007 Annual Report

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Key contributors to PPL's high-performing mix of assets are hydroelectric plants in Maine, Pennsylvania and Montana. These facilities can be ramped up quickly to generate clean, renewable electricity for the company's energy marketers to sell on short notice in times of peak customer demand.

The rainfall and snowpack provided by Mother Nature make her a strategic partner in the successful operation of these facilities. Located alongside rivers, lakes and dams, these sites also provide satisfying recreational and educational opportunities to thousands of visitors each year.

But Mother Nature also can complicate the mission of keeping the hydro Safegua:rding Our Liq u id A ssets plants humming at peak efficiency. Just ask Ryan Olson (at left), hydro foreman for PPL Montana, and other journeyman operators whose maintenance duties can involve trekking across remote terrain in near-Arctic conditions.

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• Olson is based at PPL Montana's Mystic Lake hydroelectric plant on the edge of one of the most rugged mountain regions in the West. Elevations range from 5,300 feet to 12,799 feet above sea level. The company has living quarters for the operators' use during the long Montana winters. "I grew up on a farm in North Dakota, so the remoteness doesn't bother me," Olson says. "I like being outdoors, and it's really neat to see bighorn sheep walking by your house."

PPL Corporation 2007 Annual Report 17

Keen Understanding of Mqrke S PPL people possess insight and savvy about a wide assortment of energy products and services across multiple geographies. They don't need to make speculative decisions in order for PPL to grow. In an interconnected, 24/7 global economy, they carefully and confidently make high-stakes decisions on matters of commodity prices, futures contracts and foreign currency exchange. They thoroughly analyze shifts in regulations, economic conditions, finance and consumer preferences. So they remain alert to seize opportunities for PPL to grow profitably in a changing business environment.

PPL Corporation 2007 Annual Report 19

PPL EnergyPlus, PPL's energy marketing and trading arm, actively buys and sells energy in selected competitive wholesale and deregulated retail markets. The company provides energy solutions to business, industry, government and institutions.

PPL EnergyPlus arms its customers with useful and practical guidance that leads to transactions with less risk and more price certainty.

Professionals such as Debbie Gross (at right), a senior term trader in Allentown, Pa., are joined by colleagues in another state-of-the-art trading floor in Butte, Mont.

Working in shifts around the Getting More Physical and Financial While clock, they monitor the physical energy and financial markets.

They keep abreast of wide-M inimizing Ri'sk ranging factors such as government policy changes, market rule changes and volatile fuel prices - all or any of which could affect transactions dayby day and even hour by hour.

PPL's marketing and trading activities are primarily backed by firm sales from the tangible assets of PPL's own power plants. However, an expansion of this operation has allowed PPL to extract additional value from a wider array of wholesale products and services available in the market.

In a complex business with many variables, knowledge and insight are absolutely critical. So is the management of risks. A sophisticated, quantitative risk management operation monitors all marketing activities on a real-time basis. Over-all, generation and energy marketing and trading account for more than half of the corporation's annual earnings. This operation maximizes value for shareowners within appropriate risk limits.

20 PPL Corporation 2007 Annual Report

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Our PPL Renewable Energy affiliate is a growing participant in the renewable energy market, helping commercial, industrial and institutional customers harness the power in solar, biomass, hydro and waste coal sources. For example, PPL installed solar panels that convert energy from sunlight into electricity at the training and practice complex of the National Football League's Philadelphia Eagles, whose senior vice president and chief financial officer, Donald Smolenski, is shown at left.

We build, own, operate and Balancing Bottom Lines and maintain many of these projects. They generate clean, reliable and renewable energy with low or no emissions of Environm ental carbon dioxide and other gases that are harmful contributors to global warming.

PPL Renewable Energy's projects provide the equivalent of planting tens of thousands of acres of trees or removing thousands of cars from the road. All this, and we help reduce the energy bills of PPL Renewable Energy's customers, too.

Besides the value of the energy itself to PPL and our customers, these projects generate renewable energy credits. These credits are traded on the market just like many other commodities. They are important to us in growing our energy supply portfolio and selling electricity in the growing number of states that have renewable energy standards as a prerequisite for selling electricity there.

Already, about 10 percent of the energy marketed by PPL comes from renewable sources. And we plan to invest more than $600 million in new renewable energy projects through 2011, including projects at our existing hydroelectric facilities. It's how we are continuing our long history of generating energy in an environmentally responsible manner.

PPL Corporation 2007 Annual Report 23

In today's competitive energy business, PPL recognizes that a company needs to have an edge to be successful. Good environmental performance is one important way/to maintain that competitive edge.

One of PPL Corporation's core beliefs is that our business success is linked to the prosperity and quality of life of the communities we serve. That belief drives our environmental principles of responsibility, stewardship, communication, resource commitment, innovation, compliance and improvement.

PPL's power plants use a diverse Actively Prot ecting the mix of coal, oil, natural gas, nuclear fuels Enviz nen)onf t and hydropower to generate electricity.

This balance ensures affordable and reliable power, while taking advantage of cleaner fuels where possible. PPL plans to expand generating capacity at existing nuclear and hydro plants, which do not emit greenhouse gases. We also decommissioned two coal-fired power plants in 2007, which will reduce annual carbon dioxide emissions by about 1 million tons.

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The company has made significant investments in its coal-fired power plants to improve environmental performance. Despite a dramatic increase in the demand for electricity, PPL, since the early 1990s, has cut nitrogen oxide 24 PPL Corporation 2007 Annual Report

emission rates by almost 70 percent, sulfur dioxide emission rates by more than 40 percent and carbon dioxide emission rates by about 12 percent.

PPL has developed biogas and solar energy projects and will continue to invest in new renewable energy projects. One of our renewable energy projects was selected as a 2006 "Project of the Year" by the Environmental Protection Agency, and another of our projects earned a 2007 "Community Partner of the Year" award from the EPA.

Around its power plants, PPL operates six environmental preserves that protect thousands of acres of land to provide refuge for wildlife, restore endangered species and protect habitats. Environmental education opportunities and programs at these facilities reach hundreds of thousands of children and adults each year.

And when we commissioned a new corporate office building as part of our headquarters complex in Allentown, Pa., several years ago, we insisted on a design that incorporated all of the latest "green building" features such as technologies to save water and reduce energy consumption.

PPL's senior management continues to evaluate its position on global climate change and other key issues facing the energy sector and society in general. PPL took the step in 2007 of supporting federal legislation in the United States to limit greenhouse gas emissions. We continue to remain active in the legislative process as proposals take shape.

Smart environmental moves are also smart business moves. Doing the right thing for the environment is a key to building shareowner value.

PPL Corporation 2007 Annual Report 25

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A Message from Paul Farr It doesn't seem like a full year has gone by in my role as chief financial officer, but it has. This transition has been just a small part of a very eventful year for PPL, underscoring our financial strength, ability to identify growth alternatives and capability to deliver strong total return to our shareowners.

The successful sales of our Latin American portfolio and our domestic telecommunication operations in 2007 have helped us to generate significant cash flow. And the completion of a deal announced in early 2008 to sell our gas Paul Farr and propane businesses will Executive Vice President further strengthen our cash and Chief FinancialOfficer flow position.

In late 2007 and early 2008, we repurchased

$750 million in shares of our common stock, a decision we were confident in making as our credit metrics continue to improve and as we approach the solid growth in cash flow and earnings we expect for 2010 and beyond. Our business plan includes additional share repurchases beginning in early 2009. However, we view stock buybacks as a placeholder for other growth opportunities, such as investments in new electricity generation assets, that have the ability to generate even greater shareowner value.

In addition, we fully expect to be able to fund all capital expenditures in our current business plan with cash from operations and the issuance of long-term debt and hybrid securities.

On the dividend front, we understand that dividend growth remains an important component of total shareowner return for PPL. As Jim mentioned in his chairman's letter, the company raised its annual dividend rate by 10 percent to $1.34 per share, effective with the April 1, 2008, dividend payment. This increase results in a dividend payout ratio of 56 percent based on the $2.40 per share midpoint of our 2008 earnings forecast.

The combination of stock price appreciation and the reinvestment of growing dividends places us among the very best performers in our industry in terms of total shareowner return, a lofty position we are striving very hard to maintain.

PPL Corporation 2007 Annual Report 27

Selected Financial and Operating Data PPL Corporation l) 2007 2006 2005 2004 2003 Income Items - millions Operating revenues(b) $ 6,498 $ 6,131 $ 5,539 $ 5,195 $ 5,005 Operating income (1) 1,683 1,509 1,273 1,332 1,285 Income from continuing operations (h) 1,013 839 693 679 701 Net income 1,288 865 678 698 734 Balance Sheet Items - millions (0 Property, plant and equipment- net(d) 12,605 12,069 10,916 11,149 10,593 Recoverable transition costs 574 884 1,165 1,431 1,687 Total assets 19,972 19,747 17,926 17,733 17,123 Long-term debt (d) 7,568 7,746 7,081 7,658 7,859 Long-term debt with affiliate trusts 89 89 89 681 Preferred securities ofa subsidiary 301 301 51 51 51 Common equity 5,556 5,122 4,418 4,239 3,259 Short-term debt 92 42 214 42 56 Total capital provided by investors (d) 13,517 13,300 11,853 12,079 11,906 Capital lease obligations 10 11 11 12 Financial Ratios Return on average common equity - % 24.47 17.81 15.65 18.14 26.55 Embedded cost rates (c)

Long-term debt - % 6.29 6.37 6.60 6.67 6.56 Preferred securities - % 6.18 6.18 5.14 5.14 5.14 Times interest earned before income taxes 3.46 3.39 2.71 2.79 2.97 Ratio of earnings to fixed charges - total enterprise basis (0 3.0 2.9 2.4 2.5 2.6 Common Stock Data Number of shares outstanding - thousands Yea r-end 373,271 385,039 380,145 378,143 354,723 Average 380,563 380,754 379,132 368,456 345,589 Number of shareowners of record (0 76,354 77,762 79,198 81,175 83,783 Income from continuing operations - Basic EPS (h) $ 2.66 $ 2.20 $ 1.83 $ 1.84 $ 2.03 Income from continuing operations - Diluted EPS(b) $ 2.63 $ 2.17 $ 1.81 $ 1.83 $ 2.02 Net income - Basic [PS $ 3.39 $ 2.27 $ 1.79 $ 1.89 $ 2.13 Net income - Diluted [PS $ 3.35 $ 2.24 $ 1.77 $ 1.89 $ 2.12 Dividends declared per share $ 1.22 $ 1.10 $ 0.96 $ 0.82 $ 0.77 Book value per share (0 $ 14.88 $ 13.30 $ 11.62 $ 11.21 $ 9.19 Market price per share(0 $ 52.09 $ 35.84 $ 29.40 $ 26.64 $ 21.88 Dividend payout rate - % (1) 36 49 54 44 36 Dividend yield - %(g) 2.34 3.07 3.27 3.08 3.52 Price earnings ratio M(9) 15.55 16.00 16.61 14.10 10.32 Sales Data - millions of kWh Domestic - Electric energy supplied - retail 40,074 38,810 39,413 37,673 36,774 Domestic - Electric energy supplied - wholesale 35,675 32,602 33,768 37,394 37,841 Domestic - Electric energy delivered 37,950 36,683 37,358 35,906 36,083 International - Electric energy delivered (h) 31,652 33,352 33,146 32,846 31,952

'n Theearnings each year were affected byseveral special items that management considers significant. See"Earnings"in Management's Discussion and Analysis of Financial Condition and Results ofOperations for a description of special items in2007, 2006 and 2005.

hI Data forcertain years are reclassified toconform to the current presentation, which includes the classification of the Latin American businesses and PPL's natural gas distribution and propane businesses as discontinued operations. See Note10to the Financial Statements for additional information.

Asof each respective year-end.

01 Theyear2007 excludesamounts relatedto PPLs natural gas distribution and propane businessesthathave been classified as heldforsaleatDecember31, 2007. See Note1Otothe Financial Statementsfor additional information.

0) Computed using earnings and fixed charges of PPLand itssubsidiaries. Fixed charges consist of interest onshort-and long-term debt, other interest charges, the estimated interest component of other rentals and preferred dividends.

Ms) Based ondiluted EPS.

(0) Based onyear-end market prices.

(h) Allyears include the deliveries associated with the Latin American businesses, until the dates oftheir sale in2007.

28 PPL Corporation 2007 Annual Report

Management's Discussion and Analysis Termsand abbreviations areexplained inthe glossary onpages 117-119. Dollars areinmillions, except per share data, unless otherwise noted.

Forward-looking Information o the impact of any state, federal or foreign investigations applicable to PPL and its subsidiaries and the energy industry; Statements contained inthis report concerning expectations, beliefs, plans, o capital market conditions, including changes ininterest rates, and decisions objectives, goals, strategies, future events or performance and underlying regarding capital structure; assumptions and other statements which are other than statements of historical o stock price performance of PPL; facts are "forward-looking statements" within the meaning of the federal o the market prices of equity securities and the impact on pension costs and securities laws. Although PPL believes that the expectations and assumptions resultant cash funding requirements for defined benefit pension plans; reflected inthese statements are reasonable, there can be no assurance that o securities and credit ratings; these expectations will prove to be correct. Forward-looking statements involve o foreign currency exchange rates; a number of risks and uncertainties, and actual results may differ materially from o the outcome of litigation against PPL and its subsidiaries; the results discussed inthe Management's Discussion and Analysis section herein. o potential effects of threatened or actual terrorism or war or other hostilities; and The following are among the important factors that could cause actual results to o the commitments and liabilities of PPL and its subsidiaries.

differ materially from the forward-looking statements:

o market demand and prices for energy, capacity and fuel; Any such forward-looking statements should be considered inlight of such o weather conditions affecting generation production, customer energy use important factors and inconjunction with PPL's Form ID-K and other reports on and operating costs; file with the SEC.

o competition inretail and wholesale power markets; New factors that could cause actual results to differ materially from those o liquidity of wholesale power markets; described inforward-looking statements emerge from time to time, and it is

" defaults by our counterparties under our energy, fuel or other power not possible for PPL to predict all of such factors, or the extent to which any such product contracts; factor or combination of factors may cause actual results to differ from those o the effect of any business or industry restructuring; contained inany forward-looking statement. Any forward-looking statement o the profitability and liquidity, including access to capital markets and speaks only as of the date on which such statement ismade, and PPL undertakes credit facilities, of PPL and its subsidiaries; no obligation to update the information contained insuch statement to reflect

" new accounting requirements or new interpretations or applications of subsequent developments or information.

existing requirements; o operation, availability and operating costs of existing generation facilities; Overview o transmission and distribution system conditions and operating costs; PPL isan energy and utility holding company with headquarters inAllentown, PA.

o current and future environmental conditions and requirements and the related PPL's reportable segments are Supply, International Delivery and Pennsylvania costs of compliance, including environmental capital expenditures, emission Delivery. Through its subsidiaries, PPL isprimarily engaged inthe generation and allowance costs and other expenses; marketing of electricity intwo key markets - the northeastern and western U.S.

o significant delays inthe ongoing installation of pollution control equipment at - and inthe delivery of electricity inPennsylvania and the U.K. In2007, PPL sold certain coal-fired generating units inPennsylvania due to weather conditions, its regulated electricity delivery businesses inLatin America, which were included contractor performance or other reasons; inthe International Delivery segment. InJuly 2007, PPL announced its intention to

" market prices of commodity inputs for ongoing capital expenditures; sell its natural gas distribution and propane businesses, which are included inthe

• collective labor bargaining negotiations; Pennsylvania Delivery segment. See Note 10 to the Financial Statements for infor-o development of new projects, markets and technologies; mation on the sales and planned divestitures. PPL's overall strategy isto achieve o performance of new ventures; disciplined growth inenergy supply margins while limiting volatility inboth cash o asset acquisitions and dispositions; flows and earnings and to achieve stable, long-term growth inregulated electricity o political, regulatory or economic conditions instates, regions or countries delivery businesses through efficient operations and strong customer and regula-where PPL or its subsidiaries conduct business; tory relations. More specifically, PPL's strategy for its electricity generation and o any impact of hurricanes or other severe weather on PPL and its subsidiaries, marketing business isto match energy supply with load, or customer demand, including any impact on fuel prices; under contracts of varying lengths with creditworthy counterparties to capture o receipt of necessary governmental permits, approvals and rate relief; profits while effectively managing exposure to energy and fuel price volatility and o new state, federal or foreign legislation, including new tax legislation; counterparty credit risk. PPL's strategy for its electricity delivery businesses isto o state, federal and foreign regulatory developments; own and operate these businesses at the most efficient cost while maintaining high quality customer service and reliability.

PPL Corporation 2007 Annual Report 29

Management's Discussion and Analysis PPL faces several risks inits generation business. The principal risks are elec- to need for residential, small commercial and small industrial customers. In tricity and capacity wholesale price risk, fuel supply and price risk, power plant November 2007, PPL Electric filed a plan with the PUC, which isstill pending, under performance, evolving regulatory frameworks and counterparty credit risk. PPL which its residential and small commercial customers, beginning inmid-2008, attempts to manage these risks through various means. For instance, PPL operates could begin to pay inadvance to smooth the impact of price increases when gen-a portfolio of generation assets that isdiversified as to geography, fuel source, eration rate caps expire in2010. InSeptember 2007, the PUC regulations regarding cost structure and operating characteristics. PPL currently expects to expand its the obligation of Pennsylvania electric utilities to provide default electricity supply generation capacity over the next several years through power uprates at certain in2011 and beyond became effective. Later this year, PPL Electric plans to file for of its existing power plants, the potential construction of new plants and the PUC approval of its post-2010 supply procurement plan under these regulations.

potential acquisition of existing plants or businesses. PPL isand will continue to Inaddition to this regulatory activity, the Governor of Pennsylvania has proposed remain focused on the operating efficiency and availability of its existing and any an Energy Independence Strategy which, among other things, contains initiatives newly constructed or acquired power plants. Inaddition, PPL has executed and to address PLR issues including a requirement that PLRs will obtain a "least-cost continues to pursue contracts of varying lengths for energy sales and fuel supply, portfolio" of electric supply. The Pennsylvania legislature has convened and con-and other means to mitigate the risks associated with adverse changes inthe tinues a special session to address the proposals inthe Governor's Strategy and difference, or margin, between the cost to produce electricity and the price at other energy issues. Inaddition, certain Pennsylvania legislators have introduced which PPL sells it. PPL's future profitability will be affected by whether PPL decides legislation to extend generation rate caps or otherwise limit cost recovery through to, or isable to, continue to enter into long-term or intermediate-term power sales rates for Pennsylvania utilities beyond the end of their transition periods, which in and fuel purchase agreements or renew its existing agreements and prevailing PPL Electric's case isDecember 31, 2009. PPL and PPL Electric have expressed market conditions. Currently, PPL's commitments for energy sales are satisfied strong concern regarding the severe potential consequences of such legislation on through its own generation assets and supply purchased from third parties. PPL customer service, system reliability, adequate future generation supply and PPL markets and trades around its physical portfolio of generating assets through Electric's financial viability.

integrated generation, marketing and trading functions. PPL faces additional financial risks inconducting international operations, PPL has inplace risk management programs that, among other things, are such as fluctuations inforeign currency exchange rates. PPL attempts to manage designed to monitor and manage its exposure to earnings and cash flow volatility these financial risks through its risk management programs.

related to changes inenergy and fuel prices, interest rates, foreign currency Inorder to manage financing costs and access to credit markets, a key objective exchange rates, counterparty credit quality and the operating performance of its for PPL's business as a whole isto maintain a strong credit profile. PPL continually generating units. focuses on maintaining an appropriate capital structure and liquidity position.

The principal challenge that PPL faces inits electricity delivery businesses is The purpose of"Management's Discussion and Analysis" isto provide to maintain high quality customer service and reliability ina cost-effective manner. information concerning PPL's past and expected future performance inimple-PPL's electricity delivery businesses are rate-regulated. Accordingly, these busi- menting the strategies and managing the risks and challenges mentioned nesses are subject to regulatory risk with respect to costs that may be recovered above. Specifically:

and investment returns that may be collected through customer rates. Inparticular, " "Results of Operations" provides an overview of PPL's operating results in2007, uncertainty driven by potential changes inthe regulatory treatment of PPL 2006 and 2005, including a review of earnings, with details of results by report-Electric's PLR obligation after 2009, when its full requirements supply contracts able segment. Italso provides a brief outlook for 2008.

with PPL EnergyPlus expire, presents a risk for the domestic electricity delivery " "Financial Condition - Liquidity and Capital Resources" provides an analysis business. The Customer Choice Act requires electricity delivery companies, like of PPL's liquidity position and credit profile, including its sources of cash PPL Electric, to act as a PLR of electricity and provides that electricity supply costs (including bank credit facilities and sources of operating cash flow) and uses will be recovered by such companies pursuant to regulations to be established of cash (including contractual commitments and capital expenditure require-by the PUC. As discussed inmore detail in"Results of Operations - Segment ments) and the key risks and uncertainties that impact PPL's past and future Results - Pennsylvania Delivery Segment - 2008 Outlook," there are a number liquidity position and financial condition. This subsection also includes a listing of ongoing regulatory and legislative activities that may affect PPL Electric's and discussion of PPL's current credit ratings.

recovery of supply costs after 2009. InMay 2007, the PUC approved PPL Electric's " "Financial Condition - Risk Management- Energy Marketing &Trading and plan to procure default electricity supply in2007-2009 for retail customers who Other" provides an explanation of PPL's risk management programs relating do not choose an alternative competitive supplier in2010. Pursuant to this plan, to market risk and credit risk.

PPL Electric has contracted for one-third of the 2010 electricity supply itexpects 30 PPL Corporation 2007 Annual Report

• "Application of Critical Accounting Policies" provides an overview of the Supply segment net income was:

accounting policies that are particularly important to the results of operations 2007 2006 2005 and financial condition of PPL and that require its management to make Energy revenues significant estimates, assumptions and other judgments. External $1,615 $1,659 $1,225 Intersegment 1,810 1,708 1,590 The information provided inthis Management's Discussion and Analysis Energy-related businesses 732 580 550 should be read inconjunction with PPL's Consolidated Financial Statements 3,365 Total operating revenues 4,157 3,947 and the accompanying Notes. Fueland energy purchases External 1,419 1,560 1,166 Results of Operations Intersegment 159 160 152 Other operation and maintenance 715 707 734 Earnings Depreciation 167 159 144 Net income and the related EPS were: Taxes, other than income 31 35 36 2007 2006 2005 Energy-related businesses 745 621 620 Total operating expenses 3,236 3,242 2,852 Net income $1,288 $865 $678 Other Income - net 38 4 (2)

EPS- basic $ 3.39 $2.27 $1.79 Interest Expense 156 123 115 EPS- diluted $ 3.35 $2.24 $1.77 Incomelaxes 232 147 22 The changes innet income from year to year were, inpart, attributable to Minority Interest 3 3 2 Lossfrom Discontinued Operations 20 53 several special items that management considers significant. Details of these Cumulative Effect of a Change in special items are provided within the review of each segment's earnings. Accounting Principle (8)

The year-to-year changes insignificant earnings components, including Net Income $ 568 $ 416 $ 311 domestic gross energy margins by region and significant income statement line The after-tax changes in net income between these periods were due to the items, are explained inthe "Statement of Income Analysis."

following factors, including Discontinued Operations.

PPL's earnings beyond 2007 are subject to various risks and uncertainties.

See the rest of Management's Discussion and Analysis and Note 15 to the Financial 2007 vs. 2006 2006 vs.2005 Statements for a discussion of the risks, uncertainties and factors that may impact Eastern U.S.non-trading margins $ 63 $105 PPL's future earnings. Western U.S. non-trading margins 16 7 Net energy trading margins 3 1 Segment Results Energy-related businesses 1 5 Net income by segment was: Earnings from synfuel projects 22 (32) 2007 2006 2005 Other operation and maintenance (19) (28)

Depreciation (5) (7)

Supply $ 568 $416 $311 Other income - net (Note 17) 9 (3)

International Delivery 610 268 215 Realized earnings on nuclear decommissioning Pennsylvania Delivery 110 181 152 trust (Note 17) 4 Total $1,288 $865 $678 Financing costs (16) 3 Certain tax adjustment (Note 5) 13 Supply Segment Other 1 (I)

The Supply segment primarily consists of the domestic energy marketing, domestic Special items 64 51 generation and domestic development operations of PPL Energy Supply. In August $152 $105 2007, PPL completed the sale of its domestic telecommunication operations. See e See "Domestic Gross Energy Margins" for an explanation of non-trading margins Note 9 to the Financial Statements for additional information, by geographic region and for an explanation of net energy trading margins.

The Supply segment results in 2006 and 2005 reflect the reclassification of

• The improved earnings contributions from synfuel projects in 2007 compared PPL's interest in the Griffith plant's operating revenues and expenses from certain with 2006 resulted primarily from higher net gains on options purchased to income statement line items to Discontinued Operations. The Supply segment hedge the risk associated with the phase-out of synthetic fuel tax credits. Thes e results in2005 also reflect the reclassification of the Sundance plant's revenues net gains were partially offset by higher operating losses due to increased and expenses to Discontinued Operations. See Note 10 to the Financial Statements production and by lower utilization of tax credits due to the level of crude oil for additional information, prices. The decline inearnings contributions from synfuel projects in2006 PPL Corporation 2007 Annual Report 31

Management's Discussion and Analysis compared with 2005 resulted primarily from the anticipated phase-out of the Montour power plant and at Unit 3 of the Brunner Island power plant, which synthetic fuel tax credits starting in2006 and lower production levels due to are expected to be placed inservice in2008. PPL expects these negative effects to high crude oil prices. See Note 15 to the Financial Statements for additional be partially offset by higher energy margins as a result of higher-valued wholesale information on the shutdown of these facilities. energy contracts and higher expected baseload generation compared with 2007.

" Higher operation and maintenance expenses in2007 compared with 2006 InternationalDelivery Segment were primarily due to higher outage costs at PPL's coal, hydro and nuclear The International Delivery segment includes operations of the international energy power plants. Higher operation and maintenance expenses in2006 compared businesses of PPL Global that are primarily focused on the distribution of electricity.

with 2005 were primarily due to increased outage and non-outage expenses PPL Global's major remaining international business is located inthe U.K. In2007, at the Susquehanna nuclear facility and certain of PPL's coal plants and the PPL completed the sale of its Latin American businesses. See Note 10 to the timing of other planned outages.

Financial Statements for additional information.

• Financing costs were higher in2007 compared with 2006, primarily due to The International Delivery segment results in2007, 2006 and 2005 reflect the higher interest expense on long-term debt partially resulting from increased reclassification of Latin American revenues and expenses to Discontinued Operations.

average debt outstanding at higher interest rates.

International Delivery segment net income was:

The following after-tax amounts, which management considers special items, 2007 iuns 2005 also had a significant impact on the Supply segment earnings. See the indicated uinty reveniues $863 $756 $717 Notes to the Financial Statements for additional information. Energy-related businesses 36 37 37 2007 2006 2005 Total operating revenues 900 793 753 Other operation and maintenance 252 186 161 Mark-to-market adjustments from energy-related, non-trading economic hedges W $(11) Depreciation 147 142 133 Impairment of domestic telecommunication Taxes, other than income 67 57 57 operations (Note 9) Energy-related businesses 17 17 15 Settlement of Wallingford cost-based rates (Note 15) Total operating expenses 483 402 366 Impairment of certain transmission rights (Note 15) Other Income - net 26 27 5 Sale of interest inthe Griffith plant (Note 10) (16) Interest Expense 183 173 175 Reduction inEnron reserve (Note 15) 11 Income Tax(Benefit) Expense (43) 19 39 Impairment of synfuel-related assets (Note 15) (6) Income from Discontinued Operations 307 42 37 Off-site remediation of ash basin leak (Note 15) 6 $(27) Net Income $610 $268 $215 Workforce reduction (Note 13) (4) (3)

PJMbilling dispute (Note tS) (1) (18) The after-tax changes in net income between these periods were due to the Impairment of nuclear decommissioning trust following factors, including Discontinued Operations.

investments (Note 21) (3)

Sale of the Sundance plant (Note 10) (47) 2007 vs. 2006 2006 vs.2005 Acceleration of stock-based compensation expense U.K.

for periods prior to 2005 (Note I) (3) Delivery margins $11 $32 Settlement of NorthWestern litigation tb) (6) Other operation and maintenance (14) (15)

Recording of conditional AROs (Note 21) (8) Depreciation 5 (9)

Total $ 24 $(40) $(91) Income taxes (39) 34 ta Themark-to-market impact on transactions, which do not qualify for hedge accounting under Foreign currency exchange rates 22 (5)

SFAS 133,"Accounting for Derivative Instruments and Hedging Activities,"as amended and interpret- Impairment of investment inU.K. real estate (Note 9) 6 (6) ed, and are probable of going to physical delivery, iseconomically neutral to PPL.These transactions are intended to economically hedge a specific riskand do not represent speculative trading activity. Gain on transfer of equity investment (Note 9) S See"Changes inDomestic Gross Energy Margins byRegion"and Note 18tothe Financial Statements Hyder liquidation distributions (Note 9) (21) 27 foradditional information regarding economic activity. Other 2 5 (br Inthe first quarter of 2005, PPL recognized a charge for a loss contingency related to litigation with 5 Discontinued operations 6 NorthWestern. InSeptember 2005, PPL and NorthWestern reached a finalagreement to settle this U.S.income taxes 26 (22) litigation.

Change ina U.S.income tax reserve 31 Loss on economic hedges (Note 16) (7) 2008 Outlook Other 6 1 Special items 308 1 Excluding special items, PPL projects lower 2008 earnings for its Supply segment

$342 $53 compared with 2007 as a result of the loss of synfuel-related earnings and higher depreciation for scrubbers being installed at both coal-fired generation units at 32 PPL Corporation 2007 Annual Report

" Higher U.K. delivery margins, for both periods, were primarily due to price Pennsylvania Delivery segment net income was:

increases and favorable changes in customer mix. The increase in 2007 2007 2006 2005 compared with 2006 was partially offset by a 3% decrease in sales volume, Operating revenues partially due to milder weather in 2007.

External $3,251 $3,098 $3,011

" Higher U.K. operation and maintenance expenses in 2007, compared with 2006, Intersegment 159 160 152 were primarily due to higher: compensation and pension costs; distribution Energy-related businesses I network repairs; and insurance expense. Higher U.K. operation and mainte- Total operating revenues 3,410 3,259 3,163 nance expenses in 2006 compared with 2005 were due primarily to increased Fueland energy purchases External 207 176 257 pension costs.

Intersegment 1,810 1,708 1,590

" The change in U.K. income taxes for both periods was primarily due to the Other operation and maintenance 406 373 378 transfer of a future tax liability from WPD and certain surplus tax losses from Amortization of recoverable transition costs 310 282 268 Hyder to a former Hyder affiliate that occurred in 2006. See Note S to the Depreciation 132 118 112 Financial Statements for additional information. Taxes,other than income 200 189 185

" Changes in foreign currency exchange rates increased WPD's portion of revenue Total operating expenses 3,065 2,846 2,790 and expense line items by 11%in 2007 compared with 2006 and decreased Other Income - net 31 31 21 Interest Expense 135 151 182 them by 2% in 2006 compared with 2005.

Income Taxes 81 102 67

" U.S. income taxes decreased in 2007 compared with 2006 due to WPD dividend Dividends on Preferred Securities 18 14 2 planning, higher foreign tax credits on U.K. distributions and true-ups of prior (Loss) Income from Discontinued Operations (32) 4 9 year returns. U.S. income taxes increased in2006 compared with 2005 primarily Net Income $ 110 S 181 5 152 due to a 2005 tax true-up, 2006 WPD dividend planning and lower utilization The after-tax changes in net income between these periods were due to the of foreign tax credits.

following factors, including Discontinued Operations.

" The change ina U.S. income tax reserve resulted from the lapse of an applicable statute of limitations. 2007 vs. 2006 2006 vs.2005 Delivery revenues (net of CTC/iTC amortization, interest The following after-tax amounts, which management considers special items, expense on transition bonds and ancillary charges) $15 $ (6) also had a significant impact on the International Delivery segment earnings. See Operation and maintenance (5) (13) the indicated Notes to the Financial Statements for additional information. Depreciation (8) (4)

Financing costs (3) (6) 2007 2006 2005 Interest income on loans to affiliates (1) 4 Sale of Latin American businesses (Note 10) $259 Income tax adjustments (2) (5)

Change inU.K. tax rate (Note 5) 54 Discontinued operations 8 (5)

Reduction inEnron reserve $1 Other 5 Workforce reduction (Note 13) (4) Special items (80) 64 Total $309 $1 $(71) $29 2008 Outlook " Delivery revenues increased in 2007 compared with 2006 primarily due to a Excluding special items, PPL projects the earnings of its International Delivery 4% increase in sales volume. This increase was primarily due to the impact of segment will decline in 2008 compared with 2007, due to the 2007 sale of PPL's favorable weather in 2007 on residential and commercial sales and to normal Latin American businesses and higher U.S. income taxes, primarily driven by the load growth. Delivery revenues decreased in 2006 compared with 2005 U.S. income tax benefits realized in 2007, Partially offsetting the impact of these primarily due to milder weather in 2006.

negative earnings drivers is lower pension expense at WPD.

• Operation and maintenance expenses increased in 2007 compared with 2006, primarily due to increased tree trimming, defined benefit and consumer PennsylvaniaDelivery Segment education expenses. Operation and maintenance expenses increased in 2006 The Pennsylvania Delivery segment includes the regulated electric and gas delivery compared with 2005, primarily due to increased tree trimming costs, a union operations of PPL Electric and PPL Gas Utilities. InJuly 2007, PPL announced its contract ratification bonus and storm restoration costs.

intention to sell its natural gas distribution and propane businesses. See Note 10

" Depreciation expense was higher in both periods primarily due to PP&E additions.

to the Financial Statements for additional information.

" Earnings from Discontinued Operations increased in 2007 compared with 2006 The Pennsylvania Delivery segment results in 2007, 2006 and 2005 reflect the primarily due to higher revenues as a result of higher gas distribution rates that reclassification of the natural gas distribution and propane businesses' revenues became effective in early 2007.

and expenses to Discontinued Operations.

PPL Corporation 2007 Annual Report 33

Management's Discussion and Analysis The following after-tax amounts, which management considers special items, InMay 2007, the PUC approved final regulations regarding the obligation of also had a significant impact on the Pennsylvania Delivery segment earnings. See Pennsylvania electric utilities to provide default electricity supply in2011 and the indicated Notes to the Financial Statements for additional information. beyond. The new regulations provide that default service providers will acquire 2007 2006 2005 electricity supply at prevailing market prices pursuant to procurement and imple-mentation plans approved by the PUC. The regulations also address the utilities' Anticipated sale of gas and propane businesses (Note 10) $(44) recovery of market supply costs. The final regulations became effective in Workforce reduction (1) September 2007.

Realization of benefits related to Black Lung Trust Inaddition, the Governor of Pennsylvania proposed an Energy Independence assets (Note 13) $21 Strategy (Strategy) inearly 2007 which, among other things, contains initiatives PJMbilling dispute (Note 15) 21 $(27)

Reversal of cost recovery - Hurricane Isabel to address PLR issues. For example, under the Strategy, retail customers could (Note 1) (7) elect to phase-in over three years any initial generation rate increase approved by Acceleration of stock-based compensation the PUC. Also, PLR providers would be required to obtain a "least cost portfolio" of expense for periods prior to 2005 (Note 1) (2)

Total $(45) $35 $(29) supply by purchasing power inthe spot market and through contracts of varying lengths, and the provider would be required to procure energy conservation 2008 Outlook resources before acquiring additional power. Inaddition, PLR providers could enter Excluding special items, PPL projects higher earnings for its Pennsylvania into long-term contracts with large energy users and alternative energy develop-Delivery segment, driven by higher revenues as a result of PPL Electric's new ers. It isuncertain at this time whether the details of implementing the Strategy, distribution rates effective January 1,2008. including the issues of deferral of costs and recovery of interest for the customer In March 2007, PPL Electric filed a request with the PUC to increase distribu- rate phase-in program and the timing of PUC approval for PLR supply portfolios, tion rates by approximately $84 million (subsequently amended to $77 million). will be delegated to the PUC.

In August 2007, PPL Electric entered into a settlement agreement with the parties Components of the Strategy are included invarious bills. One such bill that to increase its distribution rates by $55 million, effective January 1,2008, for an passed inthe Pennsylvania House of Representatives (House) inFebruary 2008, overall revenue increase of 1.7% over PPL Electric's 2007 rates. In December 2007, contains conservation and demand-side management targets and mandatory the PUC approved this settlement without modification. deployment of smart metering technology. The bill provides for full and current In May 2007, the PUC approved PPL Electric's plan to procure default elec- cost recovery through an energy efficiency and demand-side management tricity supply in 2007-2009 for retail customers who do not choose an alternative recovery mechanism.

competitive supplier in 2010 after PPL Electric's PLR contract with PPL EnergyPlus InSeptember 2007, the Pennsylvania General Assembly convened aspecial expires. Under the plan, PPL Electric was approved to issue a series of competitive session to address the proposals inthe Governor's Strategy. Central to the bids for such supply in 2007, 2008 and 2009. InJuly 2007, the PUC approved bids Governor's Strategy isan $850 million Energy Independence Fund to support for the first of six competitive solicitations and PPL Electric entered into supply alternative and renewable energy sources and energy conservation that would be contracts for 850 MW, or one-sixth of its expected electricity supply needs in funded through revenue bonds and a surcharge on electricity bills. The Pennsylvania 2010 for residential, small commercial and small industrial customers who do not Senate (Senate) has formed a special committee to manage legislation for the choose a competitive supplier. The average generation supply prices from the first special legislative session. As an alternative to the Governor's $850 million Energy bid process were $101.77 per MWh for residential customers and $105.11 per Independence Fund, the full Senate has approved a bill that would create a MWh for small commercial and small industrial customers. In October 2007, the $650 million fund for clean energy projects, conservation and energy efficiency PUC approved bids for the second competitive solicitation and PPL Electric entered initiatives and pollution control projects that would be funded through revenue into contracts for another 850 MW of 2010 generation supply for these customers. bonds and gross receipts tax revenue, which will increase as rate caps expire. The The average generation supply prices from the second bid process were $105.08 House isalso considering similar legislation to create an $850 million fund, also to per MWh for residential customers and $105.75 per MWh for small commercial be funded through revenue bonds and gross receipts tax revenue.

and small industrial customers. As a result, PPL Electric has contracted for one- PPL and PPL Electric currently are working with Pennsylvania legislators, reg-third of the electricity supply it expects to need for 2010. Ifthe average prices paid ulators and other stakeholders to develop constructive measures to help customers for the supply purchased so far were to be the same for the remaining four pur- transition to market rates after 2009, including a variety of rate mitigation, educa-chases, the average residential customer's monthly bill in 2010 would increase tional and energy conservation programs, consistent with several initiatives being about 34.5% over 2009 levels, while small commercial and small industrial bills developed by the state administration and legislature. Inthis regardc, inNovember would increase inthe range of 22.8% to 42.2%. The estimated increases include 2007, PPL Electric requested the PUC to approve a plan under which its residential Pennsylvania gross receipts tax and an adjustment for line losses, and exclude PPL and small commercial customers could smooth the impact of price increases when Electric's January 1,2008 rate increase. Actual 2010 prices will not be known until generation rate caps expire in2010. The proposed phase-in plan would provide all six supply purchases have been made. The third solicitation will be conducted customers the option of paying additional amounts on their electric bills beginning in March 2008. inmid-2008 and continuing through 2009. Funds collected during 2008 and 34 PPL Corporation 2007 Annual Report

2009, plus accrued interest, would be applied to 2010 and 2011 electric bills, miti- Changes inDomestic Gross Energy MarginsBy Region gating the impact of the rate cap expiration. PPL Electric requested expedited Domestic gross energy margins are generated through PPLs non-trading and consideration by the PUC. Ten parties have filed responses to PPL Electric's peti- trading activities. PPL manages its non-trading energy business on a geographic tion, primarily because PPL Electric's proposal would offer the program on an basis that isaligned with its generation assets. Additionally, beginning in2006, "opt-out" basis (i.e., customers would be enrolled automatically and affirmatively PPL further segregates non-trading activities into two categories: hedge activity have to "opt-out" ifthey choose not to participate). The parties have reached a and economic activity. Economic activity represents the net unrealized effect of settlement of this proceeding under which PPL Electric has agreed to change the derivative transactions that are entered into as economic hedges, and that do not "opt-out" approach to an "opt-in" approach (i.e., customers would have to affir- qualify for hedge accounting, or for which hedge accounting was not elected, matively enroll). Inaddition, PPL Electric has agreed to make the program avail- under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities,"

able to customers enrolled inbudget billing. On February 27, 2008, the settlement as amended and interpreted.

agreement was filed with the Administrative Law Judge assigned to this case. The 2007 vs. 2006 2006 vs.2005 settlement must be approved by the Administrative Law Judge and the PUC.

Non-trading Certain Pennsylvania legislators have introduced or are contemplating the Eastern U.S. $180 $161 introduction of legislation to extend generation rate caps or otherwise limit cost Western U.S. 27 12 recovery through rates for Pennsylvania utilities beyond their transition periods, Net energy trading (6) 13 which inPPL Electric's case would be December 31, 2009. PPL and PPL Electric have Domestic gross energy margins $201 $186 expressed strong concern regarding the severe potential consequences of such legislation on customer service, system reliability, adequate future generation Eastern U.S.

supply and PPL Electric's financial viability. Ifsuch legislation or similar legislation Eastern U.S. non-trading margins, excluding results from economic activity and hedge ineffectiveness, were $119 million higher in2007 compared with 2006.

isenacted, PPL Electric could experience operating losses, cash flow shortfalls and This increase was primarily due to new full requirements supply contracts and other adverse financial impacts. Inaddition, continuing uncertainty regarding PPL Electric's ability to recover its market supply and other costs of operation after higher wholesale market prices for electricity. Also contributing to the improve-2009 could adversely impact its credit quality, financing costs and availability of ment was increased generation output from PPL's nuclear and coal generating credit facilities necessary to operate its business. Inaddition, PPL and PPL Electric facilities. Nuclear generation was 2%higher in2007. Coal generation was up believe that such an extension of rate caps, ifenacted into law, would violate federal slightly in2007 despite the retirement of Martins Creek Units I and 2 inSeptember.

Eastern U.S. non-trading margins that resulted from economic activity and law and the U.S. Constitution. At this time, PPL and PPL Electric cannot predict the final outcome or impact of this legislative and regulatory process. hedge ineffectiveness were $61 million higher in2007 compared with 2006. This change relates to gains inelectricity positions, including a $19 million increase in Statement of Income Analysis - Domestic Gross Energy Margins the fair value of capacity contracts in PJM related to PJM's implementation of its The following table provides pre-tax changes in the income statement line items Reliability Pricing Model (RPM). Prior to the RPM, PPL recorded valuation reserves that comprise domestic gross energy margins. for capacity contracts due to the lack of liquidity and reliable, observable prices 2007 vs. 2006 2006 vs.2005 inthe marketplace. With the implementation of the RPM and the completion of Utility $259 $126 PJM capacity auctions, forward capacity prices became sufficiently observable Unregulated retail electric 11 (10) and PPL no longer reserves for capacity contracts in PJM.

Wholesale energy marketing (60) 441 Eastern U.S. non-trading margins, excluding results from economic activity Net energy trading margins 6 3 and hedge ineffectiveness, were $166 million higher in2006 compared with Other revenue adjustments (,) (115) (5) 2005, primarily due to higher PLR sales prices and higher wholesale prices. PLR Total revenues 101 555 sales prices were 8.4% higher in2006, inaccordance with the schedule estab-Fuel 143 (33) lished by the PUC Final Order. Partially offsetting these higher margins was lower Energy purchases (253) 346 Other cost adjustments (a) 10 56 nuclear generation of 3%, as well as higher coal and nuclear fuel prices, which Total cost of sales (100) 369 were up 12% and 10%.

Domestic gross energy margins $201 $186 Eastern U.S. non-trading margins that resulted from economic activity and c Adjusted to exclude the impact of any revenues and costs not associated with domestic gross energy hedge ineffectiveness were $5million lower in2006 compared with 2005.

margins, consistent with the way management reviews domestic gross energy margins internally.

These exclusions include revenues and energy costs related to the international operations of PPL Western U.S.

Global, the domestic delivery operations of PPLElectric, revenues prior to 2007 associated with the settlement ofWallingford cost-based rates (see Note15to the Financial Statements for additional Western U.S. non-trading margins, excluding results from economic activity information) and an accrual for the loss contingency related to the PJM billing dispute in2005 and and hedge ineffectiveness, were $30 million higher in2007 compared with 2006.

2006 (see Note 15to the Financial Statements for additional information). Also adjusted to include the margins of the Griffithand Sundance plants prior to their sales inJune 2006 and May 2005, This increase was primarily due to higher market prices for electricity combined which are included inDiscontinued Operations, and gains or losses on sales of emission allowances, with increased generation from the coal-fired generating facilities. Coal genera-which are included in"Other operation and maintenance" expenses on the Statements of Income.

tion was 6%higher in2007.

PPL Corporation 2007 Annual Report 35

Management's Discussion and Analysis Western U.S. non-trading margins that resulted from economic activity and The increases in utility revenues for 2007 compared with 2006, excluding hedge ineffectiveness were $3million lower in 2007 compared with 2006. foreign currency exchange rate impacts, were primarily due to:

Western U.S. non-trading margins, excluding results from economic activity " higher PLR revenues and electric delivery revenues, primarily due to a 4%

and hedge ineffectiveness, were $10 million higher in2006 compared with 2005, increase in sales volume. This increase was primarily due to the impact of primarily due to higher wholesale prices. Also contributing to the increase was a favorable weather in 2007 on residential and commercial sales and to normal 6% increase in hydroelectric generation. Partially offsetting these improvements load growth; and were higher coal prices, which were up 14%, and the sale of PPL's 50% interest in " higher U.K.utility revenues, primarily due to an increase in prices effective the Griffith plant in June 2006 and the sale of PPL's Sundance plant in May 2005. April 1, 2007, favorable changes in customer mix and an increase in engineering See Note 10 to the Financial Statements for additional information on these sales. services performed for third parties. The increase was partially offset by a 3%

Western U.S. non-trading margins that resulted from economic activity and decrease insales volume, primarily due to milder weather in 2007.

hedge ineffectiveness were $2 million higher in 2006 compared with 2005.

The increases in utility revenues for 2006 compared with 2005, excluding Net Energy Trading foreign currency exchange rate impacts, were primarily due to:

PPL enters into energy contracts to take advantage of market opportunities. As a " higher PLR revenues resulting from an 8.4% rate increase, offset by a decrease in result, PPL may at times create a net open position in its portfolio that could result domestic electric delivery revenues, resulting from a decrease in sales volume in significant losses if prices do not move in the manner or direction anticipated. due in part to milder weather in 2006; and The margins from these trading activities are reflected inthe Statements of Income " higher U.K.utility revenues, primarily due to higher average prices and favorable as "Net energy trading margins." These physical and financial contracts cover changes in customer mix.

trading activity associated with electricity, gas and oil.

Energy-related Businesses Net energy trading margins decreased by $6 million in 2007 compared with Energy-related businesses contributed $27 million more to operating income in 2006. Energy trading margins from realized transactions decreased $10 million 2007 compared with 2006. The increase was primarily attributable to:

and were partially offset by an increase in unrealized transactions of $4million.

• $61 million of higher pre-tax contributions from synfuel projects. This reflects Net energy trading margins increased by $13 million in 2006 compared with a $66 million net gain on the settlement of options purchased to hedge the risk 2005. Energy trading margins from unrealized transactions increased $14 million associated with the phase-out of the synthetic fuel tax credits and an impair-and were partially offset by a decrease in realized transactions of $1 million. This ment charge of $10 million on the synfuel-related assets in 2006, partially change in unrealized transactions was primarily due to contracts reclassified as offset by $15 million of higher operating losses due to higher production levels trading activity from hedge (non-trading) transactions related to the Griffith plant in 2007; and after the announced plan to sell PPL's interest in the plant.

o a $9 million increase related to PPL's mechanical contracting and engineering The realized physical volumes for electricity and gas associated with energy subsidiaries; partially offset by trading were:

o a $39 million impairment of domestic telecommunication assets that were sold 2007 2006 2005 in August 2007 (see Note 9 to the Financial Statements).

6Wh 13,290 7,724 5,800 Energy-related businesses contributed $29 million more to operating income Bcf 16.1 21.5 13.4 in 2006 compared with 2005. The increase was primarily attributable to:

Utility Revenues * $18 million of lower pre-tax losses from synfuel projects. This reflects $29 mil-The increases inutility revenues were attributable to: lion of lower operating losses due to lower production levels, partially offset by 2007 vs. 2006 2006 vs.2005 an impairment charge of $10 million recorded in 2006 on the synfuel-related assets; and Domestic:

Retail electric revenue (PPLElectric)

• an $8million increase from its domestic telecommunications subsidiary, due to PLRelectric delivery $109 $127 an increase in transport-related sales, as well as reduced spending on a product Electric delivery 43 (38) line (before depreciation, interest expense and income taxes).

Other (2)

International: See Note 15 to the Financial Statements for additional information on the U.K.retail electric revenue 31 45 shutdown of the synfuel facilities in 2007.

U.K.foreign currency exchange rates 76 (6)

$259 $126 36 PPL Corporation 2007 Annuat Report

Other Operation and Maintenance Taxes, Other Than Income The changes inother operation and maintenance expenses were due to: Taxes, other than income, increased by $17 million in2007 compared with 2006.

2007 vs. 2006 2006vs,2005 The increase was primarily due to:

" a $12 million increase indomestic gross receipts tax expense, which ispassed Realization of benefits related to Black Lung Trust assets in2006 (Note 13) $ 36 through to customers, resulting from a 4%increase insales volume; Impairment of certain transmission rights (Note 15) 23

• a $5million increase from changes inU.K. foreign currency exchange rates; and WPD engineering services performed for third parties 19 " a $4million increase inWPD property taxes, attributable to a $2million refund U.K. foreign currency exchange rates 19 credit in2006 and inflation; partially offset by Reduction inEnron reserve in2006 (Note 15) 19 (19)

" a $4million decrease indomestic capital stock tax expense.

Salary expense 12 6 Defined benefit costs (Note 13) 11 34 Other Income - net Martins Creek ash basin remediation (Note 15) 11 (59) See Note 17 to the Financial Statements for details of other income and deductions.

Domestic and international workforce reductions 11 Outage costs at generating stations 10 40 Financing Costs WPD insurance adjustment 7 The changes in financing costs, which include "Interest Expense" and "Dividends Stock-based compensation expense (Note 12) 7 10 on Preferred Securities of a Subsidiary," were due to:

PUC-reportable storm costs 6 9 Domestic distribution system reliability work, 2007 vs. 2006 2006 vs.2005 including tree trimming 6 19 Long-term debt interest expense $43 5(6)

WPD distribution costs 5 U.K. foreign currency exchange rates 14 (1)

Costs associated with severe ice storms in January 2005 (Note 1) Interest accrued for PJMbilling dispute (Note 15) 7 (12)

(16)

Subsequent deferral of a portion of costs associated Hedging activities 4 24 with January 2005 ice storms (Note 1) 12 Dividends on 6.25% Series Preference Stock issued Accelerated amortization of stock-based inApril 2006 (Note 7) 4 12 compensation (Note 1) (18) Short-term debt interest expense 3 (4)

NorthWestern litigation payment (9) Write-off in2005 of financing costs associated with 4 PPLEnergy Supply's 2.625% Convertible Senior U.K. metering expense Notes due to the market price trigger being met (6)

U.K. reserve related to contractor dispute Amortization of debt issuance costs (3) (6)

Union contract ratification bonus 7 Redemption of 8.23% Subordinated Debentures in PJMsystem control and dispatch services (6) February 2007 (Note 16) (7) (1)

Retired miners' medical benefits (7) Capitalized interest (35) (15)

Equipment lease expense (4) (4) Other 1 2 Hurricane Isabel (Note 1) (11) 11 $31 S(13)

Gains on sales of emission allowances (87) 3 Other 7 4 Income Taxes

$107 $(7) The changes inincome taxes were due to:

Depreciation 2007 vs. 2006 2006 vs.2005 Increases indepreciation expense were due to: Higher pre-tax book income $ 77 597 Transfer of WPD tax items in 2006 (Note 5) 20 (20) 2007 vs. 2006 2006 vs.2005 Nonconventional fuel and other tax credits 1 49 Additions to PP&E $31 $26 Taxon foreign earnings (4) 1 U.K. foreign currency exchange rates 13 (1) Taxreturn adjustments (Note 5) (15) 15 Purchase in2006 of equipment previously Taxreserve adjustments (Note 5) (19) leased (Note 11) 9 4 U.K.rate change (Note 5) (54)

Reduction of useful lives of certain WPD Other (4) (2) distribution assets (Note 1) 4 3 Extension of useful lives of certain generation $ 2 $140 assets (Note 1) (2)

See Note 5 to the Financial Statements for details on effective income tax rates.

Impact of not depreciating held for sale telecommunications assets (Note 9) (10)

Extension of useful lives of certain WPD network assets (Note 1) (18)

Other (2)

$27 $30 PPL Corporation 2007 Annual Report 37

Management's Discussion and Analysis Discontinued Operations " operational, price and credit risks associated with selling and marketing Inthe third quarter of 2007, PPL recognized a $23 million deferred tax charge in products in the wholesale power markets; connection with the anticipated sale of PPL's natural gas distribution and propane " significant switching by PPL Electric's customers to or from alternative suppliers businesses. Inthe fourth quarter of 2007, PPL recorded a $21 million impairment, that would impact the level of sales under the PLR contracts; net of a $1million tax benefit. See Note 10 to the Financial Statements for addi- " ineffectiveness of the trading, marketing and risk management policy and tional information on the operating results recorded in2007, 2006 and 2005. programs used to mitigate PPL's risk exposure to adverse electricity and fuel Inthe second quarter of 2007, PPL recorded an $89 million gain, net of a prices, interest rates, foreign currency exchange rates and counterparty credit;

$5million tax expense, inconnection with the sale of its ElSalvadoran regulated " unusual or extreme weather that may damage PPL's transmission and electricity delivery business. Inthe third quarter of 2007, PPL also sold its Bolivian distribution facilities or affect energy sales to customers; businesses. Inconnection with this sale, PPL recorded a $20 million impairment, " reliance on transmission and distribution facilities that PPL does not own net of a $17 million tax benefit. Inthe fourth quarter of 2007, PPL recorded a or control to deliver its electricity and natural gas;

$197 million gain, net ofa 5109 million tax expense, inconnection with the sale " unavailability of generating units (due to unscheduled or longer-than-of its Chilean business. anticipated generation outages, weather and natural disasters) and the In2006, PPL recorded a $23 million loss, net of a $16 million tax benefit, in resulting loss of revenues and additional costs of replacement electricity; connection with the sale of its ownership interest inthe Griffith plant. Also " the ability to recover and the timeliness and adequacy of recovery of costs included inDiscontinued Operations isthe acceleration of $7million, after tax, associated with regulated utility businesses; of net unrealized gains on derivatives associated with the Griffith plant. " costs of compliance with existing and new environmental laws and with In2005, PPL recorded a $47 million loss, net of a $26 million tax benefit, in new security and safety requirements for nuclear facilities; connection with the sale of its Sundance plant. " any adverse outcome of legal proceedings and investigations with respect See Note 10 to the Financial Statements for additional information on the to PPL's current and past business activities; and above sales, and information regarding operating results recorded prior to the sales. " a downgrade in PPL's or its rated subsidiaries' credit ratings that could adversely affect their ability to access capital and increase the cost of Cumulative Effect of a Change in Accounting Principle maintaining credit facilities and any new debt.

In2005, PPL adopted FIN47, "Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143." FIN47 clarifies that an At December 31, PPL had the following:

entity isrequired to recognize a liability for the fair value of aconditional ARO when 2007 2006 2005 incurred ifthe fair value of the ARO can be reasonably estimated. FIN47 also clarifies Cash and cash equivalents $430 $ 794 $555 when an entity would have sufficient information to reasonably estimate the fair Short-term investments 108 359 63 value of an ARO. Application of the interpretation resulted ina cumulative effect of 51,153 5618

$538 a change inaccounting principle that decreased net income by $8million in2005. Short-term debt $ 92 $ 42 $214 See Note 21 to the Financial Statements for additional information.

At December 31, 2007, PPL had $15 million of auction rate securities inits Financial Condition portfolio of short-term investments. Recent investor concerns over insurers who guarantee the credit of certain of the underlying securities and other conditions Liquidity and Capital Resources have resulted insome investors of auction rate securities being unable to sell PPL isfocused on maintaining its investment grade credit profile by maintaining such securities at auction. This has resulted ininvestors continuing to own these an appropriate liquidity position and astrong balance sheet. PPL believes that its securities, generally at higher interest rates, until the subsequent auction. As of cash on hand, short-term investments, operating cash flows, access to debt and December 31, 2007, PPL did not have material exposure to loss given the high equity capital markets and borrowing capacity, taken as a whole, provide sufficient quality of the underlying securities and the amount of auction rate securities held.

resources to fund its ongoing operating requirements, future security maturities The changes inPPL's cash and cash equivalents position resulted from:

and estimated future capital expenditures. PPL currently expects cash, cash 2007 2006 2005 equivalents and short-term investments at the end of 2008 to be approximately

$500 million and expects to increase its credit facility capacity up to approximately Net Cash Provided by Operating Activities $1,571 5 1,758 S1,388 Net Cash Used inInvesting Activities (614) (1,617) (779)

$5.0 billion in2008. However, PPL's cash flows from operations and access to Net Cash (Used in)Provided by Financing cost-effective bank and capital markets are subject to risks and uncertainties Activities (1,326) 95 (676) including, but not limited to: Effect of Exchange Rates on Cash and Cash Equivalents 5 3 6

" changes inmarket prices for electricity; Net (Decrease) Increase inCash and

" changes incommodity prices that may increase the cost of producing power Cash Equivalents $ (364) $ 239 5 (61) or decrease the amount PPL receives from selling power; 38 PPL Corporation 2007 Annual Report

OperatingActivities received from the sale of PPL's Latin American businesses and telecommunication Net cash provided by operating activities decreased by 11%, or $187 million, in operations in2007 compared to $110 million received from the sale of its interest 2007 compared with 2006, primarily as a result of increased expenditures for fuel inthe Griffith plant in 2006, as well as a change of $555 million from purchases and increased U.S. income tax payments, a portion of which related to taxes and sales of short-term investments and a change of $104 million from purchases incurred inconnection with the sale of PPL's Latin American businesses, partially and sales of emission allowances. These increases were partially offset by an offset by higher revenues in2007 compared with 2006. The higher revenues increase of $291 million in capital expenditures, primarily as a result of the con-resulted primarily from higher wholesale market prices for electricity inthe U.S. struction of pollution control equipment at coal-fired plants in Pennsylvania, and and increased domestic sales volumes, primarily due to the impact of favorable an increase of $113 million in the additional amount of cash that became restricted.

weather in2007 on residential and commercial sales and normal load growth. Net cash used in investing activities increased 108%, or $838 million, in 2006 Net cash provided by operating activities increased by 27%, or $370 million, in compared with 2005. There were a few items that contributed to this increase.

2006 compared with 2005, primarily as a result of higher domestic retail electric Capital expenditures increased $583 million, primarily as a result of the construc-revenues resulting from an 8.4% increase inPLR sales prices and increased inter- tion of pollution control equipment at coal-fired plants in Pennsylvania, as discussed national delivery revenues, predominantly related to price increases and changes in Note 15 to the Financial Statements, and $107 million related to the purchase of incustomer mix. The increase from 2005 to 2006 was also due, to a lesser extent, leased equipment. See Note 11to the Financial Statements for further discussion of to reduced expenditures for oil in2006 as a result of building up inventory in2005. the 2006 purchase of leased equipment in connection with the termination of the These increases were partially offset by a decrease indomestic delivery revenues related master lease agreements. Additionally, there was a change of $298 million resulting from a decrease insales volumes, due inpart to milder weather in2006, from purchases and sales of short-term investments, and PPL received $80 million increased expenditures for coal and increased U.S. income tax payments, primarily less in proceeds from the sale of power plants in 2006 compared with 2005. The due to lower utilization of foreign tax credits in2006. impact of the above items was partially offset by a change of $75 million from PPL expects to continue to maintain stable cash provided by operating purchases and sales of emission allowances and a decrease of $22 million inthe activities as a result of its power sales commitments from wholesale and retail additional amount of cash that became restricted.

customers and long-term fuel purchase contracts. PPL estimates that, on average, FinancingActivities approximately 91% of its expected annual generation output for the period 2008 Net cash used in financing activities was $1.3 billion in 2007, compared with net through 2009 iscommitted under power sales contracts. PPL has and will continue cash provided by financing activities of $95 million in 2006 and net cash used in to layer inpower sales contracts inthe wholesale markets for the capacity and financing activities of $676 million in 2005. The change from 2006 to 2007 primarily energy currently committed under the PLR supply contracts with PPL Electric, reflects reduced issuances of long-term debt and equity securities in2007, as well which expire at the end of 2009. Based on the way inwhich the wholesale markets as repurchases of common stock under a $750 million stock repurchase program have developed over the last several years, PPL expects that new contracts are approved by PPL's Board of Directors inJune 2007. The change from 2005 to 2006 likely to continue to be of a shorter duration than the PLR supply contracts, which primarily reflects increased issuances of long-term debt, as well as the issuance at inception had terms of approximately nine years.

of preference stock in 2006.

PPL's contracts for the sale and purchase of electricity and fuel often require In 2007, cash used infinancing activities primarily consisted of net debt retire-cash collateral or other credit enhancements, or reductions or terminations of a ments of $170 million, the repurchase of 14,929,892 shares of common stock for portion of the entire contract through cash settlement, inthe event of a down- $712 million and common and preferred dividends paid of $477 million, partially grade of PPL's or its subsidiaries' credit ratings or adverse changes inmarket prices.

offset by $32 million of common stock sale proceeds. See Note 8 to the Financial For example, inaddition to limiting its trading ability, ifPPL's or its subsidiaries' Statements for a discussion of the common stock repurchase program.

ratings were lowered to below "investment grade" and energy prices increased by In 2006, cash provided by financing activities primarily consisted of net debt 10%, PPL estimates that, based on its December 31, 2007 positions, itwould have issuances of $277 million, net proceeds of $245 million from the issuance of pref-had to post additional collateral of approximately $829 million, compared with erence stock and $21million of common stock sale proceeds, partially offset by

$387 million at December 31, 2006. PPL has inplace risk management programs common and preferred dividends paid of $419 million. See Note 7 to the Financial that are designed to monitor and manage its exposure to volatility of cash flows Statements for information regarding the preference stock issued by PPL Electric.

related to changes inenergy and fuel prices, interest rates, foreign currency In2005, cash used infinancing activities primarily consisted of net debt retire-exchange rates, counterparty credit quality and the operating performance of its ments of $340 million and common and preferred dividends paid of $349 million, generating units. partially offset by common stock sale proceeds of $37 million.

Investing Activities See "Forecasted Sources of Cash" for a discussion of PPL's plans to issue debt The primary use of cash ininvesting activities iscapital expenditures. See and equity securities, as well as a discussion of credit facility capacity available to "Forecasted Uses of Cash" for detail regarding capital expenditures in2007 PPL. Also see "Forecasted Uses of Cash" for a discussion of PPL's plans to pay divi-and projected expenditures for the years 2008 through 2012. dends on its common and preferred securities and repurchase common stock in Net cash used ininvesting activities decreased 62%, or $1.0 billion, in2007 the future, as well as maturities of PPL's long-term debt.

compared with 2006 primarily as a result of aggregate proceeds of $898 million PPL Corporation 2007 Annual Report 39

Management's Discussion and Analysis PPLs debt financing activity in 2007 was: See Note 8 to the Financial Statements for more detailed information regarding PPLs financing activities in2007.

Issuancesfa) Retirements PPLCapital Funding Junior Subordinated Notes 5 499 ForecastedSources of Cash PPLCapital Funding Senior Unsecured Notes 100 PPL expects to continue to have significant sources of cash available in the near PPLCapital Funding Medium-Term Notes $ (283) term, including various credit facilities, commercial paper programs, an asset-PPLEnergy Supply Senior Unsecured Notes 49 backed commercial paper program, operating leases and, in the second half of PPLEnergy SupplyTax-Exempt Financing 81 PPLEnergy Supply Convertible Senior Notes hi 2008, the anticipated sale of its natural gas distribution and propane businesses.

(45)

PPLElectric Senior Secured Bonds 250 (255) PPL also expects to continue to have access to debt and equity capital markets, PPLTransition Bond Company Transition Bonds (300) as necessary, for its long-term financing needs.

WPD Subordinated Debentures (114)

WPD Senior Unsecured Notes (d) (211)

Latin America Long-Term Debt 6 (8)

PPLElectric short-term debt (net change) (1)

WPD short-term debt (net change) 51 Bolivia short-term debt (net change) 11 Total $1,047 $(1,217)

Net decrease $ (170)

(11Amounts are net of pricing discounts, where applicable.

Mi See Notes 4and 8 to the Financial Statements for information on the terms ofthe Convertible Senior Notes and discussion of conversions during 2007.

(0 Retirement includes 529 million to settle related cross-currency swaps.

(If Retirement includes 536 million to settle related cross-currency swaps.

Credit Facilities At December 31, 2007, PPLs total committed borrowing capacity under credit facilities and the use of this borrowing capacity were:

Lettersof Committed Capacity Borrowed Credit issued (Ie AvailableCapacity PPLElectric Credit Facility(a) $ 200 5 200 PPLEnergy Supply Credit Facilities (5) 3,900 $683 3,217 WPD (South West) Credit Facilities (1) 314 4 310 WPDH Limited Credit Facility (d) 308 308 Total $4,722 $687 $4,035

't Borrowings under PPL Electric'scredit facilitygenerally bear interest atLIBOR-based tatesplus aspread, depending upon the company's public debt rating. PPL Electricalsohas the capability tocause the lenders toissueup to $200 million of letters of credit under this facility, which issuances reduce available borrowing capacity. Under certain conditions, PPL Electric may request that the facility's capacity beincreased byup to $100 million.

Thecredit facility contains a financial covenant requiring debt to total capitalization to not exceed 70%. AtDecember 31,2007 and 2006, PPLElectric's consolidated debt to total capitalization percentages, as calculated inaccordance with itscredit facility, were 47% and 48%. Thecredit facility also contains standard representations and warranties that must be made forPPLElectric to borrow under it.

M) PPL Energy Supply has the ability to borrow $3.7 billion under itscredit facilities. Such borrowings generally bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating.

PPLEnergy Supply also has the capability to cause the lenders to issue up to $3.9 billion of letters of credit under these facilities, which issuances reduce available borrowing capacity. Under certain conditions, PPL Energy Supply may request that the capacity of one of itsfacilities be increased byup to $500 million.

These credit facilities contain a financial covenant requiring debt to total capitalization to not exceed 65%. AtDecember 31,2007 and 2006, PPLEnergy Supply's consolidated debt to total capitalization percentage, as calculated inaccordance with its credit facilities, was 36% and 35%. Thecredit facilities also contain standard representations and warranties that must bemade for PPL Energy Supply to borrow under them.

rc)WPD (South West) has two credit facilities: one under which st can make cash borrowings and another under which ithas the capability to cause the lender to issue up to approximately 03million (approximately

$5million at December 31,2007) of letters of credit. Borrowings bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating.

Thecredit facility under which it can make cash borrowings contains 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, depreciation and amortization and a regulatory asset base (RAB) at f150 million greater than total gross debt, ineach case as calculated inaccordance with the credit facility. AtDecember 31,2007 and 2006,WPD (South West)s interest coverage ratios, as calculated inaccordance with itscredit facility, were 4.4 and 5.3. AtDecember 31,2007 and 2006,WPD (South West)'s AB, as calculated inaccordance with the credit facility, exceeded itstotal gross debt byE349 million and E247 million.

i Borrowings underWPDH Limited's credit facility bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating.

This credit facilitycontains financial covenants that require WPDH Limited to maintain an interest coverage ratio of not less than 3.0 times consolidated earnings before income taxes, depreciation and amortization and a RAB that exceeds total net debt bythe higher of an amount equal to 15% of total net debt or f150 million, ineach case as calculated inaccordance with the credit facility. AtDecember 31,2007,WPDH Limited's interest coverage ratio, as calculated inaccordance with itscredit facility, was 4.0. AtDecember 31,2007, WPDH Limited's RAB, as calculated inaccordance with the credit facility, exceeded itstotal net debt byE548 million, or 54%.

, Theborrower under each ofthese facilities has a reimbursement obligation to the extent any letters of credit are drawn upon.The letters of credit issued as of December 31,2007, generally expire in2008.

40 PPL Corporation 2007 Annual Report

Inaddition to the financial covenants noted inthe table above, these credit Operating Leases agreements contain various other covenants. Failure to comply with the cove- PPL and its subsidiaries also have available funding sources that are provided nants after applicable grace periods could result inacceleration of repayment of through operating leases. PPL's subsidiaries lease office space, land, buildings and borrowings and/or termination of the agreements. PPL monitors compliance certain equipment. These leasing structures provide PPL with additional operating with the covenants on a regular basis. At December 31, 2007, PPL was inmaterial and financing flexibility. The operating leases contain covenants that are typical compliance with these covenants. At this time, PPL believes that these covenants for these agreements, such as maintaining insurance, maintaining corporate exis-and other borrowing conditions will not limit access to these funding sources. tence and timely payment of rent and other fees.

During 2008, PPL intends to maintain its existing credit facility capacity, PPL, through its subsidiary PPL Montana, leases a 50% interest inColstrip Units which may require the renewal and extension of certain facilities. Inaddition, PPL I and 2 and a 30% interest inUnit 3,under four 36-year, non-cancelable operating expects to increase its credit facility capacity by up to $500 million in2008. See leases. These operating leases are not recorded on PPL's Balance Sheets. The leases Note 8 to the Financial Statements for further discussion of PPL's credit facilities. place certain restrictions on PPL Montana's ability to incur additional debt, sell assets and declare dividends. At this time, PPL believes that these restrictions will not limit Commercial Paper access to these funding sources or cause acceleration or termination of the leases.

PPL Energy Supply and PPL Electric maintain commercial paper programs for up to See Note 8 to the Financial Statements for a discussion of other dividend restrictions

$500 million for PPL Energy Supply and for up to $200 million for PPL Electric to related to PPL subsidiaries.

provide an additional financing source to fund their short-term liquidity needs, if See Note 11to the Financial Statements for further discussion of the and when necessary. Commercial paper issuances are supported by certain credit operating leases.

agreements of each company. Neither PPL Energy Supply nor PPL Electric had commercial paper outstanding at December 31, 2007 and 2006. During 2008, PPL Anticipated Sale of Gas and Propane Businesses Energy Supply and PPL Electric may issue commercial paper from time to time to In2007, PPL announced its intention to sell its natural gas distribution and propane facilitate short-term cash flow needs. Additionally, PPL Energy Supply expects to businesses. PPL expects the sale to be completed during the second half of 2008.

increase the size of its commercial paper program to $1.0 billion in2008. Proceeds from the sale are expected to be used to invest ingrowth opportunities in PPLs core electricity supply and delivery businesses and/or for the repurchase Asset-Backed Commercial Paper Program of securities, including PPL common stock.

PPL Electric participates inan asset-backed commercial paper program through which itobtains financing by selling and contributing its eligible accounts receiv- Long-Term Debt and Equity Securities able and unbilled revenues to a special purpose, wholly-owned subsidiary on an Subject to market conditions in2008, PPL and its subsidiaries currently plan to ongoing basis. The subsidiary pledges these assets to secure loans of up to an issue up to $600 million inlong-term debt securities. PPL expects to use the aggregate of $150 million from a commercial paper conduit sponsored by a finan- proceeds primarily to fund capital expenditures, to fund redemptions of existing cial institution. PPL Electric uses the proceeds from the program for general corpo- debt and for general corporate purposes. PPL currently does not plan to issue rate purposes and to cash collateralize letters of credit. At December 31, 2007 and significant amounts of common stock in2008.

2006, loan balances outstanding were $41 million and $42 million, all of which ForecastedUses of Cash were being used to cash collateralize letters of credit. See Note 8 to the Financial Inaddition to expenditures required for normal operating activities, such as Statements for further discussion of the 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 repurchase of a portion of its common stock, beginning in2009.

Capital Expenditures The table below shows PPL's a/tual spending for the year 2007 and current capital expenditure projections for the years 2008 through 2012.

Actual Projected 2007 2008 2009 2010 2011 2012 Construction expenditures c11 Generating facilities $ 313 $ 376 $ 448 $ 474 $ 349 $ 249 Transmission and distribution facilities 612 554 608 713 843 839 Environmental 587 461 169 57 129 45 Other 91 116 69 73 64 70 Total Construction Expenditures 1,603 1,507 1,294 1,317 1,385 1,203 Nuclear fuel 82 102 162 173 171 173 Total Capital Expenditures $1,685 $1,609 $1,456 $1,490 $1,556 $1,376 which areexpected to be approximately $270 million for the 2008-2012 period.

a Construction expenditures include capitalized interest and AFUDC, PPL Corporation 2007 Annual Report 41

Management's Discussion and Analysis PPL's capital expenditure projections for the years 2008-2012 total approxi- See Note 15 to the Financial Statements for additional information regarding the mately $7.5 billion. Capital expenditure plans are revised periodically to reflect installation cost of sulfur dioxide scrubbers and other pollution control equipment, changes in operational, market and regulatory conditions. This table includes which comprise most of the "Environmental" expenditures noted above.

projected costs related to the planned 331 MW incremental capacity increases. PPL plans to fund all of its capital expenditures in2008 with cash on hand, cash from operations and the issuance of debt securities.

Contractual Obligations PPL has assumed various financial obligations and commitments inthe ordinary course of conducting its business. At December 31, 2007, the estimated contractual cash obligations of PPL were:

Contractual CashObligations Total LessThanI Year 1-3Years 4-5 Years After5 Years Long-term Debt(,) $ 7,555 $ 678 $ 687 $ 502 $5,688 Interest on Long-term Debt (r) 9,016 434 763 700 7,119 Capital Lease Obligations Operating Leases 598 52 109 109 328 Purchase Obligations (1) 7,009 1,687 1,969 1,029 2,324 Other Long-term Liabilities Reflected on the Balance Sheet under GAAPta)te) 236 75 148 13 Total Contractual Cash Obligations $24,414 $2,926 $3,676 $2,353 $15,459 tat Reflects principal maturities only. See Note 4 to the Financial Statements for a discussion of conversion triggers related to PPLEnergySupply's 2.625% Convertible Senior Notes. Also, see Statements of Long-term Debt fora discussion of the remarketing feature related to PPLEnergy Supply's 5.70% REsetPut Securities and the inclusion of $10million of long-term debt that has been classified as held for sale.

tbt Assumes interest payments through maturity, except for the 2.625% Convertible Senior Notes. Thepayments herein are subject to change, as payments for debt that is or becomes variable-rate debt have been estimated and payments denominated inBritishpounds sterling have been translated to U.S.dollars at a current foreign currency exchange rate.

(c) Thepayments reflected herein are subject to change, as certain purchase obligations included areestimates based on projected obligated quantities and/or projected pricing under the contracts. Purchase orders made inthe ordinary course of business are excluded from the amounts presented.The payments also include obligations related to nuclear fueland the installation of the scrubbers, which are also reflected inthe CapitalExpenditures table presented above.

(d) Theamrounts reflected represent WPD's contractual deficit pension funding requirements arising from an actuarial valuation performed inMarch2007.The U.K. electricity regulator currently allows arecovery Ofa substantial portion of the contributions relating to the plan deficit; however, WPD cannot be certain that this willcontinue beyond the current review period, which extends to March 31,2010.

Based on the current funded status of PPIs U.S.qualified pension plans, no contributions are required. See Note 13tothe Financial Statements for a discussion of expected contributions.

t") AtDecember 31,2007, total unrecognized tax benefits of $189 million were excluded from this table as PPLcannot reasonably estimate the amount and period of future payments. See Note Sto the Financial Statements for additional information.

Dividends Common Stock Repurchase PPL views dividend growth as an integral component of shareowner return and Given its strong internal cash flows and credit profile, PPL expects to repurchase expects to continue its trend of common stock dividend increases. In2007, PPL additional shares of its common stock beginning in2009, absent better opportu-increased the annualized dividend rate on its common stock from $1.10 to $1.22 nities to enhance shareowner value at that time through business growth invest-per share, effective with the April 1,2007 dividend payment. In2008, PPL ments. Any such repurchases will require the approval of PPL's Board of Directors.

increased the annualized dividend rate on its common stock from $1.22 to $1.34 Credit Ratings per share, effective with the April 1,2008 dividend payment. Future dividends Moody's, S&P and Fitch periodically review the credit ratings on the debt will be declared at the discretion of the Board of Directors and will depend upon and preferred securities of PPL and its subsidiaries. Based on their respective available earnings, cash flows, financial requirements and other relevant factors at independent reviews, the rating agencies may make certain ratings revisions the time. As discussed inNote 8 to the Financial Statements, PPL may not declare or ratings affirmations.

or pay any cash dividend on its common stock during any period inwhich PPL Acredit rating reflects an assessment by the rating agency of the credit-Capital Funding defers interest payments on its 2007 Series AJunior Subordinated worthiness associated with an issuer and particular securities that itissues. The Notes due 2067.

credit ratings of PPL and its subsidiaries are based on information provided by PPL Electric expects to continue to pay quarterly dividends on its outstanding PPL and other sources. The ratings of Moody's, S&P and Fitch are not a recom-preferred securities, ifand as declared by its Board of Directors.

mendation to buy, sell or hold any securities of PPL or its subsidiaries. Such ratings See Note 8 to the Financial Statements for other restrictions related to distri-may be subject to revisions or withdrawal by the agencies at any time and should butions on capital interests for PPL subsidiaries.

be evaluated independently of each other and any other rating that may be assigned to the securities. Adowngrade inPPL's or its subsidiaries' credit ratings could result inhigher borrowing costs and reduced access to capital markets.

42 PPL Corporation 2007 Annual Repnort

The following table summarizes the credit ratings of PPL and its rated The rating agencies took the following actions related to PPL and its rated subsidiaries at December 31, 2007. subsidiaries in2007:

Moody's S&P or Fitch

• Inconnection with PPL Capital Funding's issuance inMarch 2007 of the 2007 Series AJunior Subordinated Notes due 2067, Moody's, S&P and Fitch PPL Issuer Rating Raa2 BBB BBB assigned ratings of Baa3, BB+and BBB- to the junior subordinated debt of Outlook STABLE STABLE STABLE PPL Capital Funding.

PPL Energy Supply (0 " Also in March 2007, Fitch affirmed its BBB rating of PPL Montana's 8.903%

Issuer Rating BBB BBB Pass Through Certificates due 2020.

Senior Unsecured Notes Baa2 BBB BBB+ " In August 2007, Fitch affirmed its AAA rating for the Transition Bonds of Commercial Paper P-2 A-2 F2 PPL Transition Bond Company.

Outlook STABLE STABLE STABLE

" In December 2007, S&P completed its annual review of PPL, PPL Energy PPL Capital Funding Issuer Rating BBB Supply and PPL Electric. At that time, S&P affirmed its credit ratings and Senior Unsecured Debt Baa2 BBB- BBB stable outlook noted inthe table above for these entities.

Junior Subordinated Notes Baa3 BB+ BBB-Ratings Triggers Outlook STABLE STABLE STABLE PPL Electric1 (' PPL Energy Supply's 2.625% Convertible Senior Notes due 2023 are convertible Senior Unsecured/Issuer Rating Baal A- BBB upon the occurrence of certain events, including ifthe long-term credit ratings First Mortgage Bonds A3 A- A- assigned to the notes by Moody's and S&P are lower than 88 and Ba2, or either Senior Secured Bonds A3 A- A- Moody's or S&P no longer rates the notes. The terms of the notes require cash Commercial Paper P-2 A-2 F2 settlement of the principal amount upon conversion of the notes. See Note 4 Preferred Stock Baa3 BBB BBB+

to the Financial Statements for more information concerning the Convertible Preference Stock Baa3 BBB BBB Outlook STABLE STABLE STABLE Senior Notes.

PPL Transition Bond Company WPD (South West)'s 1.541% Index-linked Notes due 2053 and 2056 and Transition Bonds Aaa AAA AAA WPD (South Wales)'s 4.80436% Notes due 2037 may be put by the holders back PPL Montana to the issuer for redemption ifthe long-term credit ratings assigned to the notes Pass-Through Certificates Baa3 BBB- BBB by Moody's, S&P or Fitch are withdrawn by any of the rating agencies or reduced Outlook STABLE STABLE to a non-investment grade rating of Bal or BB+inconnection with a restructuring WPDH Limited Issuer Rating Baa3 BBB- BBB- event. Arestructuring event includes the loss of, or a material adverse change to, Senior Unsecured Debt Baa3 BBB- BBB the distribution license under which WPD (South West) and WPD (South Wales)

Short-term Debt A-3 operate. These notes totaled $943 million at December 31, 2007.

Outlook STABLE STABLE STABLE PPL and its subsidiaries do not have additional material liquidity exposures WPD LLP caused by a ratings downgrade below "investment grade" that would accelerate Issuer Rating BBB- BBB the due dates of borrowings. However, if PPLs and PPL Energy Supply's debt ratings Short-term Debt A-3 SABE had been below investment grade at December 31, 2007, PPL and PPL Energy Supply Outlook STABLE STABLE STABLE would have had to post an additional $132 million of collateral to counteriparties.

WPD (South Wales)

Issuer Rating BBB- BBB+ Off-Balance Sheet Arrangements Senior Unsecured Debt Baal BBB+ A-PPL provides guarantees for certain consolidated affiliate financing arrangements Short-term Debt A-2 F2 Outlook STABLE STABLE STABLE that enable certain transactions. Some of the guarantees contain financial and WPD (South West) other covenants that, ifnot met, would limit or restrict the consolidated affiliates' Issuer Rating Baal BBB+ BBB+ access to funds under these financing arrangements, require early maturity of Senior Unsecured Debt Baal BBB+ A- such arrangements or limit the consolidated affiliates' ability to enter into certain Short-term Debt P-2 A-2 F2 transactions. At this time, PPL believes that these covenants will not limit access Outlook STABLE STABLE STABLE to the relevant funding sources.

(1) AllIssuer Ratings for Fitchare'Issuer Default Ratings:'

PPL has entered into certain guarantee agreements that are within the scope (N Excludes Exempt Facilities Revenue Bonds issued bythe Pennsylvania Economic Development Financing Authority on behalf of PPLEnergy Supply, which are currently supported bya letter of of FIN45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, credit and are rated on the basis of the credit enhancement. Including Indirect Guarantees of Indebtedness of Others, an Interpretation of 0 Excludes Pollution Control Revenue Bonds issued bythe Lehigh County Industrial Development FASB Statements No. 5,57, and 107 and Rescission of FASB Interpretation No. 34."

Authority on behalf of PPLElectric, which are insured and are currently rated on the basis of the relevant insurer's ratings. See Note 15 to the Financial Statements for a discussion of guarantees.

PPL Corporation 2007 Annual Report 43

Management's Discussion and Analysis Risk Management - Energy Marketing &Trading and Other To record energy derivatives at their fair value, PPL discounts the forward Market Risk values, as appropriate, using the U.S. Utility BBB Curve. Additionally, PPL adjusts Background derivative carrying values to recognize differences incounterparty credit quality, Market risk isthe potential loss PPL may incur as a result of price changes potential market illiquidity for net open positions and the risk that modeled associated with a particular financial or commodity instrument. PPL isexposed values may be inaccurate, as follows:

to market risk from:

• The credit adjustment takes into account the probability of default for each

• commodity price risk for energy and energy-related products associated with counterparty that has a net out-of-the money position with PPL.

the sale of electricity from its generating assets and other electricity marketing " The liquidity adjustment takes into account the fact that PPL might have to activities, the purchase of fuel for generating assets and energy trading activities, accept the "ask" price ifitwants to close an open sales position or the "bid" and the purchase of certain metals necessary for the scrubbers PPL isinstalling price ifitwants to close an open purchase position.

at some of its coal-fired generating stations; " The modeling adjustment takes into account the uncertainty of the market

" interest rate risk associated with variable-rate debt and the fair value of fixed- values used for certain contracts when there isno external market to value the rate debt used to finance operations, as well as the fair value of debt securities contract or when PPL isunable to find independent confirmation of the true invested inby PPL's nuclear decommissioning trust funds, as well as PPl's market value of the cohtract.

defined benefit plans; Accounting and Reporting

" foreign currency exchange rate risk associated with investments inU.K.affiliates, To account for and report on contracts entered into to manage market risk, as well as purchases of equipment incurrencies other than U.S. dollars; and PPL follows the provisions of SFAS 133, "Accounting for Derivative Instruments

" price risk associated with the fair value of equity securities invested inby PPL's and Hedging Activities," as amended and interpreted (together, "SFAS 133");

nuclear decommissioning trust funds, as well as PPL's defined benefit plans.

EITF 02-3, "Issues Involved inAccounting for Derivative Contracts Held for PPL has a risk management policy approved by its Board of Directors to Trading Purposes and Contracts Involved in Energy Trading and Risk Management manage market risk and counterparty credit risk. Credit risk isdiscussed below. Activities;" and EITF 03-11, "Reporting Realized Gains and Losses on Derivative The RMC, comprised of senior management and chaired by the Vice President-Risk Instruments That Are Subject to FASB Statement No. 133 and Not 'Held for Trading Management, oversees the risk management function. Key risk control activities Purposes' as Defined in Issue No. 02-3." Inaccordance with SFAS 133, all derivative designed to ensure compliance with the risk policy and detailed programs include, instruments are recorded at fair value on the balance sheet as an asset or liability but are not limited to, credit review and approval, validation of transactions and (unless they meet SFAS 133's criteria for exclusion), and changes inthe derivatives' market prices, verification of risk and transaction limits, sensitivity analyses, daily fair value are recognized currently inearnings unless specific hedge accounting portfolio reporting, including open positions, mark-to-market valuations and criteria are met.

other risk measurement metrics. Inaccordance with EITF 02-3, PPL reflects its net realized and unrealized The forward-looking information presented below provides estimates of gains and losses associated with all derivatives that are held for trading purposes what may occur inthe future, assuming certain adverse market conditions, due to inthe "Net energy trading margins" line on the Statements of Income.

reliance on model assumptions. Actual future results may differ materially from Inaccordance with EITF 03-11, non-trading bilateral sales of electricity at those presented. These disclosures are not precise indicators of expected future major market delivery points are netted with purchases that offset the sales at losses, but only indicators of reasonably possible losses. those same delivery points. Amajor market delivery point isany delivery point with liquid pricing available.

Contract Valuation These contracts are recorded as "Price risk management assets" and "Price PPL utilizes forward contracts, futures contracts, options, swaps and structured risk management liabilities" on the Balance Sheets. Short-term derivative positions deals, such as tolling agreements, as part of its risk management strategy to are included in"Current Assets" and "Current Liabilities." Long-term derivative minimize unanticipated fluctuations inearnings caused by commodity price, positions are included in"Regulatory and Other Noncurrent Assets" and "Deferred interest rate and foreign currency volatility. When available, quoted market prices Credits and Other Noncurrent Liabilities."

are used to determine the fair value of a commodity or financial instrument. This may include exchange prices, quotes obtained from brokers, or an independent Accounting Designation valuation by an external source, such as a bank. However, market prices for energy Energy contracts that do not qualify as derivatives receive accrual accounting or energy-related contracts may not be readily determinable because of market treatment. For commodity contracts that meet the definition of a derivative, the illiquidity. Ifno active trading market exists, contract valuations may include the circumstances and intent existing at the time that energy transactions are entered use of internally developed models, which are then reviewed by an independent, into determine their accounting designation. Inaddition to commodity transactions, internal group. Although PPL believes that its valuation methods are reasonable, PPL enters into financial interest rate and foreign currency swap contracts to hedge changes inthe underlying assumptions could result insignificantly different values interest expense and foreign currency risk associated with both existing and and realization infuture periods. anticipated debt issuances. PPL also enters into foreign currency swap contracts to hedge the fair value of firm commitments denominated inforeign currency 44 PPL Corporation 2007 Annual Report

and net investments inforeign operations. As with commodity transactions, the first reduced by the amount of unavailable generation due to planned maintenance circumstances and intent existing at the time of the transaction determine a con- on a particular unit. Another reduction, representing the unplanned outage rate, tract's accounting designation. These designations are verified by an independent isthe amount of MWhs that historically isnot produced by a plant due to such internal group on a daily basis. See Note 18 to the Financial Statements for a sum- factors as equipment breakage. Finally, the potential output of certain plants mary of the guidelines used for the designation of derivative energy contracts. (such as peaking units) isreduced because their higher cost of production will not allow them to economically run during all hours.

Commodity Price Risk (Non-trading)

PPL's non-trading portfolio also includes full requirements energy contracts Commodity price risk isone of PPL's most significant risks due to the level of that qualify for accrual accounting. The net obligation to serve these contracts investment that PPL maintains inits generation assets. Several factors influence changes minute by minute. Anticipated usage patterns and energy peaks are price levels and volatilities. These factors include, but are not limited to, seasonal affected by expected load changes, regional economic drivers and seasonality.

changes indemand, weather conditions, available generating assets within PPL analyzes historical on-peak and off-peak usage patterns, expected load regions, transportation availability and reliability within and between regions, changes, regional economic drivers, and weather patterns, among other factors, market liquidity, and the nature and extent of current and potential federal and to determine a monthly level of a block of electricity that best fits the usage state regulations.

patterns inorder to minimize earnings volatility. To satisfy its full requirements To hedge the impact of market price fluctuations on PPL's energy-related obligations, PPL may enter into contracts to purchase unbundled products of elec-assets, liabilities and other contractual arrangements, PPL EnergyPlus sells and tricity, capacity, renewable energy credits and other ancillary products. Alternatively, purchases physical energy at the wholesale level under FERC market-based PPL may reserve a block amount of generation for full requirements contracts tariffs throughout the U.S. and enters into financial exchange-traded and over-that isexpected to be the best match with anticipated usage patterns and energy the-counter contracts. PPL's non-trading commodity derivative contracts mature peaks. The majority of purchases to supply full requirements sales contracts at various times through 2017. PPL segregates its non-trading activities into two receive hedge accounting treatment.

categories: hedge activity and economic activity. Transactions that are accounted Besides energy commodities, PPL implemented a program in2006 to hedge for as hedge activity qualify for hedge accounting treatment under SFAS 133.

its exposures to changes inmarket prices of certain metals necessary for the The majority of PPL's energy transactions qualify for accrual or hedge accounting.

scrubbers PPL isinstalling at the Brunner Island and Montour generating plants.

The economic activity category includes transactions that address a specific risk, These contracts qualified for hedge accounting treatment.

but were not eligible for hedge accounting or for which hedge accounting was The following chart sets forth the net fair market value of PPL's non-trading not elected. Included inthis category are certain load-following energy obligations commodity derivative contracts.

and related supply contracts, FTRs, crude oil swaps to hedge rail transportation charges and hedges of synthetic fuel tax credits. Although they do not receive Gains (Losses) hedge accounting treatment, these contracts are considered non-trading activity. 2007 0) 2006 The fair value of economic activity at December 31, 2007, including net premiums Fairvalue of contracts outstanding at the beginning of the period $(111) $(284) on options, was $67 million. Contracts realized or otherwise settled during the period (161) 38 Fairvalue of new contracts at inception 79 (44)

Within PPL's non-trading portfolio, the decision to enter into energy con-Other changes infair values (112) 179 tracts isinfluenced by the expected value of PPL's generation. Indetermining the Fairvalue of contracts outstanding at the end of the period $(305) $(111) number of MWhs that are available to be sold forward, PPL reduces the maximum

• ) Activity for 2007 excludes contracts of PPL GasUtilities, which are classified as held forsale on potential output that a plant may produce by three factors - planned maintenance, the Balance Sheet at December 31,2007.The fairvalue of these contracts was insignificant as of unplanned outages and economic conditions. The potential output of a plant is December 31,2007.

The following chart segregates estimated fair values of PPL's non-trading commodity derivative contracts at December 31, 2007, based on whether fair values are determined by quoted market prices or other more subjective means.

Maturity Less Maturity Maturity Maturity in Fair Value of Contracts at Period-End Gains (Losses) Than 1Year 1-3Years 4-5 Years Excessof 5Years Total Fair Value Source of Fair Value Prices actively quoted $9 S(51) $ (42) S (84)

Prices provided by other external sources (79) (203) (112) $(45) (439)

Prices based on models and other valuation methods 20 10 34 154 218 Fairvalue of contracts outstanding at the end of the period $(50) $(244) $1120) $109 $(305)

PPL Corporation 2007 Annual Report 45

Management's Discussion and Analysis The "Prices actively quoted" category includes the fair value of exchange- ina net sales position, and a decrease inthe market price for fuel isconsidered traded options and futures contracts, which have quoted prices through 2013. an adverse movement because PPLs commodity fuels portfolio isgenerally ina The "Prices provided by other external sources" category includes PPL's forward net purchase position. PPL enters into those commodity contracts to reduce the positions and options innatural gas and electricity and natural gas basis swaps at market risk inherent inthe generation of electricity.

points for which over-the-counter (OTC) broker quotes are available. Starting in2007, PPL elected to use an alternative method for disclosing The "Prices based on models and other valuation methods" category includes quantitative information about certain market risk sensitive instruments. This the value of transactions for which an internally developed price curve was con- method utilizes aVaR model to measure commodity price risk inits non-trading structed as a result of the long-dated nature of the transaction or the illiquidity and trading portfolios. This approach isconsistent with how PPLs Risk Manager of the market point, or the value of options not quoted by an exchange or OTC assesses the market risk of its commodity business. VaR isa statistical model broker. This category includes the fair value of transactions completed inauction that attempts to predict risk of loss, under normal market conditions, based on markets, where contract prices represent the market value for load-following historical market price volatility. PPL calculates VaR using a Monte Carlo simula-bundled energy prices delivered at illiquid delivery points. tion technique, which uses historical data from the past 12 month period. The Because of PPL's efforts to hedge the value of energy from its generation VaR isthe estimated nominal loss of earnings based on a one-day holding period assets, PPL sells electricity, capacity and related services and buys fuel on a at a 95% confidence interval. At December 31, 2007, the VaR for PP['s non-trading forward basis, resulting inopen contractual positions. IfPPL were unable to portfolio was $12 million.

deliver firm capacity and energy or to accept the delivery of fuel under its agree-Commodity Price Risk (Trading) ments, under certain circumstances itcould be required to pay damages. These PPL also executes energy contracts to take advantage of market opportunities.

damages would be based on the difference between the market price and the As a result, PPL may at times create a net open position inits portfolio that could contract price of the commodity. Depending on price volatility inthe wholesale result insignificant losses ifprices do not move inthe manner or direction antici-energy markets, such damages could be significant. Extreme weather conditions, pated. The margins from these trading activities are shown inthe Statements of unplanned power plant outages, transmission disruptions, nonperformance by Income as "Net energy trading margins."

counterparties (or their own counterparties) with which it has energy contracts PPL's trading contracts mature at various times through 2012. The following and other factors could affect PPL's ability to meet its obligations, or cause signifi-chart sets forth the net fair market value of PPL's trading contracts.

cant increases inthe market price of replacement energy. Although PPL attempts to mitigate these risks, there can be no assurance that itwill be able to fully meet its Gains(Losses) firm obligations, that it will not be required to pay damages for failure to perform, 2007 2006 or that itwill not experience counterparty nonperformance inthe future. Fairvalue of contracts outstanding at the beginning of the period $ 41 $5 At December 31, 2007, PPL estimated that a 10% adverse movement inmarket Contracts realized or otherwise settled during the period (29) (10)

Fairvalue of new contracts at inception (15) (2) prices across all geographic areas and time periods would have decreased the Other changes infair values 19 48 value of the commodity contracts inits non-trading portfolio by approximately Fairvalue of contracts outstanding at the end of the period $16 $41

$513 million, compared with a decrease of $303 million at December 31, 2006.

For purposes of this calculation, an increase inthe market price for electricity is PPL expects to reverse unrealized losses of approximately $9million over the considered an adverse movement because PPL's electricity portfolio isgenerally next three months as the transactions are realized.

The following chart segregates estimated fair values of PPL's trading portfolio at December 31, 2007, based on whether the fair values are determined by quoted mar-ket prices or other more subjective means.

Maturity Less Maturity Maturity Maturity in Fair Value of Contracts at Period-End Gains (Losses) Than1Year 1-3 Years 4-5 Years Excess of 5Years Total FairValue Source of Fair Value Prices actively quoted $6 $6 $ 12 Prices provided by other external sources (1) 14 $1 14 Prices based on models and other valuation methods (6) (4) (10)

Fairvalue of contracts outstanding at the end of the period $(t) $16 $1 $16 46 PPL Corporation 2007 Annual Report

See "Commodity Price Risk (Non-trading)" for information on the various exposure to a change inthe fair value of its debt portfolio, through a 10% adverse sources of fair value. movement ininterest rates, was $336 million, which iscomparable with the At December 31, 2007, PPL estimated that a 10% adverse movement inmarket amount at December 31, 2006.

prices across all geographic areas and time periods would have decreased the PPL utilizes various risk management instruments to reduce its exposure value of the commodity contracts in its trading portfolio by $27 million, compared to the expected future cash flow variability of its debt instruments. These risks with a decrease of $37 million at December 31, 2006. include exposure to adverse interest rate movements for outstanding variable rate At December 31, 2007, the VaR for PPL's trading portfolio was $3million. debt and for future anticipated financing. While PPL isexposed to changes inthe fair value of these instruments, any changes inthe fair value of these instruments Synthetic Fuel Tax Credit Risk are recorded inequity and then reclassified into earnings inthe same period during PPL expected the high level and the volatility of crude oil prices to reduce the which the item being hedged affects earnings. At December 31, 2007, the market amount of synthetic fuel tax credits itwould receive through synthetic fuel produc-value of these instruments, representing the amount PPL would pay upon their tion. The tax credits are reduced ifthe annual average wellhead price of domestic termination, was $12 million. PPL estimated that its potential additional exposure crude oil falls within a phase-out range. The tax credits are eliminated ifthis refer-to achange inthe fair value of these instruments, through a 10% adverse move-ence price exceeds the phase-out range. See "Regulatory Issues - IRSSynthetic ment inthe hedged exposure, was $11million at December 31, 2007, compared Fuels Tax Credits" inNote 15 to the Financial Statements for more information with $19 million at December 31, 2006.

regarding the phase-out of the tax credits.

PPL also utilizes various risk management instruments to adjust the mix of PPL implemented a risk management strategy to hedge a portion of the fixed and floating interest rates inits debt portfolio. While PPL isexposed to variability of cash flows associated with its 2006 and 2007 synthetic fuel tax changes inthe fair value of these instruments, any change inmarket value is credits by hedging the risk that 2006 and 2007 annual average wellhead prices recorded with an equal and offsetting change inthe value of the debt being for domestic crude oil will be within the phase-out range.

hedged. At December 31, 2007, the market value of these instruments, represent-PPL had net purchased options for 2007 to mitigate its tax credit phase-out ing the amount PPL would receive upon their termination, was $20 million. PPL risk due to an increase of the average wellhead price in2007. These positions did estimated that its potential exposure to a change inthe fair value of these instru-not qualify for hedge accounting treatment. The settlement value of these positions ments, through a 10% adverse movement ininterest rates, was $19 million at at December 31, 2007, was a gain of $100 million. The proceeds were received in December 31, 2007, compared with $18 million at December 31, 2006.

January 2008.

WPDH Limited holds a net position incross-currency swaps totaling $527 mil-Commodity Price Risk Summary lion to hedge the interest payments and principal of its U.S. dollar-denominated Inaccordance with its marketing strategy, PPL does not completely hedge its bonds with maturity dates ranging from December 2008 to December 2028. The generation output or fuel requirements. PPL estimates that for its entire portfolio, estimated value of this position at December 31, 2007, being the amount WPDH including all generation, emissions and physical and financial energy positions, a Limited would pay to terminate it, including accrued interest, was $152 million.

10% adverse change inpower prices across all geographic zones and time periods At December 31, 2007, WPDH Limited estimated that its potential additional would not have a material effect on expected 2008 gross margins. Similarly, a exposure to a change inthe market value of these instruments, through a 10%

10% adverse movement inall fossil fuel prices would decrease expected 2008 adverse movement inforeign currency exchange rates and interest rates, was gross margins by $20 million. $122 million. At December 31, 2006, the potential additional exposure for the Interest Rate Risk cross-currency swaps outstanding at that time was $115 million for a 10%

adverse movement inforeign currency exchange rates and interest rates.

PPL and its subsidiaries have issued debt to finance their operations, which exposes them to interest rate risk. PPL utilizes various financial derivative prod- Foreign Currency Risk ucts to adjust the mix of fixed and floating interest rates inits debt portfolio, PPL isexposed to foreign currency risk, primarily through investments inU.K.

adjust the duration of its debt portfolio and lock intreasury rates (and interest affiliates. Inaddition, PPLs domestic operations may make purchases of equip-rate spreads over treasuries) inanticipation of future financing, when appropriate. ment incurrencies other than U.S. dollars.

Risk limits under the risk management program are designed to balance risk PPL has adopted a foreign currency risk management program designed to exposure to volatility ininterest expense and changes inthe fair value of PPL's hedge certain foreign currency exposures, including firm commitments, recognized debt portfolio due to changes inthe absolute level of interest rates. assets or liabilities, anticipated transactions and net investments. Inaddition, PPL At December 31, 2007, PPL's potential annual exposure to increased interest enters into financial instruments to protect against foreign currency translation expense, based on a 10% increase ininterest rates, was $8million, compared risk of expected earnings.

with $10 million at December 31, 2006. In2007, PPL executed forward sale contracts totaling £98 million to protect PPL isalso exposed to changes inthe fair value of its domestic and interna- the value of a portion of its net investment inWPD. The settlement dates of these tional debt portfolios. At December 31, 2007, PPL estimated that its potential contracts range from January 2008 through June 2011. At December 31, 2007, the PPL Corporation 2007 Annual Report 47

Management's Discussion and Analysis market value of these positions, representing the amount PPL would receive upon California ISOfor which PPL has not yet been paid, which isreflected inaccounts their termination, was $3million. PPL estimated that its potential exposure to a receivable on the Balance Sheets. See Note 15 to the Financial Statements for change inthe market value of these instruments, through a 10% adverse move- additional information.

ment inforeign currency exchange rates, was $18 million at December 31, 2007.

Related Party Transactions Nuclear Decommissioning Trust Funds - Securities Price Risk PPL isnot aware of any material ownership interests or operating responsibility by Inconnection with certain NRC requirements, PPL Susquehanna maintains trust senior management of PPL inoutside partnerships, including leasing transactions funds to fund certain costs of decommissioning the Susquehanna nuclear station. with variable interest entities, or other entities doing business with PPL.

As of December 31, 2007, these funds were invested primarily indomestic equity For additional information on related party transactions, see Note 16 to the securities and fixed-rate, fixed-income securities and are reflected at fair value on Financial Statements.

PPLs Balance Sheet. The mix of securities isdesigned to provide returns sufficient Acquisitions, Development and Divestitures to fund Susquehanna's decommissioning and to compensate for inflationary PPL continuously evaluates strategic options for its business segments and, from increases indecommissioning costs. However, the equity securities included in time to time, PPL and its subsidiaries are involved innegotiations with third parties the trusts are exposed to price fluctuation inequity markets, and the values of regarding acquisitions and dispositions of businesses and assets, joint ventures fixed-rate, fixed-income securities are exposed to changes ininterest rates. PPL and development projects, which may or may not result indefinitive agreements.

actively monitors the investment performance and periodically reviews asset Any such transactions may impact future financial results. See Notes 9,10 and 15 allocation inaccordance with its nuclear decommissioning trust policy statement.

to the Financial Statements for information regarding such recent transactions.

At December 31, 2007,a hypothetical 10% increase ininterest rates and a 10%

PPL iscurrently planning incremental capacity increases of 331 MW at several decrease inequity prices would have resulted inan estimated $40 million reduc-existing domestic generating facilities. Offsetting this increase isan expected tion inthe fair value of the trust assets, compared with a $38 million reduction at 30 MW reduction innet generation capability at each of the Brunner Island and December 31, 2006. See Note 21 to the Financial Statements for additional infor-Montour plants, due to the estimated increases instation service usage during mation regarding the nuclear decommissioning trust funds.

the scrubber operation. See Note 15 to the Financial Statements for additional Defined Benefit Plans - Securities Price Risk information, as well as information regarding the shutdown of two 150 MW See "Application of Critical Accounting Policies - Defined Benefits" for additional generating units at Martins Creek inSeptember 2007.

information regarding the effect of securities price risk on plan assets. PPL continuously reexamines development projects based on market condi-tions and other factors to determine whether to proceed with the projects, sell, Credit Risk cancel or expand them, execute tolling agreements or pursue other options.

Credit risk relates to the risk of loss that PPL would incur as a result of nonperfor-mance by counterparties of their contractual obligations. PPL maintains credit Environmental Matters policies and procedures with respect to counterparties (including requirements See Note 15 to the Financial Statements for a discussion of environmental matters.

that counterparties maintain certain credit ratings criteria) and requires other assurances inthe form of credit support or collateral incertain circumstances in New Accounting Standards order to limit counterparty credit risk. However, PPL has concentrations of suppliers See Note 23 to the Financial Statements for a discussion of new accounting stan-and customers among electric utilities, natural gas distribution companies and dards recently adopted or pending adoption.

other energy marketing and trading companies. These concentrations of counter parties may impact PPLs overall exposure to credit risk, either positively or nega- Application of Critical Accounting Policies tively, inthat counterparties may be similarly affected by changes ineconomic, regulatory or other conditions. As discussed above in"Contract Valuation," PPL PPL's financial condition and results of operations are impacted by the methods, records certain nonperformance reserves to reflect the probability that a counter- assumptions and estimates used inthe application of critical accounting policies.

party with contracts that are out of the money (from the counterparty's stand- The following accounting policies are particularly important to the financial condi-point) will default inits performance. Inthis case, PPL would have to sell into a tion or results of operations of PPL, and require estimates or other judgments of lower-priced market or purchase from a higher-priced market. These reserves are matters inherently uncertain. Changes inthe estimates or other judgments included reflected inthe fair value of assets recorded in"Price risk management assets" within these accounting policies could result ina significant change to the infor-on the Balance Sheets. PPL also records reserves to reflect the probability that mation presented inthe Financial Statements. (These accounting policies are also a counterparty will not make payments for deliveries PPL has made but not discussed in Note I to the Financial Statements.) PPLs senior management has yet billed. These reserves are reflected in"Unbilled revenues" on the Balance reviewed these critical accounting policies, and the estimates and assumptions Sheets. PPL also has established a reserve with respect to certain sales to the regarding them, with its Audit Committee. Inaddition, PPL's senior management has reviewed the following disclosures regarding the application of these critical accounting policies with the Audit Committee.

48 PPL Corporation 2007 Annual Report

In 2006, the FASB issued SFAS 157, "Fair Value Measurements." Among other results. Any differences between actual and estimated results are recorded in things, SFAS 157 provides a definition of fair value as well as a framework for OCI or regulatory assets for certain regulated subsidiaries. These amounts inaccu-measuring fair value. In February 2008, the FASB amended SFAS 157 through the mulated OCI or regulatory assets for certain regulated subsidiaries are amortized issuance of FSP FAS 157-1, "Application of FASB Statement No. 157 to FASB to income over future periods. This delayed recognition inincome of actual results Statement No. 13 and Other Accounting Pronouncements That Address Fair Value allows for a smoothed recognition of costs over the working lives of the employees Measurements for Purposes of Lease Classification or Measurement under who benefit under the plans. The primary assumptions are:

Statement 13" and FSP FAS 157-2, "Effective Date of FASB Statement No. 157." " Discount Rate - The discount rate isused incalculating the present value of FSP FAS 157-1 amends SEAS 157 to exclude from its scope, certain accounting benefits, which are based on projections of benefit payments to be made in pronouncements that address fair value measurements associated with leases. the future. The objective inselecting the discount rate isto measure the single FSP FAS 157-2 delays the effective date of SFAS 157 to fiscal years beginning after amount that, ifinvested at the measurement date ina portfolio of high-quality November 15, 2008 for nonfinancial assets and nonfinancial liabilities that are not debt instruments, would provide the necessary future cash flows to pay the recognized or disclosed at fair value inthe financial statements on a recurring accumulated benefits when due.

basis (at least annually). " Expected Return on Plan Assets- Management projects the future return on As permitted by this guidance, PPL will partially adopt SFAS 157, as amended, plan assets considering prior performance, but primarily based upon the plans' effective January 1,2008. The January 1,2008 adoption, although not expected mix of assets and expectations for the long-term returns on those asset classes.

to be significant, is expected to affect the fair value component of PPLs critical These projected returns reduce the net benefit costs PPL records currently.

accounting policies related to "Price Risk Management" and "Defined Benefits" " Rate of Compensation Increase - Management projects employees' annual pay infuture periods. As permitted by this guidance, PPL will adopt SFAS 157, as increases, which are used to project employees' pension benefits at retirement.

amended, effective January 1,2009, for nonfinancial assets and nonfinancial " Health Care Cost Trend Rate - Management projects the expected increases liabilities that are not recognized or disclosed at fair value in the financial state- inthe cost of health care.

ments on a recurring basis. The January 1, 2009 adoption could affect the fair Inselecting a discount rate for its domestic defined benefit plans, PPL value component of PPLs critical accounting policies related to "Asset Impairment" starts with an analysis of the expected benefit payment stream for its plans.

and "Asset Retirement Obligations." See Note 23 to the Financial Statements for This information isfirst matched against a spot-rate yield curve. Aportfolio additional information regarding SFAS 157, as amended.

of over 500 Aa-graded non-callable (or callable with make-whole provisions)

1) Price Risk Management bonds, with atotal amount outstanding inexcess of $350 billion, serves as the See "Risk Management - Energy Marketing & Trading and Other" in Financial base from which those with the lowest and highest yields are eliminated to Condition. develop the ultimate yield curve. The results of this analysis are considered together with other economic data and movements invarious bond indices to

2) Defined Benefits determine the discount rate assumption. At December 31, 2007, PPL increased PPL and certain of its subsidiaries sponsor various defined benefit pension and the discount rate for its domestic pension plans from 5.94% to 6.39% as a result other postretirement plans applicable to the majority of the employees of PPL of this assessment and increased the discount rate for its other postretirement and its subsidiaries. PPL follows the guidance of SFAS 87, "Employers' Accounting for Pensions," and SFAS 106, "Employers' Accounting for Postretirement Benefits benefit plans from 5.88% to 6.26%.

Asimilar process isused to select the discount rate for the WPD pension Other Than Pensions," when accounting for these defined benefits. In addition, plans, which uses an iBoxx British pounds sterling denominated corporate bond PPL adopted the recognition and measurement date provisions of SFAS 158, index as its base. At December 31, 2007, PPL increased the discount rate for its "Employers' Accounting for Defined Benefit Pension and Other Postretirement international pension plans from 5.17% to 6.37% as a result of this assessment.

Plans," effective December 31, 2006. Subsequent to the adoption of SFAS 158, Inselecting an expected return on plan assets, PPL considers tax implications, PPL and its subsidiaries are required to record an asset or liability to recognize past performance and economic forecasts for the types of investments held by the the funded status of all defined benefit plans with an offsetting entry to other plans. At December 31, 2007, PPL's expected return on plan assets was reduced comprehensive income (OCI)or regulatory assets for certain regulated subsidiaries.

from 8.50% to 8.25% for its domestic pension plans and increased from 7.75%

Consequently, the funded status of all defined benefit plans is now fully recog-to 7.80% for its other postretirement benefit plans. For its international plans, nized on the Balance Sheets and PPL no longer recognizes additional minimum PPL's expected return on plan assets was reduced from 8.09% to 7.90% at liability adjustments in OCI.See Note 13 to the Financial Statements for additional information about the plans and the accounting for defined benefits.

December 31, 2007.

Under these accounting standards, assumptions are made regarding the Inselecting a rate of compensation increase, PPL considers past experience inlight of movements ininflation rates. At December 31, 2007, PPL's rate of com-valuation of benefit obligations and the performance of plan assets. Delayed pensation increase remained at 4.75% for its domestic plans. For its international recognition in earnings of differences between actual results and expected or plans, PPL's rate of compensation increase was increased from 4.0% to 4.25% at estimated results is a guiding principle of these standards. Annual net periodic December 31, 2007.

defined benefit costs are recorded in current earnings based on these estimated PPL Corporation 2007 Annual Report 49

Management's Discussion and Analysis Inselecting health care cost trend rates, PPL considers past performance and assets for certain regulated subsidiaries by asimilar amount inthe opposite forecasts of health care costs. At December 31, 2007, PPL's health care cost trend direction. The sensitivities below reflect an evaluation of the change based solely rates were 9.0% for 2008, gradually declining to 5.5% for 2014. on a change inthat assumption and does not include income tax effects.

Avariance inthe assumptions listed above could have a significant impact on At December 31, 2007, PPL had recorded the following defined benefit plan accrued defined benefit liabilities or assets, reported annual net periodic defined assets and liabilities:

benefit costs and OCI or regulatory assets for certain regulated subsidiaries. While Pension assets 5185 the charts below reflect either an increase or decrease ineach assumption, the Pension liabilities 69 inverse of this change would impact the accrued defined benefit liabilities or Other postretirement benefit liabilities 250 assets, reported annual net periodic defined benefit costs and OCI or regulatory The following chart reflects the sensitivities inthe December 31, 2007 Balance Sheet associated with a change incertain assumptions based on PPL's primary defined benefit plans.

Increase (Decrease)

Impact onpension Impact on Impact onregulatory Actuarial assumption Change inassumption Impact onobligations assets postreturement liabilities Impact onOCI assets Discount Rate (0.25)% $186 $(173) $13 $(157) $(29)

Rate of Compensation Increase 0.25% 35 (34) 1 (30) (5)

Health Care Cost Trend Rate (, 1.0% 19 N/A 19 (11) (8)

(0)Only impacts other postretirement benefits.

In2007, PPL recognized net periodic defined benefit costs charged to operat- " a current-period operating or cash flow loss combined with a history of losses ing expenses of $102 million. This amount represents a $17 million increase from or a forecast that demonstrates continuing losses; or 2006. This increase inexpense was primarily attributable to PPL's international " a current expectation that, more likely than not, an asset will be sold or other-plans and increased amortization from accumulated OCI of prior losses. wise disposed of before the end of its previously estimated useful life.

The following chart reflects the sensitivities inthe 2007 Statement of Income For a long-lived asset, an impairment exists when the carrying value exceeds associated with a change incertain assumptions based on PPLs primary defined the sum of the estimated undiscounted cash flows expected to result from the use benefit plans.

and eventual disposition of the asset. Ifthe asset isimpaired, an impairment loss Impact ot defined Change in Impact ondefined isrecorded to adjust the asset's carrying value to its estimated fair value.

Actuarial Assumption assumption benefit costs

$17 Indetermining asset impairments, management must make significant Discount Rate (0.25)%

judgments to estimate future cash flows, the useful lives of long-lived assets, the Expected Return on Plan Assets (0.25)% 12 0.25% 5 fair value of the assets and management's intent to use the assets. Changes in Rate of Compensation Increase Health CareCostTrend Rate 1.0% 3 assumptions and estimates included within the impairment reviews could result insignificantly different results than those identified and recorded inthe financial

3) Asset Impairment statements. For determining fair value, the FASB has indicated that quoted market PPL performs impairment analyses for long-lived assets, including intangibles, prices inactive markets are the best evidence of fair value. However, when market which are subject to depreciation or amortization in accordance with SEAS 144, prices are unavailable, other valuation techniques may be used. PPL has generally "Accounting for the Impairment or Disposal of Long-Lived Assets." PPL tests for used discounted cash flow to estimate fair value. Discounted cash flow iscalculated impairment whenever events or changes in circumstances indicate that a long- by estimating future cash flow streams and applying appropriate discount rates lived asset's carrying value may not be recoverable. Examples of such events or to determine the present value of the cash flow streams.

changes incircumstances are: PPL has determined that, when considering alternative courses of action

" a significant decrease inthe market price of an asset; to recover the carrying value of a long-lived asset, it uses estimated cash flows

• a significant adverse change inthe manner in which an asset is being used from the "most likely" approach to assess impairment whenever one scenario or in its physical condition; isclearly the most likely outcome. Ifno scenario isclearly most likely, then a

" a significant adverse change in legal factors or in the business climate; probability-weighted approach isused taking into consideration estimated

" an accumulation of costs significantly in excess of the amount originally cash flows from the alternative scenarios. For assets tested for impairment as of expected for the acquisition or construction of an asset; the balance sheet date, the estimates of future cash flows used inthat test con-sider the likelihood of possible outcomes that existed at the balance sheet date, 50 PPL Corporation 2007 Annual Report

including the assessment of the likelihood of the future sale of the assets. That PPL also performs a review of the residual value of leased assets inaccordance assessment made as of the balance sheet date isnot revised based on events that with SFAS 13, "Accounting for Leases." PPL tests the residual value of these assets occur after the balance sheet date. annually or more frequently whenever events or changes incircumstances indicate In2007, PPL recorded impairments of certain long-lived assets. See Note 9 that a leased asset's residual value may have declined. The residual value isdefined to the Financial Statements for a discussion of the impairment of PPL's domestic by SFAS 13 as the estimated fair value of the leased property at the end of the lease telecommunication assets, Note 10 to the Financial Statements for a discussion of term. Ifthe review produces a lower estimate of residual value than was originally the impairment of certain Latin American businesses and the natural gas distribu- recorded, PPL isrequired to determine whether the decline isother than temporary.

tion and propane businesses, and Note 15 to the Financial Statements for a discus- Ifit isother than temporary, the residual value will be revised using the new esti-sion of the impairment of certain transmission rights. mate. This reduction inthe residual value will be recognized as a loss inthe period PPL performs impairment analyses for goodwill inaccordance with SFAS 142, inwhich the estimate was changed. Ifthe review provides a higher estimate of "Goodwill and Other Intangible Assets." SFAS 142 requires goodwill to be tested residual value than was originally recorded, no adjustment will be made.

for impairment at the reporting unit level. PPL has determined its reporting units Intesting the residual value of leased assets, management must make to be at or one level below its operating segments. PPL performs an annual significant assumptions to estimate: future cash flows; the useful lives of the impairment test for goodwill, or more frequently ifevents or changes incircum- leased assets; fair value of the assets; and management's intent to use the assets.

stances indicate that the carrying value of the reporting unit may be greater than Changes inassumptions used inthe tests could result insignificantly different the unit's fair value. outcomes from those identified and recorded inthe financial statements. PPL Goodwill istested for impairment using a two-step approach. The first step uses discounted cash flow to determine the estimated fair value of the leased of the goodwill impairment test compares the estimated fair value of a reporting assets at the end of the lease term.

unit with its carrying value, including goodwill. Ifthe estimated fair value of a In2007, PPL and its subsidiaries evaluated the residual value of certain leased reporting unit exceeds its carrying value, goodwill of the reporting unit isconsid- assets. This analysis did not indicate any necessary changes to the residual value.

ered not impaired. Ifthe carrying value exceeds the estimated fair value of the PPL's estimate was based on using projections of electric and fuel prices and any reporting unit, the second step isperformed to measure the amount of impair- firm sale and purchase agreements. An increase of the discount rate by 25 basis ment loss, ifany. points or a 10% reduction inthe forecasted cash flows would not have resulted The second step requires a calculation of the implied fair value of goodwill. ina reduction of the residual value of these leased assets.

The implied fair value of goodwill isdetermined inthe same manner as the

4) Leasing amount of goodwill ina business combination. That is,the estimated fair value of PPL applies the provisions of SFAS 13, "Accounting for Leases," to all leasing a reporting unit isallocated to all of the assets and liabilities of that unit as ifthe transactions. Inaddition, PPL applies the provisions of numerous other account-reporting unit had been acquired ina business combination and the estimated fair ing pronouncements issued by the FASB and the EITF that provide specific value of the reporting unit was the price paid to acquire the reporting unit. The guidance and additional requirements related to accounting for various leasing excess of the estimated fair value of a reporting unit over the amounts assigned to arrangements. Ingeneral, there are two types of leases from a lessee's perspective:

its assets and liabilities isthe implied fair value of goodwill. The implied fair value operating leases (leases accounted for off-balance sheet); and capital leases of the reporting unit goodwill isthen compared with the carrying value of that (leases capitalized on the balance sheet).

goodwill. Ifthe carrying value exceeds the implied fair value, an impairment loss Inaccounting for leases, management makes various assumptions, including isrecognized inan amount equal to that excess. The loss recognized cannot the discount rate, the fair market value of the leased assets and the estimated exceed the carrying value of the reporting unit's goodwill.

useful life, indetermining whether a lease should be classified as operating or In2007, no second-step assessments were required for goodwill inany capital. Changes inthese assumptions could result inthe difference between reporting units. PPLs most significant assumptions surrounding the goodwill whether a lease isdetermined to be an operating lease or a capital lease, thus impairment tests relate to the estimates of reporting unit fair values. PPL significantly impacting the amounts to be recognized inthe financial statements.

estimated fair values primarily based upon discounted cash flows. For the U.K.

Inaddition to uncertainty inherent inmanagement's assumptions, leasing reporting unit, an increase of the discount rate by 25 basis points or a 10%

transactions and the related accounting rules become increasingly complex when reduction incash flows would have resulted inthe failure of the first-step assess-they involve: real estate and/or related integral equipment; sale/leaseback ment and required the performance of the second-step assessment. The second-accounting (leasing transactions where the lessee previously owned the leased step assessment would have required a purchase price allocation based on the assets); synthetic leases (leases that qualify for operating lease treatment for book guidance from SFAS 141, "Business Combinations." Itwould have taken a signifi-accounting purposes and financing treatment for tax accounting purposes); and cant change inthe fair value of the assets and liabilities of WPD to result inan lessee involvement inthe construction of leased assets.

impairment of goodwill inthe second-step assessment. Adecrease inthe fore-At December 31, 2007, PPL continued to participate ina significant sale/lease-casted cash flows of 10% or an increase of the discount rates by 25 basis points back transaction. InJuly 2000, PPL Montana sold its interest inthe Colstrip for the other goodwill tests would not have resulted inan impairment of good-generating plant to owner lessors who are leasing the assets back to PPL Montana will inother reporting units.

PPL Corporation 2007 Annual Report 51

Management's Discussion and Analysis under four 36-year leases. This transaction is accounted for as an operating lease remediation expenses inconnection with the ash basin leak at the Martins Creek inaccordance with current accounting pronouncements related to sale/leaseback generating station. Significant judgment was required by PPL's management to arrangements. Iffor any reason this transaction did not meet the requirements perform the initial assessment of these contingencies.

for off-balance sheet operating lease treatment as a sale/leaseback, PPL would " In2004, Exelon Corporation, on behalf of its subsidiary, PECO Energy, Inc.

have recorded approximately $231 million of additional assets and approximately (PECO), filed a complaint against PJM and PPL Electric with the FERC, alleging

$292 million of additional liabilities on its balance sheet at December 31, 2007, that PJM had overcharged PECO from April 1998 through May 2003 as a result and would have recorded additional expenses estimated at $6million, after-tax, of an error by PJM. The complaint requested the FERC, among other things, to in2001. direct PPL Electric to refund to PJM $39 million, plus interest of $8million, and See Note I1 to the Financial Statements for additional information related to for PJM to refund these same amounts to PECO. InApril 2005, the FERC issued operating leases. an Order Establishing Hearing and Settlement Judge Proceedings (the Order).

Inthe Order, the FERC determined that PECO was entitled to reimbursement

5) Loss Accruals for the transmission congestion charges that PECO asserted PJM erroneously PPL periodically accrues losses for the estimated impacts of various conditions, billed. The FERC ordered settlement discussions, before a judge, to determine situations or circumstances involving uncertain outcomes. PPL's accounting for the amount of the overcharge to PECO and the parties responsible for reim-such events is prescribed by SFAS 5, "Accounting for Contingencies," and other bursement to PECO.

related accounting guidance. SFAS 5 defines a contingency as "an existing condi-Based on an evaluation of the FERC Order, PPL's management concluded tion, situation, or set of circumstances involving uncertainty as to possible gain or that it was probable that a loss had been incurred inconnection with the PJM loss to an enterprise that will ultimately be resolved when one or more future billing dispute. PPL Electric recorded a loss accrual of $47 million, the amount events occur or fail to occur."

of PECO's claim, inthe first quarter of 2005.

For loss contingencies, the loss must be accrued if (1)information is available

" InAugust 2005, there was a leak of water containing fly ash from a disposal that indicates it is "probable" that the loss has been incurred, given the likelihood basin at the Martins Creek plant. This resulted inash being deposited onto of the uncertain future events and (2)the amount of the loss can be reasonably adjacent roadways and fields, and into a nearby creek and the Delaware River.

estimated. The FASB defines "probable" as cases in which "the future event or PPL immediately began to work with the Pennsylvania DEP and appropriate events are likely to occur." SFAS 5 does not permit the accrual of contingencies that agencies and consultants to assess the extent of environmental damage caused might result in gains. PPL continuously assesses potential loss contingencies for by the discharge and to remediate the damage. At that time, PPL had, and still environmental remediation, litigation claims, regulatory penalties and other events.

has, no reason to believe that the Martins Creek fly ash leak has caused any PPL also has accrued estimated losses on long-term purchase commitments danger to human health or any adverse biological impact on the river aquatic when significant events have occurred. For example, estimated losses were accrued life. However, at that time, PPL expected that it would be subject to an enforce-when long-term purchase commitments were assumed under asset acquisition ment action by the Pennsylvania DEP and that claims may be brought against agreements and when PPL Electric's generation business was deregulated. Under itby several state agencies and private litigants.

regulatory accounting, PPL Electric recorded the above-market cost of energy pur-chases from NUGs as part of its purchased power costs on an as-incurred basis, PPL's management assessed the contingency inthe third quarter of 2005. The since these costs were recovered in regulated rates. When the generation business ultimate cost of the remediation effort was difficult to estimate due to a number was deregulated, the estimated loss associated with these long-term purchase of uncertainties, such as the scope of the project, the impact of weather conditions commitments to make above-market NUG purchases was recorded because PPL on the ash recovery effort, and the ultimate outcome of enforcement actions and Electric was committed to purchase electricity at above market prices but it could private litigation. PPL's management concluded, at the time, that $33 million was no longer recover these costs in regulated rates. PPL considers these losses to be the best estimate of the cost of the remediation effort. PPL recorded this loss similar to asset impairments or inventory write-downs. accrual inthe third quarter of 2005.

The accounting aspects of estimated loss accruals include: (1)the initial iden- See Note 15 to the Financial Statements for additional information on both tification and recording of the loss; (2)the determination of triggering events for of these contingencies and see "Ongoing Assessment of Recorded Loss Accruals" reducing a recorded loss accrual; and (3)the ongoing assessment as to whether a below for adiscussion of the year-end assessments of these contingencies.

recorded loss accrual is sufficient. All three of these aspects of accounting for loss There were no significant loss accruals initially recorded in2007 or 2006.

accruals require significant judgment by PPL's management. PPL has identified certain other events that could give rise to a loss, but that do not meet the conditions for accrual under SFAS 5.SFAS 5 requires disclosure, Initial Identificationand Recording of the Loss Accrual but not a recording, of potential losses when it is"reasonably possible" that a loss PPL uses its internal expertise and outside experts (such as lawyers and engineers),

has been incurred. The FASB defines "reasonably possible" as cases inwhich "the as necessary, to help estimate the probability that a loss has been incurred and chance of the future event or events occurring ismore than remote but less than the amount (or range) of the loss.

likely." See Note 15 to the Financial Statements for disclosure of other potential Two significant loss accruals were initially recorded in2005. One was the loss contingencies that have not met the criteria for accrual under SFAS 5.

loss accrual related to the PJM billing dispute. Another involved the accrual of 52 PPL Corporation 2007 Annual Report

Reducing Recorded Loss Accruals payment, and PJM would include a single credit for this amount inPECO's When an estimated loss isaccrued, PPL identifies, where applicable, the triggering monthly PJM bill. Through December 31, 2006, the estimated interest on this events for subsequently reducing the loss accrual. The triggering events generally payment was $4million, for a total payment of $42 million, Based on the occur when the contingency has been resolved and the actual loss isincurred, or Compliance Filing, PPL reduced the recorded loss accrual by $5million at when the risk of loss has diminished or been eliminated. The following are some of December 31, 2006.

the triggering events that provide for the reduction of certain recorded loss accruals: InMarch 2007, the FERC entered an order approving the Compliance Filing.

" Certain loss accruals are systematically reduced based on the expiration of InApril 2007, PPL Electric paid PJM the full settlement amount of $43 million, contract terms. An example of this isthe loss accrual for above-market NUG including additional interest of $1million recorded during the three months purchase commitments, which isdescribed below. This loss accrual isbeing ended March 31, 2007. This proceeding isnow terminated and no contingency reduced over the lives of the NUG purchase contracts. exists at December 31, 2007.

• Allowances for uncollectible accounts are reduced when accounts are written off In2005, PPL also re-assessed the contingency for the Martins Creek ash basin after prescribed collection procedures have been exhausted, a better estimate remediation. Based on the ongoing remediation efforts and communications of the allowance isdetermined or underlying amounts are ultimately collected. with the Pennsylvania DEP and other appropriate agencies, at December 31,

" Environmental and other litigation contingencies are reduced when the contin- 2005, PP~s management concluded that $48 million was the best estimate gency isresolved and PPL makes actual payments, a better estimate of the loss of the cost of the remediation effort.

isdetermined or the loss isno longer considered probable.

In2006, PPL reduced the estimate of costs to $37 million, primarily due to an The largest loss accrual on PPL's balance sheet, and the loss accrual that insurance claim settlement. At December 31, 2007, management's best estimate changed most significantly in2007, was for an impairment of above-market of the probable loss associated with the Martins Creek ash basin leak remains at NUG purchase commitments. This loss accrual reflects the estimated difference $37 million. Based on actual costs incurred and recorded to date, at December 31, between the above-market contract terms, under the purchase commitments, 2007, the remaining contingency for this remediation was $9million. PPL cannot and the expected fair value of the electricity to be purchased at the date these predict the final cost of the remediation, the outcome of the action initiated by contracts were impaired. This loss accrual was originally recorded at $879 million the Pennsylvania DEF, the outcome of the natural resource damage assessment, in1998, when PPL Electric's generation business was deregulated. the outcome of the lawsuit brought by the citizens and businesses and the exact When the loss accrual related to NUG purchases was recorded in 1998, PPL nature of any other regulatory or other legal actions that may be initiated against Electric established the triggering events for when the loss accrual would be PPL as a result of the disposal basin leak. PPL also cannot predict with certainty reduced. Aschedule was established to reduce the liability based on projected the extent of the fines or damages that may be sought inconnection with any purchases over the lives of the NUG contracts. This loss accrual was transferred such actions or the ultimate financial impact on PPL. 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

6) Asset Retirement Obligations schedule. As PPL EnergyPlus reduces the liability for the above-market NUG pur-SFAS 143, "Accounting for Asset Retirement Obligations," requires legal obligations chases, it offsets the actual cost of NUG purchases, thereby bringing the net power associated with the retirement of long-lived assets to be recognized as a liability purchase expense more inline with expected market prices. The above-market inthe financial statements. The initial obligation should be measured at the loss accrual was $71million at December 31, 2007. This loss accrual will be signifi-estimated fair value. An equivalent amount should be recorded as an increase in cantly reduced by 2009, when all but one of the NUG contracts expires. The then-the value of the capitalized asset and allocated to expense over the useful life of remaining NUG contract will expire in2014.

the asset. Until the obligation issettled, the liability should be increased, through Ongoing Assessment of Recorded Loss Accruals the recognition of accretion expense inthe income statement, for changes inthe PP_ reviews its loss accruals on a regular basis to assure that the recorded potential obligation due to the passage of time.

loss exposures are sufficient. This involves ongoing communication and analyses FIN47, "Accounting for Conditional Asset Retirement Obligations, an inter-with internal and external legal counsel, engineers, operation management and pretation of FASB Statement No. 143," clarifies the term conditional ARO as used other parties. inSFAS 143. FIN47 specifies that a conditional ARO must be recognized when As part of the year-end preparation of its financial statements, PPt's manage- incurred ifthe fair value of the ARO can be reasonably estimated.

ment re-assessed the loss accruals recorded in2005, for the two contingencies Indetermining AROs, management must make significant judgments and described above under "initial Identification and Recording of the Loss Accrual." estimates to calculate fair value. Fair value isdeveloped through consideration of

• InDecember 2006, PPL Electric and Exelon filed with the FERC, pursuant to estimated retirement costs incurrent period dollars, inflated to the anticipated a November 2006 order, a modified offer of settlement (Compliance Filing). retirement date and then discounted back to the date the ARO was incurred.

Under the Compliance Filing, PPL Electric would make a single payment Changes inassumptions and estimates included within the calculations of the fair through its monthly PJM bill of $38 million, plus interest through the date of value of AROs could result insignificantly different results than those identified PPL Corporation 2007 Annual Report 53

Management's Discussion and Analysis and recorded inthe financial statements. Estimated ARO costs and settlement Similar to SEAS 5, FIN48 continues to require significant management dates, which affect the carrying value of various AROs and the related assets, are judgment in determining the amount of benefit to be recognized in relation to reviewed periodically to ensure that any material changes are incorporated into an uncertain tax position. FIN48 requires PPL to evaluate its tax positions follow-the latest estimate of the obligations. ing a two-step process. The first step requires an entity to determine whether, At December 31, 2007, PPL had AROs totaling $376 million recorded on based on the technical merits supporting a particular tax position, it is more likely the Balance Sheet. Of this amount, $298 million or 79% relates to PPL's nuclear than not (greater than a 50 percent chance) that the tax position will be sustained.

decommissioning ARO. PPL's most significant assumptions surrounding AROs This determination assumes that the relevant taxing authority will examine the are the forecasted retirement costs, the discount rates and the inflation rates. tax position and is aware of all the relevant facts surrounding the tax position.

Avariance inthe forecasted retirement costs, the discount rates or the inflation The second step requires an entity to recognize in the financial statements the rates could have a significant impact on the ARO liabilities. benefit of a tax position that meets the more-likely-than-not recognition criterion.

The following chart reflects the sensitivities related to the nuclear decom- The measurement of the benefit equals the largest amount of benefit that has a missioning ARO liability at PPL as of December 31, 2007, associated with a likelihood of realization, upon settlement, that exceeds 50 percent. PPL's manage-change inthese assumptions at the time of initial recognition. There isno signifi- ment considers a number of factors in assessing the benefit to be recognized, cant change to the annual depreciation expense of the ARO asset or the annual including negotiation of a settlement.

accretion expense of the ARO liability as a result of changing the assumptions. On a quarterly basis, PPL reassesses its uncertain tax positions by considering Each sensitivity below reflects an evaluation of the change based solely on a information known at the reporting date. Based on management's assessment of change inthat assumption. new information, PPL may subsequently recognize a tax benefit for a previously Change in Impact on unrecognized tax position, de-recognize a previously recognized tax position, Assumption ARO Liability or re-measure the benefit of a previously recognized tax position. The amounts Retirement Cost 1o%/(10)% $27/5(27) ultimately paid upon resolution of issues raised by taxing authorities may differ Discount Rate 0.25%/(0.25)% $(28)/$31 materially from the amounts accrued and may materially impact PP['s financial Inflation Rate o.25%/(0.25)% $35/$(31) statements inthe future.

The balance sheet classification of unrecognized tax benefits and the need for

7) Income Tax Uncertainties valuation allowances to reduce deferred tax assets also require significant manage-Significant management judgment isrequired indeveloping PPL's provision for mentjudgment. FIN48 requires an entity to classify unrecognized tax benefits as income taxes. This isprimarily due to uncertainty invarious tax positions taken or current, to the extent management expects to settle an uncertain tax position, by expected to be taken intax returns, the determination of deferred tax assets, lia-paying cash, within one year of the reporting date. Valuation allowances are initially bilities and valuation allowances and estimating the phase-out range for synthetic recorded and reevaluated each reporting period by assessing the likelihood of the fuel tax credits that isnot published by the IRS until April of the following year.

ultimate realization of a deferred tax asset. Management considers a number of Prior to January 1,2007, and inaccordance with SEAS 5,"Accounting for factors inassessing the realization of a deferred tax asset, including the reversal Contingencies," PPL evaluated uncertain tax positions and accrued charges for of temporary differences, future taxable income and ongoing prudent and feasible probable exposures based on management's best estimate of the amount of tax planning strategies. Any tax planning strategy utilized in this assessment must benefit that should be recognized inthe financial statements. This assessment meet the recognition and measurement criteria of FIN48. See Note S to the resulted inmanagement's best estimate of the ultimate settled tax position for Financial Statements for the disclosures required by FIN48.

each tax year. Inaddition, management considered the reversal of temporary dif-See Note 15 to the Financial Statements for additional information regarding ferences, future taxable income and ongoing prudent and feasible tax planning synthetic fuel tax credits.

strategies ininitially recording and reevaluating the need for valuation allowances.

InJune 2006, the FASB issued FIN48, "Accounting for Uncertainty inIncome Other Information Taxes, an interpretation of FASB Statement No. 109." InMay 2007, the FASB amended this guidance by issuing FSP FIN 48-1, "Definition of Settlement in PPL's Audit Committee has approved the independent auditor to provide audit FASB Interpretation No. 48." PPL and its subsidiaries adopted FIN48, as amended, and audit-related services and other services permitted by Sarbanes-Oxley and effective January 1,2007. The adoption of FIN 48 alters the methodology PPL pre- SEC rules. The audit and audit-related services include services in connection with viously used to account for income tax uncertainties. Effective with the adoption statutory and regulatory filings, reviews of offering documents and registration of FIN48, uncertain tax positions are no longer considered to be contingencies statements, and internal control reviews.

assessed inaccordance with SEAS 5.

54 PPL Corporation 2007 Annual Report

Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareowners of PPL Corporation Inour opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PPL Corporation and We have audited the accompanying consolidated balance sheets and statements subsidiaries at December 31, 2007 and 2006, and the consolidated results of their of long-term debt of PPL Corporation and subsidiaries as of December 31, 2007 operations and their cash flows for each of the two years inthe period ended and 2006, and the related consolidated statements of income, shareowners' com-December 31, 2007, inconformity with U.S. generally accepted accounting principles.

mon equity and comprehensive income, and cash flows for each of the two years As discussed inNote 5 to the consolidated financial statements, the Company inthe period ended December 31, 2007. These financial statements are the adopted FIN48, Accounting for Uncertainty inIncome Taxes, an interpretation of responsibility of the Company's management. Our responsibility isto express an FASB Statement No. 109, effective January 1,2007.

opinion on these financial statements based on our audits.

We also have audited, inaccordance with the standards of the Public Company We conducted our audits inaccordance with the standards of the Public Accounting Oversight Board (United States), PPL Corporation's internal control Company Accounting Oversight Board (United States). Those standards require over financial reporting as of December 31, 2007, based on criteria established in that we plan and perform the audit to obtain reasonable assurance about whether Internal Control - Integrated Framework issued by the Committee of Sponsoring the financial statements are free of material misstatement. An audit includes Organizations of the Treadway Commission and our report dated February 28, examining, on atest basis, evidence supporting the amounts and disclosures in 2008 expressed an unqualified opinion thereon.

the financial statements. An audit also includes assessing the accounting princi-ples used and significant estimates made by management, as well as evaluating 12L4444t e, 41741ILLP the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Philadelphia, Pennsylvania February 28, 2008 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareowners of PPL Corporation assurance that transactions are recorded as necessary to permit preparation of We have audited PPL Corporation's internal control over financial reporting as of financial statements inaccordance with generally accepted accounting principles, December 31, 2007, based on criteria established inInternal Control - Integrated and that receipts and expenditures of the company are being made only inaccor-Framework issued by the Committee of Sponsoring Organizations of the Treadway dance with authorizations of management and directors of the company; and Commission (the COSO criteria). PPL Corporation's management isresponsible for (3)provide reasonable assurance regarding prevention or timely detection of maintaining effective internal control over financial reporting, and for its assess- unauthorized acquisition, use, or disposition of the company's assets that could ment of the effectiveness of internal control over financial reporting included in have a material effect on the financial statements.

Management's Report on Internal Control over Financial Reporting. Our responsi- Because of its inherent limitations, internal control over financial reporting bility isto express an opinion on the company's internal control over financial may not prevent or detect misstatements. Also, projections of any evaluation of reporting based on our audit. effectiveness to future periods are subject to the risk that controls may become We conducted our audit inaccordance with the standards of the Public Company inadequate because of changes inconditions, or that the degree of compliance Accounting Oversight Board (United States). Those standards require that we plan with the policies or procedures may deteriorate.

and perform the audit to obtain reasonable assurance about whether effective Inour opinion, PPL Corporation maintained, inall material respects, effective internal control over financial reporting was maintained inall material respects. internal control over financial reporting as of December 31, 2007, based on the Our audit included obtaining an understanding of internal control over financial COSO criteria.

reporting, assessing the risk that a material weakness exists, testing and evaluating We also have audited, inaccordance with the standards of the Public the design and operating effectiveness of internal control based on the assessed Company Accounting Oversight Board (United States), the consolidated balance risk, and performing such other procedures as we considered necessary inthe cir- sheets and statements of long-term debt of PPL Corporation and subsidiaries as of cumstances. We believe that our audit provides a reasonable basis for our opinion. December 31, 2007 and 2006, and the related consolidated statements of income, Acompany's internal control over financial reporting isa process designed to shareowners' common equity and comprehensive income, and cash flows for provide reasonable assurance regarding the reliability of financial reporting and each of the two years inthe period ended December 31, 2007 and expressed an the preparation of financial statements for external purposes inaccordance with unqualified opinion thereon.

generally accepted accounting principles. Acompany's internal control over finan-cial reporting includes those policies and procedures that (1)pertain to the main-tenance of records that, inreasonable detail, accurately and fairly reflect the Philadelphia, Pennsylvania transactions and dispositions of the assets of the company; (2)provide reasonable February 28, 2008 PPL Corporation 2007 Annual Report 55

Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareowners of PPL Corporation:

Inour opinion, the accompanyingconsolidated statements of income, of share-owners' common equity and comprehensive income and of cash flows present fairly, inall material respects, the results of operations and the cash flows of PPL Corporation and its subsidiaries (the "Company") for the year ended December 31, 2005 inconformity with accounting principles generally accepted inthe United States of America. These financial statements are the responsibility of the Company's management. Our responsibility isto express an opinion on these financial statements based on our audit. We conducted our audit of these state-ments inaccordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and per-form the audit to obtain reasonable assurance about whether the financial state-ments are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

As discussed inNote 21 to the consolidated financial statements, the Company adopted FINNo. 47, Accounting for ConditionalAsset Retirement Obligations, in2005.

Philadelphia, Pennsylvania February 24, 2006, except for Note 10, "Sale of Interest inGriffith Plant" section, which isas of December 13, 2006, Note 10, "Sale of Latin American Businesses" section, which isas of June 20, 2007 and Note 10, "Anticipated Sale of Gas and Propane Businesses" section, which isas of February 28, 2008 56 PPL Corporation 2007 Annual Report

Management's Report on Internal Control over Financial Reporting PPLs management isresponsible for establishing and maintaining adequate inter-nal control over financial reporting, as such term isdefined inExchange Act Rule 13a-15(f). PPL's internal control over financial reporting isa process designed to provide reasonable assurance to PPL's management and Board of Directors regard-ing 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, includ-ing 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, 2007. The effectiveness of our internal control over financial reporting has been audited by Ernst &Young LLP, an inde-pendent registered public accounting firm, as stated intheir report.

PPL Corporation 2007 Annual Report 57

Consolidated Statements of Income (Millionsof dollars, exceptper share data) For the years ended Oecember 31, 2007 2006 2005 Operating Revenues Utility $4,114 $3,855 $3,729 Unregulated retail electric 102 91 101 Wholesale energy marketing 1,472 1,532 1,091 Net energy trading margins 41 35 32 Energy-related businesses 769 618 586 Total 6,498 6,131 5,539 Operating Expenses Operation Fuel 906 763 796 Energy purchases 720 973 627 Other operation and maintenance 1,373 1,266 1,273 Amortization of recoverable transition costs 310 282 268 Depreciation (Note 1) 446 419 389 Taxes, other than income (Note 5) 298 281 278 Energy-related businesses (Note 9) 762 638 635 Total 4,815 4,622 4,266 Operating Income 1,683 1,509 1,273 Other Income - net (Note 17) 95 62 24 Interest Expense 474 447 472 Income from Continuing Operations Before Income Taxes, Minority Interest and Dividends on Preferred Securities of a Subsidiary 1,304 1,124 825 Income Taxes (Note 5) 270 268 128 Minority Interest 3 3 2 Dividends on Preferred Securities of a Subsidiary (Notes 7 and 8) 18 14 2 Income from Continuing Operations 1,013 839 693 Income (Loss) from Discontinued Operations (net of income taxes) (Note 10) 275 26 (7)

Income Before Cumulative Effect of a Change in Accounting Principle 1,288 865 686 Cumulative Effect ofa Change in Accounting Principle (net of income taxes) (Note 21) (8)

Net Income $1,288 $ 865 $ 678 Earnings Per Share of Common Stock (Note 4)

Income from Continuing Operations:

Basic $ 2.66 $ 2.20 $ 1.83 Diluted $ 2.63 $ 2.17 $1.81 Net Income:

Basic $ 3.39 $ 2.27 $ 1.79 Diluted $ 3.35 $ 2.24 $ 1.77 Dividends Declared Per Share of Common Stock $ 1.22 $ 1.10 $ 0.96 Theaccompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

58 PPL Corporation 2007 Annual Report

Consolidated Statements of Cash Flows (Millions of dollors) Forthe years endedDecember 31, 2007 2006 2005 Cash Flows from Operating Activities Net income $1,288 $ 865 $ 678 Adjustments to reconcile net income to net cash provided by operating activities Cumulative effect of a change in accounting principle 8 Pre-tax gain from the sale of the Latin American businesses (400)

Pre-tax loss from the sale of the Sundance plant 72 Pre-tax loss from the sale of interest in Griffith plant 39 Depreciation 458 446 423 Amortizations - recoverable transition costs and other 433 309 298 Defined benefits (39) (115) (41)

Impairment of assets 121 Deferred income taxes and investment tax credits 42 (25) (66)

Other (66) 47 124 Change in current assets and current liabilities Accounts receivable (186) (31) (93)

Accounts payable 127 116 141 Fuel, materials and supplies 25 (31) (38)

Other (144) 107 (101)

Other operating activities Other assets (12) 17 18 Other liabilities (76) 14 (35)

Net cash provided by operating activities 1,571 1,758 1,388 Cash Flows from Investing Activities Expenditures for property, plant and equipment (1,685) (1,394) (811)

Proceeds from the sale of the Latin American businesses 851 Proceeds from the sale of telecommunication operations 47 Proceeds from the sale of the Sundance plant 190 Proceeds from the sale of interest in Griffith plant 110 Purchases of emission allowances (33) (76) (169)

Proceeds from the sale of emission allowances 107 46 64 Purchases of nuclear decommissioning trust investments (190) (227) (239)

Proceeds from the sale of nuclear decommissioning trust investments 175 211 223 Purchases of short-term investments (601) (696) (116)

Proceeds from the sale of short-term investments 860 400 118 Net increase in restricted cash and cash equivalents (125) (12) (34)

Other investing activities (20) 21 (5)

Net cash used in investing activities (614) (1,617) (779)

Cash Flows from Financing Activities Issuance of long-term debt 985 1,985 737 Retirement of long-term debt (1,216) (1,535) (1,261)

Repurchase of common stock (712)

Issuance of preference stock, net of issuance costs 245 Issuance of common stock 32 21 37 Payment of common stock dividends (459) (409) (347)

Net increase (decrease) in short-term debt 61 (173) 184 Other financing activities (17) (39) (26)

Net cash (used in) provided by financing activities (1,326) 95 (676)

Effect of Exchange Rates on Cash and Cash Equivalents 5 3 6 Net (Decrease) Increase in Cash and Cash Equivalents (364) 239 (61)

Cash and Cash Equivalents at Beginning of Period 794 555 616 Cash and Cash Equivalents at End of Period $ 430 $ 794 $ 555 Supplemental Disclosures of Cash Flow Information Cash paid during the period for:

Interest $ 437 $ 449 $ 466 Income taxes - net $ 376 $ 270 $ 149 Theaccompanying Notesto Consolidated Financial Statementsare an integral part ofthefinancial statements.

PPL Corporation 2007 Annual Report 59

Consolidated Balance Sheets (Millions of dollars) ArDecember31, 2007 2006 ASSETS Current Assets Cash and cash equivalents $ 430 $ 794 Short-term investments 108 359 Restricted cash and cash equivalents (Note 19) 203 102 Accounts receivable (less reserve: 2007, $39; 2006, $50)

Customer 574 499 Other 87 92 Unbilled revenues 531 469 Fuel, materials and supplies (Note 1) 316 318 Prepayments 160 79 Deferred income taxes (Note 5) 25 162 Price risk management assets (Note 18) 319 551 Other intangibles (Note 20) 76 124 Assets held for sale (Note 10) 318 Other 21 21 Total Current Assets 3,168 3,630 Investments Investment in unconsolidated affiliates - at equity (Note 3) 44 47 Nuclear plant decommissioning trust funds (Note 21) 555 510 Other 9 7 Total Investments 608 564 Property, Plant and Equipment (Note 1)

Electric plant inservice Transmission and distribution 8,787 8,836 Generation 8,812 8,744 General 836 779 18,435 18,359 Construction work inprogress 1,287 682 Nuclear fuel 387 354 Electric plant 20,109 19,395 Gas and oil plant 66 373 Other property 202 311 20,377 20,079 Less: accumulated depreciation 7,772 8,010 Total Property, Plant and Equipment 12,605 12,069 Regulatory and Other Noncurrent Assets (Note 1)

Recoverable transition costs 574 884 Goodwill (Note 20) 991 1,154 Other intangibles (Note 20) 335 367 Price risk management assets (Note 18) 587 144 Other 1,104 935 Total Regulatory and Other Noncurrent Assets 3,591 3,484 Total Assets $19,972 $19,141 The accompanying Nutes tuConsulidated Financial Statements areanintegral part uflthe financial statements.

60 PPL Corporation 2007 Annual Report

Consolidated Balance Sheets (Millions ofdo/lors) At December37, 2007 2006 LIABILITIES AND EQUITY Current Liabilities Short-term debt (Note 8) $ 92 $ 42 Long-term debt 678 1,018 Long-term debt with affiliate trust (Notes 8, 16 and 22) 89 Accounts payable 723 667 Above market NUG contracts (Note 15) 42 65 Taxes 127 194 Interest 131 109 Dividends 118 111 Price risk management liabilities (Note 18) 423 550 Liabilities held for sale (Note 10) 68 Other 480 503 Total Current Liabilities 2,882 3,348 Long-term Debt 6,890 6,728 Deferred Credits and Other Noncurrent Liabilities Deferred income taxes and investment tax credits (Note 5) 2,192 2,331 Price risk management liabilities (Note 18) 916 459 Accrued pension obligations (Note 13) 59 364 Asset retirement obligations (Note 21) 376 336 Above market NUG contracts (Note 15) 29 71 Other 752 627 Total Deferred Credits and Other Noncurrent Liabilities 4,324 4,188 Commitments and Contingent Liabilities (Note 15)

Minority Interest 19 60 Preferred Securities of a Subsidiary (Note 7) 301 301 Shareowners' Common Equity Common stock - $0.01 par value 0) 4 4 Capital in excess of par value 2,172 2,810 Earnings reinvested 3,448 2,626 Accumulated other comprehensive loss (Note 1) (68) (318)

Total Shareowners'Common Equity 5,556 5,122 Total Liabilities and Equity $19,972 $19,747 (1)780 million shares authorized; 373 million shares issued and outstanding at December 31,2007, and 385 million shares issued and outstanding at December 31,2006.

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

PPL Corporation 2007 Annual Report 61

Consolidated Statements of Shareowners' Common Equity and Comprehensive Income (Millions of dollars,except pershare amounts) For the years ended December31, 2007 2006 2005 Common stock at beginning of year $ 4 $ 4 $ 2 Common stock split 2 Common stock at end of year 4 4 4 Capital inexcess of par value at beginning of year 2,810 3,602 3,528 Common stock split (2)

Retirement of treasury stock (Note 1) (839)

Common stock issued 48 26 42 Common stock repurchased (Note 8) (712)

Stock-based compensation 26 22 32 Other (1) 2 Capital inexcess of par value at end of year 2,172 2,810 3,602 Treasury stock at beginning of year (838) (838)

Treasury stock purchased (1)

Retirement of treasury stock (Note 1) 839 Treasury stock at end of year (838)

Earnings reinvested at beginning of year 2,626 2,182 1,870 Net income 1,288 865 678 Dividends and dividend equivalents declared on common stock and restricted stock units (466) (421) (366)

Earnings reinvested at end of year 3,448 2,626 2,182 Accumulated other comprehensive loss at beginning of year (') (318) (532) (323)

Other comprehensive income (loss) (h) 250 414 (209)

Adjustment to initially apply SFAS 158, net of tax benefit of $103 (Note 13) (200)

Accumulated other comprehensive loss at end of year (68) (318) (532)

Total Shareowners' Common Equity $5,556 $5,122 $4,418 Common stock shares outstanding at beginning of year (1) 385,039 380,145 378,143 Common stock shares issued through the ICP, ICPKE, 2.625% Convertible Senior Notes and directors retirement plan, net of forfeitures 3,177 4,955 2,024 Common stock shares repurchased (14,945)

Treasury stock shares purchased (61) (22)

Common stock shares outstanding at end of year 373,271 385,039 380,145

'a Shares inthousands. Each share entitles the holderto one vote on any question presented to any shareowners'meeting.

tbt Statement of Comprehensive Income (Note 1):

Net income $1,288 $ 865 $ 678 Other comprehensive income (loss):

Foreign currency translation adjustments, net of tax expense of Sl, $0,$0 93 155 (53)

Unrealized gains onavailable-for-sale securities, net of tax expense of S6, $33,$5(5) 8 10 8 Additional minimum pension liability adjustments, net of tax expense of $26, $8 54 19 Defined benefit plans (Note 13)

Netprior service costs, net of tax benefit of $(6) 16 Net actuarial gain, net of taxexpense of $123 273 Amortization of net transition obligations, net of tax expense of $1 1 Net unrealized (losses) gains onqualifying derivatives, net of tax (benefit) expense of $(105), $124, $(115) (141) 195 (183)

Totalother comprehensive income (loss) 250 414 (209)

Comprehensive Income $1,538 $1,279 $ 469 Ct See Note Ifor disclosure of balances for each component of accumulated other comprehensive loss.

tdt The2005 amount includes unrealized losses on investments inthe nuclear decommissioning trust funds. Beginning in2006, such losses represent other than temporary impairments and arerecognized inearnings.

See Note21for additional information.

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

62 PPL Corporation 2007 Annual Report

Consolidated Statements of Long-term Debt Outstanding (Millions of dollars) At December31, 2007 2006 Maturity I')

U.S.

6.84% - 8.375% Medium-term Notes $ 283 2007 4.33% - 7.0% Senior Unsecured Notes $2,451(m)tt 2,301 2009-2047 Junior Subordinated Notes (') 500 2067 2.625% Convertible Senior Notes (1) 57 102 2023 8.05% - 8.30% Senior Secured Notes (d) 437 437 2013 8.70% Unsecured Promissory Notes 10(r) 10 2022 7.375% First Mortgage Bonds re) 10 10 2014 4.30% - 6.45% Senior Secured Bonds rer 1,036 1,041 2007-2037 3.125% - 4.75% Senior Secured Bonds (Pollution Control Series) tl 314 314 2008-2029 7.05% - 7.15% Series 1999-1 Transition Bonds 305 605 2007-2008 Floating Rate Exempt Facilities Note (9) 81 2037 Floating Rate Pollution Control Facilities Note (hr 9 9 2027 5,210 5,112 U.K.

4.80436%- 9.25% Senior Unsecured Notes i) 1,864(°)(P) 1,987 2007-2037 1.541% Index-linked Senior Unsecured Notes 000) 481 WrqW 443 2053-2056 2,345 2,430 Latin America (k) 3.75%-9.0 % Inflation-linked Debt 205 2007-2027 4.00% - 8.57% Other 18 2007-2011 223 7,555 7,765 Fair value adjustments from hedging activities 28 (9)

Unamortized premium 11 12 Unamortized discount (16) (22) 7,578 7,746 Less amount due within one year (678) (1,018)

Less amount included in liabilities held for sale (1 0)il Total Long-term Debt $6,890 $6,728 Long-term Debt with Affiliate Trust:

8.23% Subordinated Debentures I' $ $ 89 2027 Less amount due within one year (89)

Total Long-term Debt with Affiliate Trust $ $

SeeNote8forinformation ondebtissuances, debtretirements andotherchanges inlong-term debt, ia) Aggregate marturities oflong-term debtare(millions ofdollars): 2008,S67N; 2009,$687;2010,50;2011,S501; 2012,t1; and55,688 thereafter Thereareenodebtsecurities outstanding thathavesinking fundrequirements.

(b) Thenotesbearinterest at 6.70 intoMarch 2017,atwhichtimethenotr willbearinterest atThree-month LIBOR plus2.665%,resetquarterly, untilmaturity.Interestpayments maybedeferred, fhomrimeto rime, ononeonmoreoccasions forupto tenconsecu-tiveyears.Thenotesmaybe redeemed at parbeginning in March 2017.

1Q1TheConvertible Senior Notesmaybe redeemed beginning onMay20,2008.Additona ly,theholdershavetherightto require PPLEnergy Supply toprchase the notes at parvalueoneveryfifthanniversary oftheissuance, withsuchfirstdatebeingMay15,2008, Thebalance outstanding at December 31,2007,hasbeenclassified asa currentliabiltyontheBalance Sheet.SeeNotes4and8fora discussion ofconversionterms.

10) Represents leasefinancing consolidated througha variable interest entity.SeeNote22foradditional information.

We TheRFstMortgage Bonds were issuedunder,andaresecured by,thelienofthe 1945First Mortgage BondIndenture. The lienofthe 1945First Mortgage Bond Indenture covers substantially allelectricdistribution plantandcertaintransmission plantownedby PPL Electric TheSeniorSecured Bondswereissuedunderthe2001Senior Secured BondIndenture, TheSeniorSecured Bonds aresecured by(i)an equalprincipal amountofFirst Mortgage Bondsissuedunderthe1945RuitMortgage Bond Indenture and(it)the lienofthe2001SeniorSecured BondIndenture, which covers substantiallyall electric distribution plantand certain transmission plant owned by PPL Electric and which isjunior to the lien ofthe 1945 FirstMortgage Bond Indenture.

Itl PPL Electricissueda seriesofinsSeniorSecured Bondstosecureitsobligations to makepayments withrespectto eachseriesofPollution Coontrol Bonds thatwereissuedbytheLehigh County IodustrialDevelopment Authoity (LCIDA)onbehalfofPPLElectric TheseSeniorSecured Bonds wereIssuedinthesameprincipal amountandbearthesameinterest rateassucsPollution Control Bonds. These SeniorSecured Bonds wereissuedunderthe2001SeniorSecured BondIndenture andaresecured asnotedin(e)above.

$224 million oftheseSenior Secured Bonds maybe redeemed at parbeginning in 2015.

(t) The Pennsylvania Economic Development Financing Authority (PEDFA) issuedExempt FacilitiesRevenue BondsonbehalfofPPLEnergy Supply. Inconnection withtheissuance ofsuchbonds,PPLEnergy Supply enteredintoa loanagreement withthePEDFA pursuanttowhichthePEDFA hasloanedto PPL Energy Supply theproceeds ofthebondsonpayment termsthatcorrespond tothebonds.Thebondsarestructured asvariable-rate remarketable bonds.They accrueinterest at 3.2%through January2008.Effective February2008,thebondswillbesubjectto dailyremarketing untilsuchtimethatthefrequency ofremarketing ischangedattheelectionofPPLEnergy Supply. PPLEnergy Supply mayconverttheinterest rateontheBonds fromtimeto timetoa commercial paperrate,dailyrate,weekly rateora termrateofat leastoneyear,asdetermined bythe remarketing agent.TheBonds aresubjectto mandatory purchase undercertain circumstances, including uponconversion toa different ratemode.Totheextentthata interest purchaseisrequired priorto thematurity date,PPLEnergy Supply hastheability andintentto refinance suchobligation ona long-term basis, (h) Ratewas4.923%atDecember 31,2007,and3.97% at December 31,2006.

it Although financial information offoreign subsidiaries isrecorded ona one-monthlag,WPD's December 2007bondretirement isreflectedinthe2007Financial Statements, asdiscussed inNote8,anditsDecember 2006bondissuances and bondretirement are inthe2006Finanoial reflected Statements duetothemateriality ofthesetransactions.

The TI principal amount ofthesenotesisadjustedona semi-annual basisbasedonchanges in a specifiedindex,asdetailedinthetenrs oftherelated indentures.

(k) In2007,PPLsolditsLatin American businesses,Debtofthebusinesses soldwasnotretained byPPLSeeNotef0foradditional information.

Il Represents debtwitha wholly-owned trustthatwasdeconsolidated effective December 31,2003.SeeNotes16and22forfurther discussion. SeeNote8foradiscussion oftheredemption ofthesedebentures inFebruary 2007.

(ml includes $300million of5.70%REset PutSecuaries due2035(REPS-),.The REPS bearinterestata rateof5.70%perannumto,but excluding, October 15,2015(Remarketing Date).TheREPS arerequired to beputbyexisting ontheRemarketing holders Dateeither for(a)purchase and remarketing by a designated remarketing dealer,or (b)repurchase by PPL Energy Supply, Ifthe remarketing dealerelects to purchasethe REPS forremarketing, it will purchase the REPS at 100% ofthe principal amount, andtheREPS willbear interest onandaftertheRemarketing Dateata newfixedrateperannumdetermined inthe remarketing. PPL Energy Supply hastherighttoterminate theremarketing process. iftheremarketing isterminated at theoptionofPPLEnergy Supply,orundercertain othercircumstances, including theoccurrence ofaneventofdefaultbyPPLEnergy Supply undertherelatedindenture ora failedremarketing forcertain specified reasons, PPLEnergy Supply willberequired to paytheremarketing dealera settlementamountas calculatedin accordance withtherelatedremarketing agreement.

Wl Includes $250million ofnotesthatmayberedeemed atparbeginning inJuly2011and$s00million ofnotesthatmaybe redeemed at parbeginning inJuly2012.

I0) Change includes anincrease relatedto an increase in foreign currency exchange rares.

IOuIncludes $463milionofnotesthatmayberedeemed, intotalbutnotinpart,onDecember 21,2026,atthegreateroftheprincipal valueora valuedetermined byreference to thegrossredemption yieldona nominated U.K. government the bond.Additionally,

$463 million ofsuchnotesmaybeput bytheholders backtotheissuerforredemption ifthelong-term creditratingsassigned to thenotesbyMoodys, S&PorFitch arewithdrawn byanyoftheratingagencies orreducedtoa non-investment graderatingofBalor BB+inconnection with a restructuringevent. A restructuring event includes the lossof,or a materiaI adverse change to,the distributionlicense under which the issuer operates.

(1) Thesenotesmaybe redeemed, intotalbyseries, onDecember 1,2026,at thegreateroftheadjustedprincipal valueanda make-wholevalue determined byreference to thegrossrealyieldona nominated U.K. government bond.Additionally,thesenotesmay be putbytheholdersbackto theissuerforredemption ifthelong-term creditratings assigned to thenotesbyMoudys, S&PorFitch arewithdrawn byanyoftheratingagencies orreducedtoa non-investment graderatingofBatorBB+inconnection witha restroctudng event.Arestructuring eventincludes thelossof,ora material adverse changeto,thedistribution licenseunderwhichtheissueroperates.

0 In2007,PPLannounced itsintentionto sellitsnaturalgasdistribution andpropane businesses. Theassetsandliabilties ofthesebusinesses, including the8,70%Unsecured Promissory Notes, havebeenclassified asheldforsaleatDecember 31,2007.SeeNote10 foradditional information.

Theaccompanying Notes to Consolidated Financial Statements are an integral part of the financial statements, PPL Corporation 2007 Annual Report 63

Notes to Consolidated Financial Statements Terms and abbreviations appearing inNotes to Consolidated Financial Statements are explained inthe glossary, Dollars are inmillions, except per share data, unless otherwise noted.

Note 1. Summary of Significant are accounted for under the equity method. See Note 3 for additional information.

Accounting Policies All other investments are carried at cost or fair value. All significant intercompany transactions have been eliminated. Any minority interests are reflected inthe General consolidated financial statements.

Business and Consolidation PPL isan energy and utility holding company that, through its subsidiaries, ispri- Regulation marily engaged inthe generation and marketing of electricity inthe northeastern PPL Electric and PPL Gas Utilities account for regulated operations inaccordance and western U.S. and inthe delivery of electricity inPennsylvania and the U.K. with the provisions of SFAS 71, "Accounting for the Effects of Certain Types of Headquartered inAllentown, PA, PPL's principal direct subsidiaries are PPL Energy Regulation," which requires cost-based rate-regulated entities to reflect the Funding, PPL Electric, PPL Gas Utilities, PPL Services and PPL Capital Funding. effects of regulatory actions intheir financial statements.

InJuly 2007, PPL announced its intentions to sell its natural gas distribution The regulatory assets below are either included in"Regulatory and Other and propane businesses. PPL expects to complete the sale during the second half Noncurrent Assets" or "Assets held for sale" on the Balance Sheets.

of 2008. See Note 10 for additional information. 2007 2006 PPL Energy Funding isthe parent of PPL Energy Supply, which serves as the Recoverable transition costs(') $574 $ 884 holding company for PPLs principal unregulated subsidiaries. PPL Energy Supply Taxes recoverable through future rates 245 265 isthe parent of PPL Generation, PPL EnergyPlus and PPL Global. Recoverable costs of defined benefit plans 75 PPL Generation owns and operates a portfolio of domestic power generating Costs associated with severe ice storms - January 2005 12 12 assets. These power plants are located inPennsylvania, Montana, Illinois, Other 12 6

$843 $1,242 Connecticut, New York and Maine and use well-diversified fuel sources including coal, uranium, natural gas, oil and water. PPL EnergyPlus markets or brokers ) Earn acurrent return.

electricity produced by PPL Generation subsidiaries, along with purchased power, The recoverable transition costs are the result of the PUC Final Order, which natural gas and oil, incompetitive wholesale and deregulated retail markets, allowed PPL Electric to begin amortizing its competitive transition (or stranded) primarily inthe northeastern and western U.S. PPL Global owns and operates costs, $2.97 billion, over an 11-year transition period effective January 1,1999.

international energy businesses that are primarily focused on the distribution InAugust 1999, competitive transition costs of $2.4 billion were converted to of electricity. intangible transition costs when they were securitized by the issuance of transi-It isthe policy of PPL to consolidate foreign subsidiaries on a one-month lag. tion bonds. The intangible transition costs are being amortized over the life of the Material intervening events, such as debt issuances and retirements, acquisitions transition bonds, through December 2008, inaccordance with an amortization or divestitures that occur inthe lag period are recognized inthe current Financial schedule filed with the PUC. The assets of PPL Transition Bond Company, including Statements. Significant, but not material, events are disclosed. the intangible transition property, are not available to creditors of PPL or PPL In2007, PPL Energy Supply completed the sale of its domestic telecommuni- Electric. The transition bonds are obligations of PPL Transition Bond Company and cation operations. See Note 9 for additional information. Also in2007, PPL Energy are non-recourse to PPL and PPL Electric. The remaining competitive transition Supply completed the sale of its Latin American businesses inChile, ElSalvador, costs are also being amortized based on an amortization schedule previously filed and Bolivia. In2006 and 2005, PPL Energy Supply completed the sale of its interest with the PUC, adjusted for those competitive transition costs that were converted inthe Griffith plant and the Sundance plant. See Note 10 for additional information to intangible transition costs. As a result of the conversion of a significant portion on the above sales. of the competitive transition costs into intangible transition costs, amortization of The consolidated financial statements of PPL include its share of undivided substantially all of the remaining competitive transition costs of $351 million will interests injointly-owned facilities, as well as their share of the related operating occur in2009.

costs of those facilities, See Note 14 for additional information. Taxes recoverable through future rates represent the portion of future income PPL Electric isa rate-regulated subsidiary of PPL. PPL Electric's principal busi- taxes that will be recovered through future rates based upon established regulatory ness isthe transmission and distribution of electricity to serve retail customers practices. Accordingly, this regulatory asset isrecognized when the offsetting in its franchised territory ineastern and central Pennsylvania, and the supply of deferred tax liability isrecognized. Inaccordance with SFAS 109, "Accounting for electricity to retail customers inthat territory as a PLR. Income Taxes," this regulatory asset and the deferred tax liability are not offset for The consolidated financial statements of PPL include its own accounts general-purpose financial reporting; rather, each isdisplayed separately. Because as well as the accounts of all entities inwhich the company has a controlling this regulatory asset does not represent cash tax expenditures already incurred financial interest. (See Note 22 for additional information regarding variable by PPL, this regulatory asset isnot earning a current return. This regulatory asset interest entities.) Investments inentities inwhich the company has the ability isexpected to be recovered over the period that the underlying book-tax timing to exercise significant influence but does not have a controlling financial interest differences reverse and the actual cash taxes are incurred.

64 PPL Corporation 2007 Annual Report

Recoverable costs of defined benefit plans represent the portion of unrecog- Accounting Records nized transition obligation, prior service cost, and net actuarial gain that will be The system of accounts for PPL Electric and PPL Gas Utilities are maintained in recovered through future rates based upon established regulatory practices. These accordance with the Uniform System of Accounts prescribed by the FERC and regulatory assets are adjusted annually or more frequently ifcertain significant adopted by the PUC.

events occur, when the funded status of PPL's defined benefit plans isremeasured, Use of Estimates inaccordance with the accounting requirements for defined benefit plans as The preparation of financial statements inconformity with U.S. GAAP requires described inthe "Defined Benefits" section of this note. These regulatory assets management to make estimates and assumptions that affect the reported do not represent cash expenditures already incurred; consequently, these assets amounts of assets and liabilities, the disclosure of contingent liabilities at the date are not earning a current return.

of the financial statements and the reported amounts of revenues and expenses 2007 2006 during the reporting period. Actual results could differ from those estimates.

Transition obligation $14 $16 Loss Accruals Prior service cost 82 89 Net actuarial gain (96) (30) Loss accruals are recorded inaccordance with SFAS 5,"Accounting for Recoverable costs of defined benefit plans $75 Contingencies," and other related accounting guidance. Potential losses are accrued when (1)information isavailable that indicates it is"probable" that a loss Of these costs, $11million isexpected to be amortized into net periodic benefit has been incurred, given the likelihood of the uncertain future events and (2)the cost in2008. Allcosts will be amortized over the lives of the defined benefit plans. amount of the loss can be reasonably estimated. FASB defines "probable" as cases InJanuary 2005, severe ice storms hit PPL Electric's service territory. The total inwhich "the future event or events are likely to occur." SFAS 5 does not generally cost of restoring service, excluding capitalized cost and regular payroll expenses, permit the accrual of contingencies that might result ingains. PPL continuously was $16 million. InAugust 2005, the PUC issued an order granting PPL Electric's assesses potential loss contingencies for environmental remediation, litigation petition for authority to defer and amortize for regulatory accounting and reporting claims, regulatory penalties and other events. PPL discounts its loss accruals for purposes a portion of these storm costs subject to certain conditions. As a result environmental remediation when appropriate.

of the PUC Order and inaccordance with SFAS 71, PPL Electric deferred $12 million PPL also has accrued estimated losses on long-term purchase commitments of its previously expensed storm costs. Recovery of these assets was addressed in when significant events have occurred. For example, estimated losses were accrued PPL Electric's distribution base rate case filed with the PUC inMarch 2007. In when long-term purchase commitments were assumed under asset acquisition December 2007, the PUC approved the recovery of these assets and as a result agreements and when PPL Electric's generation business was deregulated.

they will be amortized monthly beginning January 2008 through August 2015.

ChangesinClassification The remainder of the regulatory assets included in"Other" will be recovered The classification of certain amounts inthe 2006 and 2005 financial statements through 2013.

have been changed to conform to the current presentation. The changes inclassi-InAugust 2006, the Commonwealth Court of Pennsylvania overturned the fication did not affect net income or total equity.

PUC's decision of December 2004 that previously allowed PPL Electric to recover, In2007, PPL sold its Latin American businesses and inJuly 2007, PPL over a 10-year period, restoration costs incurred inconnection with Hurricane announced its intention to sell its natural gas distribution and propane businesses.

Isabel inSeptember 2003. As a result of the PUC's 2004 decision and inaccordance Inaccordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-with SFAS 71, PPL Electric had established a regulatory asset for the restoration Lived Assets," the operating results of these businesses are classified as "Income costs. Effective January 1,2005, PPL Electric began billing these costs to customers (Loss) from Discontinued Operations" on the Statements of Income. See Note 10 and amortizing the regulatory asset. The Commonwealth Court denied recovery of for further discussion. The Balance Sheets and Statements of Cash Flows of periods these costs because they were incurred when PPL Electric was subject to capped prior to 2007 were not impacted.

rates for transmission and distribution services, through December 31; 2004. As a result of the Court's decision in2006, PPL Electric recorded a charge of $11million, Comprehensive Income or $7million after tax, in"Other operation and maintenance" on the Statements Comprehensive income consists of net income and other comprehensive income, of Income, reversed the remaining unamortized regulatory asset of $9million and defined as changes inequity from transactions not related to shareowners.

recorded a regulatory liability of $2million for restoration costs previously billed Comprehensive income isshown on PPL's Statements of Shareowners' Common to customers from January 2005 through December 2006. InAugust 2007, PPL Equity and Comprehensive Income.

Electric began refunding these costs on customers' bills, which will continue through December 2009.

PPL Corporation 2007 Annual Report 65

Notes to Consolidated Financial Statements Accumulated other comprehensive loss, which is present ed on the Balance When recognized on the Statements of Income, realized gains and losses from Sheets of PPL, consisted of these after-tax amounts at Decem ber 31. energy contracts accounted for as fair value or cash flow hedges, are reflected in 2007 2006 "Wholesale energy marketing," "Fuel," or "Energy purchases," consistent with the Foreign currency translation adjustments $ 263 $ 170 hedged item. Unrealized gains and losses from changes inmarket prices of energy Unrealized gains on available-for-sale securities 66 58 contracts accounted for as fair value hedges are reflected in"Energy purchases" on Defined benefit plans the Statements of Income, as are changes inthe underlying position. Additionally, Transition obligation (12) (13) PPL enters into certain non-trading energy or energy-related contracts to hedge Prior service cost (97) (113) future cash flows or fair values that are not eligible for hedge accounting under Actuarial loss (113) (386) SFAS 133, or hedge accounting isnot elected. Unrealized and realized gains and Foreign currency translation 17 (17 losses on these transactions are reflected in"Wholesale energy marketing" or Net unrealized losses on qualifying derivatives $ (68) (5318) "Energy purchases," consistent with the hedged item. Unrealized and realized gains and losses on options to hedge synthetic fuel tax credits are reflected in Price Risk Management "Energy-related businesses" revenues.

PPL enters into energy and energy-related contracts to hedge the variability PPL accounts for non-trading bilateral sales and purchases inaccordance with of expected cash flows associated with their generating units and marketing EITF 03-11, "Reporting Realized Gains and Losses on Derivative Instruments That Are activities, as well as for trading purposes. PPL enters into inte rest rate derivative Subject to FASB Statement No. 133 and Not 'Held for Trading Purposes' as Defined contracts to hedge its exposure to changes inthe fair value offtheir debt instru- inIssue No. 02-3," to net non-trading bilateral sales of electricity at major market ments and to hedge its exposure to variability inexpected ca:sh flows associated delivery points with purchases that offset the sales at those same delivery points.

with existing debt instruments or forecasted issuances of debt PPL also enters into Amajor market delivery point isany delivery point with liquid pricing available.

foreign currency derivative contracts to hedge foreign currenc:y exposures related Gains and losses from interest rate and foreign currency derivative contracts to firm commitments, recognized assets or liabilities, forecast ed transactions, net that hedge interest payments, when recognized on the Statements of Income, investments and foreign earnings translation. are accounted for in"Interest Expense." Gains and losses from foreign currency Contracts that meet the definition of a derivative are accoounted for under derivative contracts that economically hedge foreign earnings translation are SFAS 133, "Accounting for Derivative Instruments and Hedgin g Activities," as recognized in"Other Income - net." Gains and losses from foreign currency amended and interpreted. Certain energy contracts have beenn excluded from the derivative contracts that hedge foreign currency payments for equipment, when requirements of SFAS 133 because they meet the definition ofa "normal purchase recognized on the Statements of Income, are accounted for in"Depreciation."

or normal sale." These contracts are reflected inthe financia Istatements using See Note 18 for additional information on SFAS 133, its amendments and the accrual method of accounting. related accounting guidance.

All derivative contracts that are subject to the requiremennts of SFAS 133 and Revenue its amendments are reflected on the balance sheet at their fai r value. These con- Utility Revenue tracts are recorded as "Price risk management assets" and "Pri ce risk management The Statements of Income "Utility" line item contains revenues from domestic liabilities" on the Balance Sheets. Short-term derivative positi ons are included and U.K. rate-regulated delivery operations.

in"Current Assets" and "Current Liabilities." PPL records long -term derivative positions in"Regulatory and Other Noncurrent Assets" and "D leferred Credits Revenue Recognition and Other Noncurrent Liabilities." On the date the derivative contract isexecuted, Operating revenues, except for "Energy-related businesses," are recorded based PPL may designate the derivative as a hedge of the fair value of a recognized asset on energy deliveries through the end of the calendar month. Unbilled retail or liability or of an unrecognized firm commitment ("fair valu e"hedge), a hedge revenues result because customers' meters are read and bills are rendered through-of a forecasted transaction or of the variability of cash flows too be received or paid out the month, rather than all being read at the end of the month. Unbilled related to a recognized asset or liability ("cash flow" hedge), aforeign currency revenues for a month are calculated by multiplying an estimate of unbilled kWh fair value or cash flow hedge ("foreign currency" hedge) or a hedge of a net invest- by the estimated average cents per kWh. Unbilled wholesale energy revenues are ment ina foreign operation ("net investment" hedge). Chang es inthe fair value of recorded at month-end to reflect estimated amounts until actual dollars and derivatives are recorded ineither other comprehensive income or incurrent-period MWhs are confirmed and invoiced. At that time, unbilled revenue isreversed and earnings inaccordance with SFAS 133. Cash inflows and outf lows related to actual revenue isrecorded.

derivative instruments are included as a component of operat ing, investing or PPL records energy marketing activity inthe period when the energy isdeliv-financing activities inthe Statements of Cash Flows, dependinngon the underlying ered. The wholesale sales and purchases that meet the criteria inEITF 03-11 are nature of the hedged items. reported net on the Statements of Income within "Wholesale energy marketing."

66 PPL Corporation 2007 Annual Report

Additionally, the bilateral sales and purchases that are designated as trading Accounts receivable collectibility isevaluated using a combination of factors, activities are also reported net, inaccordance with EITF 02-3, "Issues Involved in including past due status based on contractual terms. Reserve balances are Accounting for Derivative Contracts Held for Trading Purposes and Contracts analyzed to assess the reasonableness of the balances incomparison to the actual Involved inEnergy Trading and Risk Management Activities," and are reported accounts receivable balances and write-offs. Adjustments are made to reserve on the Statements of Income within "Net energy trading margins." Spot market balances based on the results of analysis, the aging of receivables, and historical activity that balances PPL's physical trading positions isincluded on the and industry trends.

Statements of Income in"Net energy trading margins." Additional specific reserves for uncollectible accounts receivable, such as Certain PPL subsidiaries participate inRTOs, primarily inPJM, but also in bankruptcies, are recorded on a case-by-case basis after having been researched the surrounding regions of New York (NYISO), New England (ISO-NE) and the and reviewed by management. The nature of the item, trends inwrite-offs, the Midwest (MISO). InPJM, PPL EnergyPlus isa marketer, a load-serving entity to age of the receivable, counterparty creditworthiness and economic conditions its customers who have selected itas a supplier and a seller for PPL's generation are considered as a basis for determining the adequacy of the reserve for uncol-subsidiaries. PPL Electric isatransmission owner and PLR inPJM. InISO-NE, PPL lectible account balances.

EnergyPlus isa marketer, a load-serving entity, and a seller for PPL's New England Trade receivables are charged-off inthe period inwhich the receivable is generating assets. Inthe NYISO and MISO regions, PPL EnergyPlus acts as a deemed uncollectible. Recoveries of trade receivables previously charged-off are marketer. PPL Electric does not participate inISO-NE, NYISO or MISO. Afunction recorded when itis known they will be received.

of interchange accounting isto match participants' MWh entitlements (generation At December 31, 2007 and 2006, the California ISO reserves accounted for plus scheduled bilateral purchases) against their MWh obligations (load plus 44% and 34% of the total allowance for doubtful accounts of PPL. See Note 15 scheduled bilateral sales) during every hour of every day. Ifthe net result during for additional information.

any given hour isan entitlement, the participant iscredited with a spot-market Cash sale to the ISO at the respective market price for that hour; ifthe net result isan Cash Equivalents obligation, the participant ischarged with a spot-market purchase from the ISO Allhighly liquid debt instruments purchased with original maturities of three at the respective market price for that hour. ISO purchases and sales are not months or less are considered to be cash equivalents.

allocated to individual customers. PPL records the hourly net sales and purchases inits financial statements as sales to and purchases from the respective SOs. Restricted Cash and Cash Equivalents "Energy-related businesses" revenue includes revenues from the mechanical Bank deposits and other cash equivalents that are restricted by agreement or contracting and engineering subsidiaries, WPD's telecommunications and that have been clearly designated for a specific purpose are classified as restricted property subsidiaries and PPL Global's proportionate share of affiliate earnings cash and cash equivalents. The change inrestricted cash and cash equivalents is under the equity or cost method of accounting, as described inthe "Business and reported as an investing activity inthe Statements of Cash Flows. On the Balance Consolidation" section of this note. The mechanical contracting and engineering Sheets, the current portion of restricted cash and cash equivalents isshown as subsidiaries record revenues from construction contracts on the percentage-of- "Restricted cash and cash equivalents" within current assets, while the noncurrent completion method of accounting, measured by the actual cost incurred to date portion isincluded in"Other" within other noncurrent assets. See Note 19 for the as apercentage of the estimated total cost for each contract. Accordingly, costs components of restricted cash and cash equivalents.

and estimated earnings inexcess of billings on uncompleted contracts are recorded Investments as a current asset on the Balance Sheets, and billings inexcess of costs and esti- Generally, the original maturity date of an investment and management's ability mated earnings on uncompleted contracts are recorded as a current liability on to sell an investment prior to its original maturity determine the classification of the Balance Sheets. The amount of costs inexcess of billings was $10 million and investments as either short-term or long-term. Investments that would otherwise

$9million at December 31, 2007 and 2006 and the amount of billings inexcess be classified as short-term, but are restricted as to withdrawal or use for other of costs was $76 million and $50 million at December 31, 2007 and 2006. than current operations or are clearly designated for expenditure inthe acquisition During 2007, PPL recognized $55 million of revenue related to a settlement or construction of noncurrent assets or for the liquidation of long-term debts, are agreement for cost-based payments based upon the RMR status of units at its classified as long-term.

Wallingford, Connecticut generating facility. See Note 15 for additional information.

Short-term Investments Allowance for Doubtful Accounts Short-term investments generally include certain deposits as well as securities Trade receivables are reported inthe Balance Sheets at the gross outstanding that are considered highly liquid such as auction rate and similar securities that amount adjusted for an allowance for doubtful accounts. provide for periodic reset of interest rates. Short-term investments have original maturities greater than three months and are included in"Short-term invest-ments" on the Balance Sheets of PPL.

PPL Corporation 2007 Annual Report 67

Notes to Consolidated Financial Statements Investments inDebt and Marketable Equity Securities Depreciation Investments indebt securities are classified as held-to-maturity, and measured Depreciation iscomputed over the estimated useful lives of property using various at amortized cost, when there isan intent and ability to hold the securities to methods including the straight-line, composite and group methods. When a maturity. Debt securities and marketable equity securities that are acquired and component of PP&E isretired that was depreciated under the composite or group held principally for the purpose of selling them inthe near-term are classified as method, the original cost ischarged to accumulated depreciation. When all or a trading. Trading securities are generally held to capitalize on fluctuations intheir significant portion of an operating unit that was depreciated under the composite value. Allother investments indebt and marketable equity securities are classified or group method isretired or sold, the property and the related accumulated as available-for-sale. Both trading and available-for-sale securities are carried at depreciation account isreduced and any gain or loss isincluded inincome, unless fair value. Any unrealized gains and losses for trading securities are included in otherwise required by regulators.

earnings. Unrealized gains and losses for available-for-sale securities are reported, PPL and its subsidiaries periodically review the useful lives of their fixed assets.

net of tax, inother comprehensive income or are recognized currently inearnings Inlight of significant planned environmental capital expenditures, PPL Generation when a decline infair value isdetermined to be other than temporary. The specific conducted studies of the useful lives of Montour Units 1and 2 and Brunner Island identification method isused to calculate realized gains and losses on debt and Unit 3 during the first quarter of 2005. Based on these studies, the useful lives of marketable equity securities. See Note 21 for additional information on available- these units were extended from 2025 to 2035, effective January 1,2005. Inthe for-sale securities held inthe nuclear decommissioning trust funds. second quarter of 2005, PPL Generation conducted additional studies of the useful lives of certain Eastern fossil-fuel and hydroelectric generation plants. The most Long-Lived and Intangible Assets significant change related to the useful lives of Brunner Island Units 1and 2 and Property,Plant and Equipment Martins Creek Units 3 and 4,which were extended from 2025 to 2035, effective PP&E isrecorded at original cost, unless impaired. Ifimpaired, the asset iswritten July 1,2005. The effect of these changes inuseful lives for 2005 was to increase down to fair value at that time, which becomes the asset's new cost basis. Original income from continuing operations and net income, as a result of lower deprecia-cost includes material, labor, contractor costs, construction overheads and financing tion, by $7million (or $0.02 per share, basic and diluted).

costs, where applicable. The cost of repairs and minor replacements are charged During 2005, as a result of the final regulatory outcome published by Ofgem to expense as incurred. PPL records costs associated with planned major mainte-of the most recent price control review and an assessment of the economic life nance projects inthe period inwhich the costs are incurred. No costs are accrued of meters, WPD reduced the remaining useful lives of its existing meter stock to inadvance of the period inwhich the work isperformed.

approximately nine years. The useful lives of new meters were reduced from AFUDC iscapitalized as part of the construction costs for regulated projects.

40 years to 19 years. The effect for 2005 was to decrease income from continuing Interest iscapitalized as part of construction costs for non-regulated projects.

operations and net income, as a result of higher depreciation, by $5million (or PPL capitalizes interest inaccordance with SFAS 34, "Capitalization of Interest

$0.01 per share, basic and diluted). During 2007, as a result of a further communi-Cost" for their unregulated entities. Interest incurred from borrowed funds used cation from Ofgem relating specifically to prepayment meters, WPD reduced the to construct, purchase or invest incapital assets isnot immediately expensed but remaining useful lives of these meters from nine years to 18 months. The effect rather deferred.

for 2007 was to decrease income from continuing operations and net income, as a Capitalized interest of $56 million for 2007, $21million for 2006 and $6million result of higher depreciation, by $3million (or $0.01 per share, basic and diluted).

for 2005 was excluded from "Interest Expense" on the Statements of Income.

In2007, WPD reviewed the useful lives of its distribution network assets.

Included in PP&E on the balance sheet are capitalized costs of software Effective April 1,2007, after considering information from Ofgem and other projects that were developed or obtained for internal use. These capitalized costs internal and external surveys, the weighted average useful lives were extended to are amortized ratably over the expected lives of the projects when they become 54 years from 40 years. The effect of this change inuseful lives for 2007 was to operational, generally not to exceed 5 years. At December 31, 2007 and 2006, increase income from continuing operations and net income, as a result of lower capitalized software costs were $64 million and $106 million, and there were depreciation, by $13 million (or $0.03 per share, basic and diluted).

$43 million and $76 million of accumulated amortization. During 2007, 2006 and Following are the weighted-average rates of depreciation at December 31.

2005, PPL amortized capitalized software costs of $10 million, $14 million and

$13 million. 2007 2006 The amortization of capitalized software isincluded in"Depreciation" on the Generation 2.19% 2.10%

Statements of Income. Transmission and distribution 2.52% 2.65%

General 7.87% 6.23%

The annual provisions for depreciation have been computed principally inaccordance with the following ranges, inyears, of assets lives. Generation, 40-50 years; transmission and distribution, 5-70 years; and general, 3-60 years.

68 PPL Corporation 2007 Annual Report

Goodwill and Other IntangibleAssets Asset Retirement Obligations Goodwill represents the excess of the purchase price paid over the estimated fair PPL and its subsidiaries account for the retirement of its long-lived assets accord-value of the assets acquired and liabilities assumed inthe acquisition of a business. ing to SEAS 143, "Accounting for Asset Retirement Obligations," which addresses Ifseveral businesses are acquired ina single transaction, the purchase price must the accounting for obligations associated with the retirement of tangible long-be apportioned to each business based on the fair value of each business. Each lived assets and FIN47, "Accounting for Conditional Asset Retirement Obligations, business isthen assigned to the appropriate reporting unit and the related good- an interpretation of FASB Statement No. 143,' which clarifies certain aspects of will iscalculated for each business and included inthat reporting unit. PPL's SFAS 143. SFAS 143 requires legal obligations associated with the retirement of reporting units are significant businesses that have discrete financial information long-lived assets to be recognized as liabilities inthe financial statements. The and the operating results are regularly reviewed by segment management. In initial obligation ismeasured at estimated fair value. An equivalent amount is accordance with SFAS 142, "Goodwill and Other Intangible Assets," PPL and its recorded as an increase inthe value of the capitalized asset and allocated to subsidiaries do not amortize goodwill. expense over the useful life of the asset. Until the obligation issettled, the liability Other intangible assets that have finite useful lives are valued at cost and isincreased, through the recognition of accretion expense inthe income state-amortized over their useful lives based upon the pattern inwhich the economic ment, for changes inthe obligation due to the passage of time. Estimated ARO benefits of the intangible assets are consumed or otherwise used. costs and settlement dates, which affect the carrying value of various AROs and PPL and its subsidiaries account for emission allowances as intangible assets. the related assets, are reviewed periodically to ensure that any material changes As such, emission allowances are expensed when consumed. Inaddition, vintage are incorporated into the latest estimate of the obligations.

year swaps are accounted for at fair value inaccordance with SFAS 153, See Note 21 for a discussion of accounting for AROs.

"Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29."

Compensation and Benefits See Note 20 for additional information on goodwill and other intangible assets.

Defined Benefits Asset Impairment PPL and certain of its subsidiaries sponsor various defined benefit pension and PPL and its subsidiaries review long-lived assets, including intangibles, that are other postretirement plans. PPL follows the guidance of SFAS 87, "Employers' subject to depreciation or amortization for impairment when events or circum- Accounting for Pensions," and SFAS 106, "Employers' Accounting for Postretirement stances indicate carrying amounts may not be recoverable. An impairment loss is Benefits Other Than Pensions," when accounting for these defined benefits. In recognized if the carrying amount of a long-lived asset isnot recoverable from addition, PPL adopted the recognition and measurement date provisions of SFAS 158, estimated undiscounted future cash flows. The impairment charge ismeasured "Employers' Accounting for Defined Benefit Pension and Other Postretirement by the difference between the carrying amount of the asset and its estimated fair Plans," effective December 31, 2006. Subsequent to the adoption of SFAS 158, value. See Notes 9,10 and 15 for adiscussion of asset impairment charges recorded. PPL isrequired to record an asset or liability to recognize the funded status of all Intangible assets with indefinite lives are reviewed for impairment annually defined benefit plans with an offsetting entry to other comprehensive income (OCI) or more frequently when events or circumstances indicate that the assets may be or regulatory assets for certain regulated subsidiaries. Consequently, the funded impaired. An impairment charge isrecognized ifthe carrying amount of the assets status of all defined benefit plans isnow fully recognized on the Balance Sheets exceeds its fair value. The difference represents the amount of impairment. and PPL no longer recognizes additional minimum liability adjustments inOCI.

Goodwill isreviewed for impairment, at the reporting unit level, annually or PPL uses a market-related value of plan assets inaccounting for its pension more frequently when events or circumstances indicate that the carrying value of plans. The market-related value of plan assets iscalculated by rolling forward the a reporting unit may be greater than the unit's fair value. PPL's reporting units are prior year market-related value with contributions, disbursements and expected at or one level below its operating segments. Ifthe carrying value of the reporting return on investments. One-fifth of the difference between the actual value and unit, including goodwill, exceeds its fair value, the implied fair value of goodwill the expected value isadded (or subtracted ifnegative) to the expected value to must be calculated. The implied fair value of goodwill isdetermined inthe same determine the new market-related value.

manner as the amount of goodwill ina business combination. Ifthe implied fair PPL uses an accelerated amortization method for the recognition of gains value of goodwill isless than thecarrying value, an impairment loss isrecognized and losses for its pension plans. Under the accelerated method, gains and losses for an amount equal to that difference. inexcess of 10% but less than 30% of the greater of the plan's projected benefit PPL also reviews the residual value of leased assets. Residual value isthe obligation or the market-related value of plan assets are amortized on a straight-estimated fair value of the leased property at the end of the lease term. Ifthe line basis over the estimated average future service period of plan participants.

residual value isdetermined to be less than the residual value that was originally Gains and losses inexcess of 30% of the plan's projected benefit obligation are recorded for the property, PPL must determine whether the decrease isother amortized on a straight-line basis over a period equal to one-half of the average than temporary. Ifso, the residual value would be revised using the new estimate future service period of the plan participants.

and a loss would be recorded currently. Ifthe residual value isfound to be greater See Note 13 for a discussion of defined benefits.

than the original, no adjustment isneeded.

PPL Corporation 2007 Annual Report 69

Notes to Consolidated Financial Statements Stock-Based Compensation expense immediately. For employees who are not retirement eligible when stock-PPL grants stock options, restricted stock and restricted stock units to employees based awards are granted, PPL amortizes the awards on a straight-line basis over and restricted stock units and stock units to directors under several stock-based the shorter of the vesting period or the period up to the employee's attainment of compensation plans. InDecember 2004, the FASB issued SFAS 123 (revised 2004), retirement age. Retirement eligible has been defined by PPL as the early retire-

"Share-Based Payment," which isknown as SFAS 123(R) and replaces SFAS 123, ment age of 55. The adjustments below related to retirement-eligible employees "Accounting for Stock-Based Compensation," as amended by SFAS 148, were recorded based on the aforementioned clarification of existing guidance and "Accounting for Stock-Based Compensation-Transition and Disclosure." PPL and are not related to the adoption of SFAS 123(R).

its subsidiaries adopted SFAS 123(R) effective January 1,2006. See Note 12 for In2005, PPL recorded a charge of $10 million after tax, or $0.03 per share, to a discussion of SFAS 123(R). Effective January 1,2003, PPL and its subsidiaries accelerate stock-based compensation expense for retirement-eligible employees, adopted the fair value method of accounting for stock-based compensation, as of which $5million of the after-tax total, or $0.01 per share, was related to periods prescribed by SFAS 123, "Accounting for Stock-Based Compensation," using the prior to 2005. The prior period amounts were not material to previously issued prospective method of transition permitted by SFAS 148, "Accounting for Stock- financial statements. /

Based Compensation - Transition and Disclosure, an Amendment of FASB Other Statement No. 123," The prospective method of transition requires PPL and its Income Taxes subsidiaries to use the fair value method under SFAS 123 to account for all stock-The income tax provision for PPL and its subsidiaries iscalculated inaccordance based compensation awards granted, modified or settled on or after January 1, with SFAS 109, "Accounting for Income Taxes." PPL and its domestic subsidiaries 2003. Thus, all awards granted prior to January 1,2003, were accounted for under file a consolidated U.S. federal income tax return.

the intrinsic value method of APB Opinion No. 25, "Accounting for Stock Issued to Significant management judgment isrequired indeveloping PPL's and its sub-Employees," to the extent such awards are not modified or settled.

sidiaries' provision for income taxes. This isprimarily due to uncertainty invarious Use of the fair value method prescribed by both SFAS 123 and SFAS 123(R) tax positions taken or expected to be taken, intax returns, the determination of requires PPL and its subsidiaries to recognize compensation expense for stock deferred tax assets, liabilities and valuation allowances and estimating the phase-options issued. Fair value for the stock options isdetermined using the Black-Scholes out range for synthetic fuel tax credits that isnot published by the IRS until April options pricing model. Stock options with graded vesting (i.e., that vest ininstall-of the following year.

ments) are valued as asingle award.

Prior to January 1,2007, and inaccordance with SFAS 5,"Accounting for PPL and its subsidiaries were not required to recognize compensation expense Contingencies," PPL and its subsidiaries evaluated uncertain tax positions and for stock options issued and accounted for under the intrinsic value method of accrued charges for probable exposures based on management's best estimate APB Opinion No. 25, since PPL grants stock options with an exercise price that is of the amount of benefit that should be recognized inthe financial statements.

not less than the fair market value of PPL's common stock on the date of grant.

This assessment resulted inmanagement's best estimate of the ultimate settled As currently structured, awards of restricted stock, restricted stock units and tax position for each tax year.

directors' stock units result inthe same amount of compensation expense under InJune 2006, the FASB issued FIN48, "Accounting for Uncertainty inIncome the fair value method of SFAS 123 or SFAS 123(R) as they would under the intrin-Taxes, an interpretation of FASB Statement No. 109." InMay 2007, the FASB sic value method of APB Opinion No. 25 since the value of the awards are based amended this guidance by issuing FSP FIN48-1, "Definition of Settlement in on the fair value of PPL's common stock on the date of grant. See Note 12 for a FASB Interpretation No. 48." PPL and its subsidiaries adopted FIN48, as amended, discussion of stock-based compensation. Stock-based compensation isincluded effective January 1,2007. The adoption resulted inthe recognition of a cumulative in"Other operation and maintenance" expense on the Statements of Income.

effect adjustment to the opening balance of retained earnings in2007. Under For 2005, the difference between the pro forma effect on net income and EPS FIN48, uncertain tax positions are no longer considered to be contingencies as ifthe fair value method had been used to account for all outstanding stock-assessed inaccordance with SFAS 5.FIN48 requires an entity to evaluate its tax based compensation awards and reported amounts would have been insignificant.

positions following a two-step process. The first step requires an entity to deter-In2007 and 2006, PPL accounted for all stock-based compensation awards under mine whether, based on the technical merits supporting a particular tax position, the fair value method.

itismore likely than not (greater than a 50% chance) that the tax position will be SFAS 123(R) provided additional guidance on the requirement to accelerate sustained. This determination assumes that the relevant taxing authority will expense recognition for employees who are at or near retirement age and who examine the tax position and isaware of all the relevant facts surrounding the tax are under a plan that allows for accelerated vesting upon an employee's retire-position. The second step requires-an entity to recognize inthe financial statements ment. Such guidance isrelevant to prior accounting for stock-based compensation the benefit of a tax position that meets the recognition criterion. The measure-under other accounting guidance. PPL's stock-based compensation plans allow for ment of the benefit equals the largest amount of benefit that has a likelihood of accelerated vesting upon an employee's retirement. Thus, for employees who are realization that exceeds 50%. Ifthe more likely than not threshold isnot met, retirement eligible when stock-based awards are granted, PPL recognizes the it isinappropriate to recognize any tax benefits associated with the tax position.

70 PPL Corporation 2007 Annual Report

The amounts ultimately paid upon resolution of issues raised by taxing authorities As of December 31, 2007 and 2006, PPL had receivable balances of $234 million may differ materially from the amounts accrued and may materially impact PPL's and $240 million (included in"Current Assets - Other" and "Regulatory and Other and its subsidiaries' financial statements inthe future. Noncurrent Assets - Other") and unearned revenue balances of $120 million and Deferred income taxes reflect the net future tax effects of temporary differences $128 million (included in"Current Liabilities - Other" and "Deferred Credits and between the carrying amounts of assets and liabilities for accounting purposes Other Noncurrent Liabilities - Other"). The receivable balances include $66 million and their basis for income tax purposes, as well as the tax effects of net operating of an unguaranteed residual value. Rental income received during 2007, 2006 and losses and tax credit carryforwards. 2005 was $15 million, $14 million and $15 million. Total future minimum lease PPL and its subsidiaries record valuation allowances to reduce deferred tax payments expected to be received on these leases are estimated at $17 million assets to the amounts that are more likely than not to be realized. PPL and its for each of the years from 2008 through 2012.

subsidiaries consider the reversal of temporary differences, future taxable income Fuel,Materialsand Supplies and ongoing prudent and feasible tax planning strategies ininitially recording Fuel, materials and supplies are valued at the lower of cost or market using the and subsequently reevaluating the need for valuation allowances. IfPPL and its average cost method, except for natural gas, for which the last-in, first-out cost subsidiaries determine that they are able to realize deferred tax assets inthe method (LIFO) isused. The carrying value of the LIFO inventory was $14 million and future inexcess of recorded net deferred tax assets, adjustments to the valuation

$13 million at December 31, 2007 and 2006. The excess of replacement cost over allowances increase income by reducing tax expense inthe period that such carrying value was $13 million and $16 million at December 31, 2007 and 2006.

determination ismade. Likewise, ifPPL and its subsidiaries determine that they Fuel, materials and supplies consisted of the following at December 31:

are not able to realize all or part of net deferred tax assets inthe future, adjust-ments to the valuation allowances would decrease income by increasing tax 2007 2006 expense inthe period that such determination ismade. Fuel $136 $196 PPL Energy Supply and PPL Electric defer investment tax credits when the Materials and supplies 180 182

$316 $378 credits are utilized and are amortizing the deferred amounts over the average lives of the related assets. ( 2007 excludes $18million of fuel, materials and supplies related to the natural gas distribution and propane businesses that isclassified as held for sale.

See Note 5 for additional discussion regarding income taxes.

The provision for PPL Electric's deferred income taxes for regulated assets is Guarantees based upon the ratemaking principles reflected inrates established by the PUC Inaccordance with the provisions of FIN45, "Guarantor's Accounting and Disclosure and the FERC. The difference inthe provision for deferred income taxes for regu- Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of lated assets and the amount that otherwise would be recorded under U.S. GAAP Others, an Interpretation of FASB Statements No. 5,57, and 107 and Rescission of isdeferred and included intaxes recoverable through future rates in"Regulatory FASB Interpretation No. 34," the fair values of guarantees related to arrangements and Other Noncurrent Assets - Other" on the Balance Sheet. entered into prior to January 1,2003, as well as guarantees excluded from the initial recognition and measurement provisions of FIN45, are not recorded in Taxes, Other Than Income the financial statements. See Note 15 for further discussion of recorded and PPL and its subsidiaries present sales taxes in"Accounts Payable" and value added unrecorded guarantees.

taxes in"Taxes" on their Balance Sheets. These taxes are not reflected on the Statements of Income. See Note 5 for details on taxes included in"Taxes, other Treasury Stock than income" on the Statements of Income. Treasury shares are reflected on the balance sheet as an offset to shareowners' equity under the cost method of accounting. Treasury shares are not considered Leases outstanding incalculating EPS.

PPL and its subsidiaries apply the provisions of SFAS 13, "Accounting for Leases,"

PPL held no treasury stock at December 31, 2007 and 2006. In2006, PPL as amended and interpreted, to all transactions that qualify for lease accounting.

retired all treasury shares, which totaled 62,174,729 shares, and restored them to See Note 11for a discussion of accounting for leases under which PPL isa lessee.

authorized but unissued shares of common stock. "Capital inexcess of par value" PPL EnergyPlus isthe lessor, for accounting purposes, of a 79.9 MW oil-powered was reduced by $839 million as a result of the retirement. Total "Shareowners' station inShoreham, New York. The Long Island Power Authority has contracted Common Equity" was not impacted. PPL plans to restore all shares of common to purchase all of the plant's capacity and ancillary services as part of a 15-year stock acquired inthe future to authorized but unissued shares of common stock power purchase agreement with PPL EnergyPlus, which ends in2017. The capacity upon acquisition.

payments inthe power purchase agreement result inthe plant being classified as a direct-financing lease. Additionally, a subsidiary of PPL Energy Supply isthe lessor, for accounting purposes, of two sales-type leases relating to an 8 MW on-site electrical generation plant and a 1.66 MW on-site electrical generation and thermal energy plant.

PPL Corporation 2007 Annual Report 71

Notes to Consolidated Financial Statements Foreign Currency Translationand Transactions Financial data for the segments are:

Assets and liabilities of international operations, where the local currency isthe 2007 2006 2005 functional currency, are translated at the exchange rates on the date of consolida- Income Statement D lata tion and related revenues and expenses are translated at average exchange rates Revenues fram external prevailing during the year. Adjustments resulting from translation are recorded in ustomers Supply

$2,347 $2,239 $1,775 accumulated other comprehensive loss. The effect of translation isremoved from International Delivery 900 793 753 accumulated other comprehensive loss upon the sale or substantial liquidation of Pennsylvania Delivery 3,251 3,099 3,011 the international subsidiary that gave rise to the translation adjustment. The local 6,498 6,131 5,539 currency isthe functional currency for all of PPL's international operating companies Intersegment revenues except for those located inBolivia, where the U.S. dollar isthe functional currency. Supply 1,810 1,708 1,590 Gains or losses relating to foreign currency transactions are recognized currently Pennsylvania Delivery 159 160 152 2005. Supply inincome. The net transaction losses were insignificant in2007, 2006 and Supply 167 159 144 New Accounting Standards International Delivery 147 142 133 Pennsylvania Delivery 132 118 112 See Note 23 for a discussion of new accounting standards recently adopted or 446 419 389 pending adoption.

Amortization - recoverable transition costs and other Supply 106 31 33 International Delivery 10 (14) (13)

Note 2. Segment and Related Information Pennsylvania Delivery 317 292 278 433 309 298 PPL's reportable segments are Supply, International Delivery and Pennsylvania Interest income Delivery. The Supply segment primarily consists of the domestic energy market- Supply 11 (3) (6) ing, domestic generation and domestic development operations of PPL Energy International Delivery 22 4 2 Supply. InAugust 2007, PPL completed the sale of its domestic telecommunication Pennsylvania Delivery 28 32 21 operations, which were previously included inthe Supply segment. See Note 9 61 33 17 for additional information. Interest Expense Supply 156 123 115 The International Delivery segment includes operations of the international Internatinnal Delivery 183 173 175 energy businesses of PPL Global that are primarily focused on the distribution of Pennsylvania Delivery 135 151 182 electricity. In2007, PPL completed the sale of its Latin American businesses located 474 447 472 inBolivia, ElSalvador and Chile. See Note 10 for additional information. PPL Global's Income from Continuing Operations iOi major remaining international business isWPD, which islocated inthe U.K. Supply 803 586 396 The Pennsylvania Delivery segment includes the regulated electric and International Delivery 260 245 217 gas delivery operations of PPL Electric and PPL Gas Utilities. InJuly 2007, PPL Pennsylvania Delivery 241 293 212 1,304 1,124 825 announced its intention to sell its natural gas distribution and propane businesses. IncomeTaxes See Note 10 for additional information. Supply 232 147 22 Inaccordance with SFAS 144, "Accounting for the Impairment or Disposal International Delivery (43) 19 39 of Long-Lived Assets," the operating results of the Latin American businesses Pennsylvania Delivery 81 102 67 and the natural gas distribution and propane businesses have been classified 270 268 128 as Discontinued Operations on the Statements of Income. Therefore, with the Deferred income taxes and investment tax credits Supply 9 (6) (93) exception of net income, the operating results from these businesses have been International Delivery (38) (15) 18 excluded from the income statement data tables below. Pennsylvania Delivery 18 18 8 Segments include direct charges, as well as an allocation of indirect corporate (11) (3) (67) service costs, from PPL Services. These service costs include functions such as Net Income financial, legal, human resources and information services. See Note 16 for addi- Supplyi(4ib) 568 416 311 tional information. International Delivery (a)Ci 610 268 215 Pennsylvania Delivery () 110 181 152

$1,288 $ 865 $ 678 72 PPL Corporation 2007 Annual Report

2007 2006 2005 Note 3. Investment in Unconsolidated Cash Flow Data Affiliates - at Equity Expenditures for PP&E Supply $1,043 $ 738 5 332 Investment inunconsolidated affiliates accounted for under the equity method International Delivery 340 340 289 at December 31 (equity ownership percentages as of December 31, 2007) was:

Pennsylvania Delivery 302 316 190 2007 2006

$1,685 $1,394 $811 Bangor-Pacific Hydro Associates - 50.0% $19 $19 As ofDecember 31, 2007 2006 Safe Harbor Water Power Corporation - 33.3% 16 15 Other 9 13 Balance Sheet Data

$44 $47 Investment inunconsolidated affiliates - at equity Supply $ 44 $ 44 International Delivery 3 44 47 Note 4. Earnings Per Share Total assets Supply 9,231 8,039 InAugust 2005, PPL completed a 2-for-1 split of its common stock. The distribution International Delivery 5,639 6,208 date was August 24, 2005. The share and per-share amounts included inthese Pennsylvania Delivery 5,102 5,500 financial statements have been adjusted for all periods presented to reflect the

$19,972 $19,747 stock split.

Basic EPS iscalculated using the weighted-average number of common shares 2007 2006 2005 outstanding during the period. Diluted EPS iscalculated using the weighted-Geographic Data Revenues from external customers average number of common shares outstanding that are increased for additional U.S. $5,598 $5,338 $4,786 shares that would be outstanding ifpotentially dilutive securities were converted U.K. 900 793 753 to common shares. Potentially dilutive securities consist of:

$6,498 $6,131 $5,539 " stock options, restricted stock and restricted stock units granted under the incentive compensation plans; As of December3t, 2007 2006

• stock units representing common stock granted under the directors compen-Property, Plant and Equipment sation programs; and U.S. $ 8,513 $ 7,845

• convertible senior notes.

Foreign:

U.K. 4,092 3,755 Latin America 469 4,092 4,224

$12,605 $12,069 a Allyears, except 2007 forthe Supply segment, include the results of Discontinued Operations.

See Note 10foradditional information.

b 2005 includes the cumulative effect ofa change inaccounting principle. See Note21for additional information.

2006 reflects accounting adjustments related to prior periods, due to incorrect application ofiChilean inflation incalculating depreciation and deferred income taxes oncertain Chilean assets from 1997 through 2006. Asa result, net income was increased by$14million, of which $12 million related to periods priorto 2006. These adjustments were not considered bymanagement to bematerial to the financial statements of prior periods or the financial statements for 2006.

(d) Before income taxes, minority interest and forPPL, dividends on preferred securities of a subsidiary.

PPL Corporation 2007 Annual Report 73

Notes to Consolidated Financial Statements The basic and diluted EPS calculations, and the reconciliation of the shares The conversion rate is 40.2212 shares per $1,000 principal amount of notes (inthousands) used inthe calculations, are: (or $24.8625 per share). It will be adjusted ifcertain specified distributions, whether 2007 2006 2005 in the form of cash, stock, other equity interests, evidence of indebtedness or assets, are made to holders of PPL common stock. Additionally, the conversion rate can Income (Numerator)

Income from continuing operations $1,013 $839 $ 693 be increased by PPL ifits Board of Directors has made a determination that to do Income (Loss) from discontinued operations so would be in the best interest of either PPL or holders of PPL common stock.

(net of income taxes) 275 26 (7) Ifholders elect to convert upon the occurrence of a conversion event identified Cumulative effect ofa change inaccounting above, PPL Energy Supply is required to settle the principal amount in cash and is principle (net of income taxes) (8)

Net Income $1,288 $865 $ 678 permitted to settle any conversion premium in cash or PPL common stock.

Shares (Denominator) The Convertible Senior Notes have a dilutive impact when the average market Shares for Basic EPS 380,563 380,754 379,132 price of PPL common stock equals or exceeds $24.87.

Add incremental shares See Note 8 for discussion of attainment of the market price trigger related to Convertible Senior Notes 1,601 3,221 2,263 the Convertible Senior Notes and the related conversions during 2007.

Restricted stock, stock options and other At December 31, 2007, $57 million of Convertible Senior Notes remained share-based awards 2,947 2,794 2,342 Shares for Diluted EPS 385,111 386,769 383,737 outstanding. The maximum number of shares of PPL common stock that could potentially be issued to settle the conversion premium, based upon the current Basic EPS Income from continuing operations $ 2.66 $2.20 $1.83 conversion rate, is 2,297,837 shares. Based on PPL's common stock price at Income (Loss) from discontinued operations December 31, 2007, the conversion premium equated to 1,201,082 shares of PPL (net of income taxes) 0.73 0.07 (0.02) common stock, or $63 million.

Cumulative effect ofa change inaccounting principle (net of income taxes) (0.02) See Note 8 for discussion ofa PPL common stock repurchase program initiated Net Income $ 3.39 $2.27 $1.79 during the second quarter of 2007.

Diluted EPS During 2007, PPL issued 2,289,804 shares of common stock related to the Income from continuing operations $ 2.63 $2.17 $ 1.81 exercise of stock options, vesting of restricted stock and restricted stock units and Income (Loss) from discontinued operations conversion of stock units granted to directors under its stock-based compensation (net of income taxes) 0.72 0.07 (0.02) plans. See Note 12 for a discussion of PPL's stock-based compensation plans.

Cumulative effect ofa change inaccounting principle (net of income taxes) (0.02) The following number of stock options to purchase PPL common shares were Net Income $ 3.35 $2.24 $1.77 excluded in the periods' computations of diluted EPS because the effect would have been antidilutive.

In 2003, PPL Energy Supply issued $400 million of 2.625% Convertible Senior (Thousands of Shares) 2007 2006 2005 Notes due 2023 (Convertible Senior Notes). The notes are guaranteed by PPL and, Antidilutive stock options - 334 402 as originally issued, could be converted into shares of PPL common stock if:

" during any fiscal quarter, the market price of PPL's common stock exceeded

$29.83 per share over a certain period during the preceding fiscal quarter; o PPL calls the debt for redemption; Note 5. Income and Other Taxes o the holder exercises its right to put the debt on any five-year anniversary of "Income from Continuing Operations Before Income Taxes, Minority Interest the offering; and Dividends on Preferred Securities of a Subsidiary" included the following

• the long-term credit rating assigned to the notes by Moody's and S&P falls components:

below Ba2 and BBor the notes are not rated; or o certain specified corporate transactions occur, e.g., change in control and 2007 2006 2005 certain distributions to the holders of PPL common stock. Domestic income $1,044 $ 879 $608 Foreign income 260 245 217

$1,304 $1,124 $825 74 PPL Corporation 2007 Annual Report

Significant components of PPL's deferred income tax assets and liabilities from allowances associated with business combinations to be recognized intax continuing operations at December 31 were: expense rather than ingoodwill. See Note 23 for additional information.

2007 2886 Of the total valuation allowances related to foreign capital loss carryforwards,

$83 million is currently allocable to goodwill.

Deferred Tax Assets Deferred investment tax credits $ 23 $ 30 PPL Global does not pay or record U.S. income taxes on the undistributed NUG contracts and buybacks 43 73 earnings of its foreign subsidiaries where management has determined that Unrealized loss on qualifying derivatives 138 29 the earnings are permanently reinvested. The cumulative undistributed earnings Accrued pension costs 97 140 are included in"Earnings reinvested" on the Balance Sheets. The amounts consid-Federal tax credit carryforwards 11 47 ered permanently reinvested at December 31, 2007 and 2006, are $1.1 billion Foreign loss carryfotwards 173 175 and $910 million. Ifthe earnings are remitted as dividends, PPL Global may be Foreign - pensions 74 subject to additional U.S. taxes, net of allowable foreign tax credits. Itis not Foreign - other 6 20 Contributions inaid of construction 92 85 practicable to estimate the amount of additional taxes that might be payable Other 220 245 on these foreign earnings.

Valuation allowances (186) (189) Details of the components of income tax expense, a reconciliation of federal 617 729 income taxes derived from statutory tax rates applied to "Income from Continuing Deferred Tax Liabilities Operations Before Income Taxes, Minority Interest and Dividends on Preferred Plant - net 1,464 1,428 Securities of aSubsidiary," for accounting purposes, and details of "Taxes, other Recoverable transition costs 227 333 than income" were:

Taxes recoverable through future rates 108 113 Foreign investments 34 3 2007 2006 2005 Reacquired debt costs 13 15 Income Tax Expense Foreign - plant 706 765 Current - Federal $187 $223 $144 Foreign - other 99 86 Current - State 11 16 1 Other domestic 76 68 Current - Foreign 83 32 50 2,727 2,811 281 271 195 Net deferred tax liability $2,110 $2,082 Deferred - Federal 34 (3) (86)

Deferred - State 21 8 17 PPL had federal alternative minimum tax credit carryforwards with an indefinite Deferred - Foreign 'a (52) 6 17 carryforward period of $27 million at December 31, 2006. Such amounts were not 3 11 (52) significant at December 31, 2007. PPL had federal foreign tax credit carryforwards Investment tax credit, net - Federal (14) (14) (15)

Totalincome tax expense from that expire in 2016 of $10 million and $20 million at December 31, 2007 and 2006. continuing operations (') $270 $268 $128 PPL also had state net operating loss carryforwards that expire between 2016 and Total income tax expense - Federal $207 $206 $ 43 2027 of $227 million and $216 million at December 31, 2007 and 2006. Valuation Total income tax expense - State 32 24 18 allowances have been established for the amount that, more likely than not, will Total income tax expense - Foreign 31 38 , 67 not be realized. Total income tax expense from continuing operations (h) $270 $268 $128 PPL Global had foreign net operating loss carryforwards of $37 million at Wai Includes a $54 million deferred tax benefit recorded in2007, related to the U.K. tax rate reduction both December 31, 2007 and 2006. PPL Global also had foreign capital loss effective April1,2008. See "Reconciliation of Income TaxExpense"for additional information.

carryforwards of $596 million and $563 million at December 31, 2007 and 2006. (hi Excludes $6million of deferred federal, state and foreign tax benefit in2005 related to the cumulative effect of a change inaccounting principle. Excludes current and deferred federal, state All of these losses have an unlimited carryforward period. Valuation allowances and foreign tax expense (benefit) recorded to Discontinued Operations of$143million in2007, have been established for the amount that, more likely than not, will not be $(6) million in2006 and $(35)million in2005. Excludes realized tax benefits related to stock-based compensation, recorded as anincrease to capital inexcess of par value of $25million in2007, realized. In December 2007, the FASB issued SFAS 141 (revised 2007), "Business $13million in2006 and $7million in2005. Also excludes federal, state and foreign tax expense Combinations," which is known as SFAS 141(R) and replaces SFAS 141. Upon (benefit) recorded to other comprehensive income (loss) of $20 million in2007, $80 million in 2006 and $(102) million in2005.

adoption, effective January 1,2009, SFAS 141(R) will require changes in valuation PPL Corporation 2007 Annual Report 75

Notes to Consolidated Financial Statements 2007 2006 2005 2007 2006 2005 Reconciliation of Income Tax Expense Taxes, other than income Federal income tax on Income from Continuing State gross receipts $193 S181 $175 Operations Before IncomeTaxes, Minority Interest State utility realty 5 5 6 and Dividends on Preferred Securities of a Subsidiary at statutory tax rate - 35% $456 $393 S289 State capital stock 8 12 14 Increase (decrease) due to: Property - foreign 67 57 57 State income taxes (al(ll() 31 31 23 Domestic property and other 25 26 26 Amortization of investment tax credits (10) (10) (10) $298 $281 $278 Difference related to income recognition of foreign affiliates (net of foreign income taxes) (41) (37) (37) For tax years 2000 through 2007, PPL Montana protested certain property U.K. rate change N1 (54) tax assessments by the Montana Department of Revenue on its generation Transfer of WPD tax items 't (20) facilities. The tax liabilities in dispute for 2000 through 2007, which have been Stranded cost securitization lal(dI01 (7) (7) (7)

Federal income tax credits (57) (58) (107) paid and expensed by PPL Montana, total $45 million. InJanuary 2008, both Federal income tax return adjustments (a)(d)(e) (7) 2 (12) parties reached a settlement for all years outstanding. The settlement will result Change intax reserves )(d)e) (27) (16) (5) in PPL Montana receiving a refund of taxes paid and interest totaling $8 million.

Domestic manufacturing deduction (15) (2) (3) This amount will be recorded in 2008.

Other 1 (B) (3)

(186) (125) (161) Unrecognized Tax Benefits Total income tax expense from In June 2006, the FASB issued FIN48, "Accounting for Uncertainty in Income continuing operations $ 270 $268 $128 Taxes, an interpretation of FASB Statement No. 109." In May 2007, the FAS1 Effective income tax rate 20.7% 23.8% 15.5%

amended this guidance by issuing FSP FIN48-1, "Definition of Settlement in SDuring 2007, PPL recorded an $8million benefit instate and federal income tax expense fromfiling FASO Interpretation No. 48." PPL and its subsidiaries adopted FIN48, as amended, the 2006 income tax returns, which consisted of a $7million federal benefit reflected in"Federal income tax return adjustments"and a $1million state benefit reflected in"State income taxes." effective January 1,2007. The adoption resulted in the following increases During 2007, PPL recorded a $33million benefit related to federal and state income tax reserves, (decreases) to the Balance Sheet at January 1,2007.

which consisted of a $7million benefit reflected in"Stranded costs securitization"and a $27 million federal benefit reflected in"Change intax reserves"offset bya 51 million state expense reflected in "State income taxes." Current Assets - Prepayments $20 1 InJuly 2007, the U.K.'s Finance Actof 2007, which includes amendments to existing tax law, was Current Liabilities -Taxes (134) enacted.The most significant change to the tax law was a reduction inthe U.K.'s statutory income Deferred Credits and Other Noncurrent Liabilities - Deferred income taxes tax rate. Effective April1,2008, the statutory income tax rate willbe reduced from 30% to 28%. As and investment tax credits 10 a result, PPL recorded a $54million deferred tax benefit during 2007 related to the reduction inits Regulatory and Other Noncurrent Assets - Other (5) deferred tax liabilities.

Deferred Credits and Other Noncurrent Liabilities - Other 139 1 InJanuary 2006,WPD, Hyder's liquidator and a former Hyder affiliate signed an agreement to trans-fer to the affiliate a future tax liability fromWPD and certain surplus tax losses from Hyder. TheU.K.

taxing authority subsequently confirmed this agreement. This transfer resulted ina net reduction Areconciliation of unrecognized tax benefits isas follows:

of income tax expense of $20million for 2006, and a decrease to goodwill of $12million from the resolution of a pre-acquisition tax contingency pursuant to EITF Issue93-7, "Uncertainties Related Balance at January 1,2007 $226 to IncomeTaxes ina Purchase Business Combination."

Additions based on tax positions related to the current year 8 01 During 2006, PPL recorded a $7million expense instate and federal income tax expense from filing Additions for tax positions of prior years 7 the 2005 income tax returns, which consisted of a $2million federal expense reflected in"Federal income tax return adjustments"and a $5million state expense reflected in"State income taxes." Reductions for tax positions of prior years (18)

During 2006, PPLrecorded a $14million benefit related to federal and state income tax reserves, Settlements (2) which consisted of a $7million benefit reflected in"Stranded costs securtization"and a $16million Lapse of applicable statutes of limitations (35) federal benefit reflected in"Change intax reserves," offset bya $9million state expense reflected in Effects of foreign currency translation 3 "State income taxes."

r'1 During 2005, PPL recorded a $9million benefit instate and federal income tax expense from filing Balance at December 31,2007 $189 the 2004 income tax returns, which consisted of a $12million federal benefit reflected in"Federal income tax return adjustments"offset bya $3million state expense reflected in"State income taxes.[

During 2005, PPLrecorded a 514 million benefit related to federal and state income tax reserves, which consisted of a $7million benefit reflected in"Stranded costs securitization,"a $5million federal benefit reflected in"Change intax reserves"and a $2million state benefit reflected in"State income taxes."

76 PPL Corporation 2007 Annual Report

At December 31, 2007, the total unrecognized tax benefits and related indirect PPL or its subsidiaries file tax returns infive major tax jurisdictions. With few effects that ifrecognized would decrease the effective tax rate were: exceptions, at December 31, 2007, these jurisdictions, as well as the tax years that are no longer subject to examination, were as follows:

Total unrecognized tax benefits $189 Unrecognized tax benefits associated with taxable or deductible U.S. (federal) 1997 and prior temporary differences (1)

Pennsylvania (state) 2001 and prior Unrecognized tax benefits associated with business combinations (' (19)

Montana (state) 2002 and prior Total indirect effect of unrecognized tax benefits on other tax jurisdictions (40)

U.K. (foreign) 1999 and prior Total unrecognized tax bersefits and related indirect effects that ifrecognized would decrease the effective tax rate Chile (foreign) 2004 and prior

$129

) Upon adoption, effective January 1,2009, SFAS 141(R) willrequire changes inunrecognized tax benefits associated with business combinations to be recognized intax expense rather than ingoodwill.

These amounts do not consider the impact of SFAS 141(R). See Note23for additional information.

Note 6. Financial Instruments At December 31, 2007, it was reasonably possible that during the next At December 31, 2007 and 2006, the carrying value of cash and cash equivalents, twelve months the total amount of unrecognized tax benefits could decrease by short-term investments, investments inthe nuclear decommissioning trust up to $82 million. These decreases could result from subsequent recognition; funds, other investments and short-term debt represented or approximated fair derecognition and/or changes in measurement of uncertain tax positions related value due to the liquid nature of the instruments, variable interest rates associated to the creditability of foreign taxes, the timing and utilization of foreign tax credits with the financial instruments or existing requirements to record the carrying and the related impact on alternative minimum tax and other credits, the timing value of the instruments at fair value. Price risk management assets and liabilities and/or valuation of certain deductions, intercompany transactions and unitary are recorded at fair value using exchange-traded market quotes, prices obtained filing groups. The events that could cause these changes are direct settlements through third-party brokers or internally developed price curves. Financial with taxing authorities, litigation, legal or administrative guidance by relevant instruments where the carrying amount on the Balance Sheets and the estimated taxing authorities and the lapse of an applicable statute of limitations.

fair value (based on quoted market prices for the securities where available and At December 31, 2007, PPL had accrued interest of $31million.

estimates based on current rates where quoted market prices are not available)

PPL and its subsidiaries recognize interest and penalties on unrecognized tax are different, are set forth below:

benefits in "Income Taxes" on their Statements of Income. In 2007, PPL recognized a $1million net benefit from the accrual of additional interest and the reversal of December 31, 2007 December 31,2006 Carrying Fair Carrying Fair accrued interest and penalties, primarily related to the lapse of applicable statutes Amount Value Amount Value of limitations with respect to certain issues.

Long-term debt(,) $7,578 $7,664 $7,746 $7,869 Long-term debt with affiliate trust 89 86 (t) 2007 includes long-term debt that has been classified as held for sale.

PPL Corporation 2007 Annual Report 77

Notes to Consolidated Financial Statements Note 7. Preferred Securities PPL is authorized to issue up to 10 million shares of preferred stock. No PPL preferred stock was issued in 2007, 2006 or 2005, or was outstanding at December 31, 2007 and 2006.

Details of PPL Electric's preferred securities, without sinking fund requirements, as of December 31, 2007 and 2006, were:

Issued and Optional Redemption Amount Outstanding Shares Shares Authorized Price Per Share at 12/31/07 4-1/2% Preferred Stock (W $ 25 247,524 629,936 $110.00 Series Preferred Stock (0 3.35% 2 20,605 103.50 4.40% 12 117,676 102.00 4.60% 3 28,614 103.00 6.75% 9 90,770 102.03 TotalSeries Preferred Stock 26 257,665 10,000,000 6.25% Series Preference Stock (1) 250 2,500,000 10,000,000 Total Preferred Securities $301 3,005,189 (0)During 2007, 2006 and 2005, there were no changes inthe number of shares of Preferred Stock outstanding.

(b) During 2006, 2.5million shares were issued fur $250 million inconnection with thesale of 10million depositary shares, each representing aquarter interest inashare ofPPLElectrics 6.25% Series Preference Stuck.

(1)Redeemable on or after April 6,20t1 for $100 per share (equivalent to $25 per depositary share).

Preferred Stock Dividends on the Preference Shares will be paid when, as and ifdeclared by The involuntary liquidation price of the preferred stock is$100 per share. The the Board of Directors at a fixed annual rate of 6.25%, or $1.5625 per depositary optional voluntary liquidation price isthe optional redemption price per share share per year, and are not cumulative. PPL Electric may not pay dividends on, or ineffect, except for the 4-1/2% Preferred Stock and the 6.75% Series Preferred redeem, purchase or make a liquidation payment with respect to any of its common Stock for which such price is$100 per share (plus, ineach case, any unpaid stock, except incertain circumstances, unless full dividends on the Preference dividends inarrears). Shares have been paid for the then-current dividend period.

Dividends on the preferred stock are cumulative. Preferred stock ranks InMay 2006, PPL Electric filed Amended and Restated Articles of Incorporation senior to PPL Electric's common stock and its 6.25% Series Preference Stock that, among other things, increased the authorized amount of preference stock (Preference Shares). from 5 million to 10 million shares, without nominal or par value.

Holders of the outstanding preferred stock are entitled to one vote per share on matters on which PPL Electric's shareowners are entitled to vote. However, if dividends on any preferred stock are inarrears inan amount equal to or greater Note 8. Credit Arrangements and than the annual dividend rate, the holders of the preferred stock are entitled to Financing Activities elect a majority of the Board of Directors of PPL Electric. Credit Arrangements Preference Stock PPL Energy Supply maintains credit facilities inorder to enhance liquidity and Holders of the depositary shares, each of which represents a quarter interest ina provide credit support, and as a backstop to its commercial paper program.

share of Preference Shares, are entitled to all proportional rights and preferences InMarch 2007, PPL Energy Supply extended the expiration date of its 364-day of the Preference Shares, including dividend, voting, redemption and liquidation reimbursement agreement to March 2008. Under the agreement, PPL Energy Supply rights, exercised through the bank acting as a depositary. The Preference Shares can cause the bank to issue up to $200 million of letters of credit but cannot make rank senior to PPL Electric's common stock and junior to its preferred stock, and cash borrowings. At December 31, 2007 and 2006, there were $156 million and they have no voting rights, except as provided by law. $47 million of letters of credit outstanding under this agreement.

78 PPL Corporation 2007 Annual Report

In May 2007, PPL Energy Supply entered into a $3.4 billion Second Amended PPL Electric maintains credit facilities in order to enhance liquidity and provide and Restated Five-Year Credit Agreement, which amended its previously existing credit support, and as a backstop to its commercial paper program.

$1.9 billion credit facility and extended the term of the previously existing facility In May 2007, PPL Electric entered into a $200 million Third Amended and to June 2012. Under certain conditions, PPL Energy Supply may elect to have the Restated Five-Year Credit Agreement, which extended the term of its existing principal balance of the loans outstanding on the final maturity date of the facility credit facility to May 2012. Under certain conditions, PPL Electric may elect to continue as non-revolving term loans for a period of one year from that final have the principal balance of the loans outstanding on the final maturity date maturity date. Also, under certain conditions, PPL Energy Supply may request of the facility continue as non-revolving term loans for a period of one year from that the facility's principal amount be increased by up to $500 million. PPL Energy that final maturity date. Also, under certain conditions, PPL Electric may request Supply has the ability to cause the lenders under this facility to issue letters of that the facility's principal amount be increased by up to $100 million. PPL Electric credit. At December 31, 2007, PPL Energy Supply had no cash borrowings and has the ability to cause the lenders under this facility to issue letters of credit.

$269 million of letters of credit outstanding under this facility. There were no cash PPL Electric had no cash borrowings and an insignificant amount of letters of credit borrowings and $51 million of letters of credit outstanding under the $1.9 billion outstanding under this facility at December 31, 2007 and no cash borrowings or credit facility that existed at December 31, 2006. letters of credit outstanding at December 31, 2006.

PPL Energy Supply also maintains a $300 million five-year letter of credit and PPL Electric maintains a commercial paper program for up to $200 million to revolving credit facility expiring in March 2011. There were no cash borrowings provide an additional financing source to fund its short-term liquidity needs, if and $258 million of letters of credit outstanding under this facility at December 31, and when necessary. Commercial paper issuances are supported by PPL Electric's 2007, and no cash borrowings and $222 million of letters of credit outstanding at $200 million five-year credit facility. PPL Electric had no commercial paper out-December 31, 2006. PPL Energy Supply's obligations under this facility are supported standing at December 31, 2007 and 2006.

by a $300 million letter of credit issued on PPL Energy Supply's behalf under a PPL Electric participates in an asset-backed commercial paper program through separate $300 million five-year letter of credit and reimbursement agreement, which PPL Electric obtains financing by selling and contributing its eligible accounts also expiring in March 2011. receivable and unbilled revenue to a special purpose, wholly-owned subsidiary on PPL Energy Supply maintains a commercial paper program for up to $500 million an ongoing basis. The subsidiary has pledged these assets to secure loans from a to provide an additional financing source to fund its short-term liquidity needs, if commercial paper conduit sponsored by a financial institution. PPL Electric uses the and when necessary. Commercial paper issuances are supported by PPL Energy proceeds from the credit agreement for general corporate purposes and to cash Supply's $3.4 billion five-year credit facility. PPL Energy Supply had no commercial collateralize letters of credit. The subsidiary's b6rrowing limit under this credit paper outstanding at December 31, 2007 and 2006. agreement is $150 million, and interest under the credit agreement varies based on InJanuary 2007, WPD (South West) terminated its £150 million three-year the commercial paper conduit's actual cost to issue commercial paper that supports committed credit facility, which was to expire in October 2008. This facility was the debt. At December 31, 2007 and 2006, $126 million and $136 million of accounts replaced by a new £150 million five-year committed credit facility at WPDH Limited receivable and $171million and $145 million of unbilled revenue were pledged by that expires inJanuary 2012, with the option to extend the expiration date by a the subsidiary under the credit agreement. At December 31, 2007 and 2006, there maximum of two years. WPD (South West)'s £100 million 364-day committed credit was $41million and $42 million of short-term debt outstanding under the credit facility expired in November 2007 and was not renewed. As of December 31, 2007, agreement at an interest rate of 5.11%for 2007 and 5.35% for 2006, all of which WPD (South West) maintained a £150 million five-year committed credit facility was being used to cash collateralize letters of credit issued on PPL Electric's behalf.

that expires in October 2009. WPD's total committed facilities at December 31, 2007, At December 31, 2007, based on the accounts receivable and unbilled revenue were £300 million (approximately $617 million). There were no cash borrowings pledged, an additional $109 million was available for borrowing. The funds used under WPD's committed credit facilities at December 31, 2007 and 2006. WPD to cash collateralize the letters of credit are reported in "Restricted cash and cash (South West) also had uncommitted credit facilities of £65 million (approximately equivalents" on the Balance Sheets. PPL Electric's sale to its subsidiary of the

$134 million) at December 31, 2007 and 2006, under which there were £25 million accounts receivable and unbilled revenue is an absolute sale of the assets, and PPL (approximately $51 million) of cash borrowings outstanding at December 31, 2007, Electric does not retain an interest in these assets. However, for financial reporting with a weighted-average interest rate of 6.37%, and no cash borrowings out- purposes, the subsidiary's financial results are consolidated in PPL Electric's finan-standing at December 31, 2006. cial statements. PPL Electric performs certain record-keeping and cash collection PPL Corporation 2007 Annual Report 79

Notes to Consolidated Financial Statements functions with respect to the assets inreturn for a servicing fee from the subsidiary. The subsidiaries of PPL are separate legal entities. PPLs subsidiaries are not InJuly 2007, PPL Electric and the subsidiary extended the expiration date of the liable for the debts of PPL. Accordingly, creditors of PPL may not satisfy their debts credit agreement to July 2008. from the assets of the subsidiaries absent a specific contractual undertaking by a In2001, PPL Electric completed a strategic initiative to confirm its legal subsidiary to pay PPL's creditors or as required by applicable law or regulation.

separation from PPL and PPL's other affiliated companies. This initiative was Similarly, absent a specific contractual undertaking or as required by applicable designed to enable PPL Electric to substantially reduce its exposure to volatility law or regulation, PPL is not liable for the debts of its subsidiaries. Accordingly, inenergy prices and supply risks through 2009 and to reduce its business and creditors of PPL's subsidiaries may not satisfy their debts from the assets of PPL financial risk profile by, among other things, limiting its business activities to the absent a specific contractual undertaking by PPL to pay the creditors of its subsid-transmission and distribution of electricity and businesses related to or arising iaries or as required by applicable law or regulation.

out of the electric transmission and distribution businesses. Inconnection with Financing Activities this initiative, PPL Electric:

In March 2007, PPL Capital Funding issued $500 million of 2007 Series AJunior

" obtained long-term electric supply contracts to meet its PLR obligations Subordinated Notes due 2067 (Notes). The Notes are fully and unconditionally (with its affiliate PPL EnergyPlus) through 2009, as further described inNote 16 guaranteed by PPL as to payment of principal, interest and premium, ifany. The under "PLR Contracts";

Notes mature in March 2067, and are callable at par value beginning in March

" agreed to limit its businesses to electric transmission and distribution and 2017. Prior to such time, the Notes may be redeemed at PPL Capital Funding's related activities; option at make-whole redemption prices. The Notes bear interest at 6.70% from

" adopted amendments to its Articles of Incorporation and Bylaws containing the date of issuance into March 2017. Beginning in March 2017, and continuing corporate governance and operating provisions designed to clarify and reinforce up to the maturity date, the Notes bear interest at three-month LIBOR plus its legal and corporate separateness from PPL and its other affiliated companies; 2.665%, reset quarterly. PPL Capital Funding may defer interest payments on

" appointed an independent director to its Board of Directors and required the the Notes, from time to time, on one or more occasions for up to ten consecutive unanimous approval of the Board of Directors, including the consent of the years. Deferred interest payments will accumulate additional interest at a rate independent director, to amendments to these corporate governance and equal to the interest rate then applicable to the Notes. During any period in which operating provisions or to the commencement of any insolvency proceedings, PPL Capital Funding defers interest payments on the Notes, subject to certain including any filing of a voluntary petition inbankruptcy or other similar exceptions, neither PPL Capital Funding nor PPL may (i)declare or pay any cash actions; and dividend or distribution on its capital stock, (ii)redeem, purchase, acquire or

" appointed an independent compliance administrator to review, on a semi-make a liquidation payment with respect to any of its capital stock, or (iii)make annual basis, its compliance with the corporate governance and operating any payments on any debt or any guarantee of debt by PPL that isequal or junior requirements contained inits Articles of Incorporation and Bylaws.

in right of payment to the Notes or the related guarantee by PPL.

The enhancements to PPL Electric's legal separation from its affiliates are PPL Capital Funding received $493 million of proceeds, net of a discount and intended to minimize the risk that a court would order PPL Electric's assets and underwriting fees, from the issuance of the Notes. Of the proceeds, $281 million liabilities to be substantively consolidated with those of PPL or another affiliate were used to pay at maturity PPL Capital Funding's 8.375% Medium-Term Notes of PPL inthe event that PPL or another PPL affiliate were to become a debtor in due June 2007. The remainder of the net proceeds was used for general corporate a bankruptcy case. Based on these various measures, PPL Electric was able to purposes, including capital expenditures relating to the installation of pollution issue and maintain a higher level of debt and use it to replace higher cost equity, control equipment by PPL Energy Supply subsidiaries.

thereby maintaining a lower total cost of capital. Nevertheless, ifPPL or another In connection with the issuance of the Notes, PPL and PPL Capital Funding PPL affiliate were to become a debtor ina bankruptcy case, there can be no assur- entered into a Replacement Capital Covenant, in which PPL and PPL Capital ance that a court would not order PPL Electric's assets and liabilities to be consoli- Funding agreed for the benefit of holders of a designated series of unsecured dated with those of PPL or such other PPL affiliate. long-term indebtedness of PPL or PPL Capital Funding ranking senior to the Notes that (i) PPL Capital Funding will not redeem or purchase the Notes, or otherwise 80 PPL Corporation 2007 Annual Report

satisfy, discharge or defease the principal amount of the Notes and (ii)neither $6 million were used in January 2007 to refinance bonds with maturities in 2007.

PPL nor any of its other subsidiaries will purchase the Notes before the end of These transactions were reflected in PPL's 2007 financial statements due to the March 2037, except, subject to certain limitations, to the extent that the applicable one-month lag inforeign subsidiary reporting.

redemption or repurchase price or principal amount defeased does not exceed In February 2007, WPD LLP redeemed all of the 8.23% Subordinated a specified amount of proceeds from the sale of qualifying replacement capital Debentures due 2027 that were held by SIUK Capital Trust I. Upon redemption, securities during the 180-day period prior to the date of that redemption, repur- WPD LLP paid a premium of 4.115%, or approximately $3million, on the principal chase or defeasance. The designated series of covered debt benefiting from the amount of $85 million of subordinated debentures. In connection with this Replacement Capital Covenant at December 31, 2007 was PPL Capital Funding's redemption, SIUK Capital Trust I was required to use all of the proceeds received 4.33% Notes Exchange Series Adue March 2009. Effective March 1,2008, the from the repayment of the subordinated debentures to redeem all of its common designated series of covered debt will be PPL Capital Funding's $100 million and preferred securities. WPD LLP received 53 million when its investment in aggregate principal amount of 6.85% Senior Notes due 2047 (6.85% Notes), SIUK Capital Trust I was liquidated. See Note 22 for a discussion of the trust. The which were issued inJuly 2007. redemption of the subordinated debentures and the trust's common and preferred The 6.85% Notes are fully and unconditionally guaranteed by PPL as to pay- securities resulted in a loss of $2 million, after tax, which is included in "Interest ment of principal and interest. They are not subject to redemption prior to July Expense" for PPL and "Interest Expense with Affiliates" for PPL Energy Supply on 2012. Beginning inJuly 2012, PPL Capital Funding may, at its option, redeem the the Statement of Income. Payment of $29 million was also made to settle related 6.85% Notes, inwhole or inpart, at par. PPL Capital Funding received $97 million cross-currency swaps and is included on the Statement of Cash Flows as a compo-of proceeds, net of underwriting fees, from the issuance of the 6.85% Notes. The nent of "Retirement of long-term debt."

proceeds were used for general corporate purposes, including capital expenditures In December 2007, PPL Energy Supply issued $50 million of 6.20% Senior relating to the installation of pollution control equipment by PPL Energy Supply Notes due 2016 (6.20% Notes), which are of the same series as the 6.20% Senior subsidiaries. Notes due 2016 that were issued by PPL Energy Supply in 2006. The 6.20% Notes InNovember 2007, PPL Capital Funding retired the remaining $2million of may be redeemed any time prior to maturity at PPL Energy Supply's option at make-its 6.84% Medium-Term Notes upon maturity. whole redemption prices. PPL Energy Supply received $49 million of proceeds, The terms of PPL Energy Supply's 2.625% Convertible Senior Notes due 2023 net of a discount and underwriting fees and exclusive of accrued interest, from (Convertible Senior Notes) include a market price trigger that permits holders to the issuance of the 6.20% Notes. The proceeds were used for general corporate convert the notes during any fiscal quarter ifthe closing sale price of PPrs common purposes, including capital expenditures relating to the installation of pollution stock exceeds $29.83 for at least 20 trading days inthe 30 consecutive trading control equipment by PPL Energy Supply subsidiaries.

days ending on the last trading day of the preceding fiscal quarter. Holders of the In December 2007, the Pennsylvania Economic Development Financing Authority Convertible Senior Notes were entitled to convert their notes at any time during (PEDFA) issued $81 million aggregate principal amount of Exempt Facilities Revenue 2007 and are also entitled to convert their notes any time during the first quarter Bonds, Series 2007 due 2037 (Bonds) on behalf of PPL Energy Supply. The Bonds of 2008 as a result of the market price trigger being met. As discussed inNote 4, are structured as variable-rate remarketable bonds. They accrue interest through when holders elect to convert the Convertible Senior Notes, PPL Energy Supply is January 2008 at the initial rate of 3.20%. Effective February 2008, the Bonds are required to settle the principal amount incash and any conversion premium in subject to daily remarketing until such time that PPL Energy Supply elects to change cash or PPL common stock. During 2007, Convertible Senior Notes inan aggregate the frequency of the remarketing. PPL Energy Supply may convert the interest rate principal amount of $45 million were presented for conversion. The total conversion on the Bonds from time to time to a commercial paper rate, daily rate, weekly premium related to these conversions was $44 million, which was settled with rate or a term rate of at least one year, as determined by the remarketing agent.

898,181 shares of PPL common stock, along with an insignificant amount of cash The Bonds are subject to mandatory purchase under certain circumstances, inlieu of fractional shares. At December 31, 2007, $57 million of Convertible Senior including upon conversion to a different interest rate mode. To the extent that a Notes remained outstanding. purchase is required prior to the maturity date, PPL Energy Supply has the ability InDecember 2006, Elfec issued $11million of 6.05% UFV (inflation-adjusted and intent to refinance such obligation on a long-term basis.

bolivianos) denominated bonds with serial maturities from 2012 through 2014. Inconnection with the issuance of the Bonds by the PEDFA, PPL Energy Supply Of these bonds, $5million were issued inexchange for existing bonds with entered into a loan agreement with the PEDFA pursuant to which the Authority maturities in2007 and 2008. This exchange isnot reflected inthe Statements of has loaned to PPL Energy Supply the proceeds of the Bonds on payment terms Cash Flows since it represents a non-cash financing activity. Cash proceeds of that correspond to the Bonds. PPL Energy Supply issued a note to the PEDFA to PPL Corporation 2007 Annual Report 81

Notes to Consolidated Financial Statements evidence its obligations under the loan agreement. The proceeds will be used to effective April 1,2008, to 33.5 cents per share (equivalent to $1.34 per annum).

finance a portion of the costs relating to the installation of sulfur dioxide scrubbers Future dividends, declared at the discretion of the Board of Directors, will be depen-at the Brunner Island and Montour generation facilities. At December 31, 2007, dent upon future earnings, cash flows, financial requirements and other factors.

$19 million of the proceeds was held inescrow by the trustee and was recorded as As previously discussed, neither PPL Capital Funding nor PPL may declare or restricted cash equivalents within "Regulatory and Other Noncurrent Assets - Other" pay any cash dividend or distribution on its capital stock during any period in on PPL's Balance Sheet. PPL Energy Supply may requisition funds from the trustee which PPL Capital Funding defers interest payments on the 2007 Series AJunior as it incurs additional costs inconnection with the installation of the scrubbers. Subordinated Notes due 2067.

Concurrent with the issuance of the Bonds, a letter of credit inthe amount of The PPL Montana Colstrip lease places certain restrictions on PPL Montana's

$81 million was issued under PPL Energy Supply's $3.4 billion five-year credit facility ability to declare dividends. At this time, PPL believes that these covenants will to the trustee insupport of the Bonds. The letter of credit permits the trustee to not limit PPL's or PPL Energy Supply's ability to operate as desired and will not draw amounts to pay principal of and interest on, and the purchase price of, the affect their ability to meet any of their cash obligations. Certain of PPL Global's Bonds when due. PPL Energy Supply isrequired to reimburse any draws on the international subsidiaries also have financing arrangements that limit their ability letter of credit within one business day of such draw. to pay dividends. However, PPL does not, at this time, expect that any of such InDecember 2007, WPD (South West) redeemed all $175 million of its 6.875% limitations would significantly impact PPL's or PPL Energy Supply's ability to meet Senior Notes upon maturity. Payment of $36 million was also made to settle related their cash obligations.

cross-currency swaps and isincluded on the Statement of Cash Flows as a compo- PPL Electric's 2001 Senior Secured Bond Indenture restricts dividend pay-nent of "Retirement of long-term debt." Although financial information of foreign ments on its common stock in the event that PPL Electric fails to meet interest subsidiaries isrecorded on a one-month lag, these December 2007 transactions are coverage ratios or fails to comply with certain requirements included in its reflected inthe 2007 Financial Statements due to the materiality of the redemption. Articles of Incorporation and Bylaws to maintain its separateness from PPL and InAugust 2007, PPL Electric issued $250 million of 6.45% Senior Secured Bonds PPL's other subsidiaries. PPL Electric does not, at this time, expect that any of due 2037. The bonds are secured by (i)an equal principal amount of First Mortgage such limitations would significantly impact its ability to declare dividends.

Bonds issued under the 1945 First Mortgage Bond Indenture and (ii)the lien of As discussed in Note 7,PPL Electric may not pay dividends on its common the 2001 Senior Secured Bond Indenture, which isjunior to the lien of the 1945 stock, except incertain circumstances, unless full dividends have been paid on First Mortgage Bond Indenture. The bonds may be redeemed at any time prior to the Preference Shares for the then-current dividend period. The quarterly dividend maturity at PPL Electric's option at make-whole redemption prices. PPL Electric rate for PPL Electric's Preference Shares is $1.5625 per share. PPL Electric has received $248 million of proceeds, net ofa discount and underwriting fees, from declared and paid dividends on its outstanding Preference Shares since issuance.

the issuance of the bonds. The proceeds were used, together with cash on hand, Dividends on the Preference Shares are not cumulative and future dividends, to pay at maturity $255 million aggregate principal amount of PPL Electric's Senior declared at the discretion of PPL Electric's Board of Directors, will be dependent Secured Bonds, 5-7/8% Series, due August 2007. upon future earnings, cash flows, financial requirements and other factors.

During 2007, PPL Transition Bond Company made principal payments on tran-sition bonds of $300 million.

Note 9. Acquisitions, Development and Common Stock Repurchase Program Divestitures InJune 2007, PPL's Board of Directors authorized the repurchase by PPL of up to

$750 million of its common stock from time to time, inopen market purchases, PPL continuously evaluates strategic options for its business segments and, from pre-arranged trading plans or privately negotiated transactions. The specific time to time, PPL and its subsidiaries are involved in negotiations with third parties amount and timing of repurchases isbased on a variety of factors, including regarding acquisitions and dispositions of businesses and assets, joint ventures potential share repurchase price, strategic investment considerations and other and development projects, which may or may not result in definitive agreements.

market and economic factors. As of December 31, 2007, PPL repurchased Any such transactions may impact future financial results.

14,929,892 shares of its common stock for $712 million, which was primarily Domestic recorded as a reduction to "Capital inexcess of par value" on the Balance Sheet. Sales Through February 28, 2008, a total of 15,732,708 shares were repurchased for In 2004, PPL Maine entered into an agreement with a coalition of government

$750 million, excluding related fees. agencies and private groups to sell three of its nine hydroelectric dams inMaine.

Distributions, Capital Contributions and Related Restrictions Under the agreement, a non-profit organization designated by the coalition would InFebruary 2007, PPL announced an increase to its quarterly common stock dividend, have a five-year option to purchase the dams for $25 million, and PPL Maine would effective April 1,2007, to 30.5 cents per share (equivalent to $1.22 per annum). In receive rights to increase energy output at its other hydroelectric dams in Maine.

February 2008, PPL announced an increase to its quarterly common stock dividend, The coalition has announced plans to remove or bypass the dams subject to the agreement in order to restore runs of Atlantic salmon and other migratory fish to 82 PPL Corporation 2007 Annual Report

the Penobscot River. The agreement requires several approvals by the FERC. Certain to fish passage operations at the dam. After federal, state and local approvals are of these regulatory approvals have been obtained, but PPL cannot predict whether received, PPL plans to begin construction in2009, with generation operations or when all of them will be obtained. scheduled to start in2012. PPL cannot predict whether or when the regulatory approvals will be obtained.

License Renewals In2006, PPL Susquehanna applied to the NRC for 20-year license renewals for PPL also plans to redevelop the Rainbow hydroelectric facility, near Great Falls, Montana, for a total plant capacity of 60 MW, at an expected capital cost of Units 1and 2 of the nuclear power plant. The license renewals for each of the

$175 million. The redevelopment isanticipated to increase generation by 28 MW.

Susquehanna units would extend their expiration dates from 2022 to 2042 for This planned expansion issubject to various regulatory approvals and other condi-Unit 1 and from 2024 to 2044 for Unit 2.PPL cannot predict whether or when tions, and PPL cannot predict whether or when these approvals will be obtained NRC approval will be obtained.

or the other conditions will be met.

InDecember 2007, the FERC renewed PPL Montana's operating license at InJune 2007, PJM approved the construction of a new 130-mile, 500-kilovolt the Mystic Lake Project. This license will allow PPL Montana to produce power transmission line between the Susquehanna substation inPennsylvania and the through 2049.

Roseland substation in New Jersey that has been identified as essential to long-Development term reliability ofthe mid-Atlantic electricity grid. PJM determined that the line InJanuary 2007, the NRC accepted for review the PPL Susquehanna request to isneeded to prevent potential overloads that could occur inthe next decade on increase the amount of electricity the Susquehanna nuclear plant can generate. several existing transmission lines inthe interconnected PJM system. PJM has The total expected capacity increase is159 MW, of which PPL Susquehanna's directed PPL Electric to construct the portion of the Susquehanna-Roseland line share would be 143 MW. PPL Susquehanna's share of the expected capital cost of inPennsylvania and has directed Public Service Electric &Gas Company (PSE&G) this project is$287 million. PPL Susquehanna received NRC approval inJanuary to construct the portion of the line inNew Jersey. The total cost of the project is 2008. PPL expects the units to operate at the higher power levels after the refuel- currently estimated to be approximately $1billion, with PPL Electric's share ing outages in2008 and 2010 for Unit I and in2009 for Unit 2. estimated to be between $300 million and $500 million. PPL Electric's 2008-2012 InDecember 2007, PPL announced that asubsidiary will ask the NRC to capital projections include approximately $320 million for the new transmission approve a COLA for a nuclear generating unit adjacent to the Susquehanna plant. line, which will require certain regulatory approvals.

NRC acceptance of the COLA by December 2008 would meet the first requirement InDecember 2007, PPL Electric and PSE&G filed ajoint petition for a declaratory to qualify for federal production tax credits and loan guarantees, as provided order with the FERC requesting approval of transmission rate incentives for the under the Energy Policy Act of 2005. Requests have also been filed with PJM for Susquehanna-Roseland transmission line. The companies requested: (1)an additional transmission feasibility and system impact studies. PPL has contracted with an 1.5% allowed rate of return on equity; (2)recognition of construction work in affiliate of UniStar Nuclear LLC,ajoint venture between Constellation Energy progress inrate base; (3)recovery of all costs ifthe project iscancelled; and Group, Inc. and AREVA NP, Inc. (AREVA) to prepare the application. The facility for (4)an additional 0.5% allowed rate of return on equity for membership inPJM.

which the application will be submitted will be based on the U.S. Evolutionary This filing remains pending before the FERC, and PPL Electric cannot predict Power Reactor design developed by AREVA's parent. PPL iscurrently authorized to the outcome.

spend approximately $90 million on the COLA, most of which would be incurred Sale of Telecommunication Operations by the end of 2008. PPL has made no decision to proceed with development and Inthe first quarter of 2007, PPL completed a review of strategic options for construction of another nuclear unit and expects that such decision could take as long as four years given an anticipated lengthy approval process. These cost the transport operations of its domestic telecommunications subsidiary, which offers fiber optic capacity to other telecommunications companies and enterprise estimates do not reflect any construction expenditures, nor do they represent a customers. The operating results of this subsidiary are included inthe Supply commitment to build. Additionally, PPL has announced that itwould likely only proceed to construction inajoint-venture arrangement. Through December 31, segment. The transport operations did not meet the criteria for discontinued operations presentation on the Statement of Income because there were not 2007, $14 million of costs associated with the licensing effort were capitalized as separate and distinguishable cash flows. Due to a combination of significant PPL deems itprobable that upon receiving approval of the COLA from the NRC, capital requirements for the telecommunication operations and competing capital itwould build the unit, sell the COLA rights to another party, or contribute the needs inPPLs core electricity supply and delivery businesses, PPL decided to COLA to a joint venture.

actively market these telecommunication operations. As a result, PPL recorded a InDecember 2007, PPL asked the FERC for approval to expand the capacity

$31 million ($18 million after tax) impairment of the telecommunication assets of its Holtwood hydroelectric plant by 125 MW. The expansion project has an based on their estimated fair value.

expected capital cost of $364 million and would include significant improvements PPL Corporation 2007 Annual Report 83

Notes to Consolidated Financial Statements In May 2007, PPL reached a definitive agreement to sell its telecommunication Note 10. Discontinued Operations operations. In the second quarter of 2007, PPL recorded an additional impairment Sale of Latin American Businesses of $3million ($2 million after tax). In August 2007, PPL completed the sale of its telecommunication operations and recorded an additional impairment of InMarch 2007, PPL completed a review of strategic options for its Latin American

$5 million ($3 million after tax). The impairments are included in "Energy-related businesses and announced its intention to sell its regulated electricity delivery businesses" expenses on the Statement of Income. PPL realized net proceeds businesses inChile, ElSalvador and Bolivia, which were included inthe of $47 million from the sale. As a result of the sale, $65 million of assets (which International Delivery segment.

primarily consisted of PP&E) and $18 million of liabilities were removed from InApril 2007, PPL agreed to sell its Bolivian businesses to a group organized by local management and employees of the companies. As a result, in2007, PPL the Balance Sheet during 2007.

recorded impairments totaling $37 million, or $20 million after tax, to reflect the Other estimated fair value of the businesses at the date the agreement was reached.

See Note 15 for a discussion of the impairment of PPL Energy Supply's synthetic This sale was completed inJuly 2007.

fuel production facilities recorded in 2006, closure of these facilities in 2007 and In May 2007, PPL completed the sale of its ElSalvadoran business for an impairment of certain transmission rights recorded in 2007. $180 million incash. PPL recorded a gain of $94 million, or $89 million after tax, International as a result of the sale.

Sales InNovember 2007, PPL completed the sale of its Chilean business for In 2005, WPD effectively sold an equity investment by transferring substantially $660 million incash. PPL recorded a gain of $306 million, or $197 million after all risks and rewards of ownership of the two subsidiaries that held the investment, tax, as a result of the sale.

receiving $9million (at then-current exchange rates). The gain was deferred until As a result of these sales, $835 million of assets, which include $475 million WPD's continuing involvement inthe subsidiaries ceased. InJuly 2006, WPD ceased of PP&E and $185 million of current assets, and $425 million of liabilities and involvement with one subsidiary. At that time, PPL Global recognized a pre-tax related minority interest were removed from the Balance Sheet during 2007.

gain of $5million. In December 2006, WPD ceased involvement with the other Inaccordance with SFAS 144, "Accounting for the Impairment or Disposal of subsidiary. In the first quarter of 2007, due to the one-month lag inforeign sub- Long-Lived Assets," the results of operations for the years 2005 through 2007 sidiary reporting, PPL Global recognized the remaining pre-tax gain of $5 million. have been classified as Discontinued Operations on the Statements of Income.

These gains are included in"Other Income - net" on the Statements of Income. Following are the components of Discontinued Operations on the Statements of In 2006, PPL Global completed the sale of its minority interest in Aguaytia Income related to PPL's Latin American regulated electricity delivery businesses.

Energy, LLC, a combined generating and natural gas facility in Peru. PPL Global 2007 2006 2005 received $15million from the sale, and recorded a pre-tax gain of $3million, Operating revenues $529 $554 5453 which is included in "Other Income - net" on the Statement of Income. Operating expenses (1) 497 478 393 Operating income 32 76 60 Other Other income - net 15 6 5 In 2006, WPD received legal notification citing one of its real estate investments Interest expense (b) 25 30 28 as an environmentally protected area, thus restricting planned development. An Income before income taxes and minority interest 22 52 37 impairment assessment was performed based on a third-party appraisal. As a result, Income tax expense (benefit) () (5) 2 (5)

PPL Global recorded an impairment charge of $8million ($6 million after tax), Minority interest 6 8 5 which is included in "Other Income - net" on the Statement of Income. Gain on sale of businesses (net of tax expense of

$114 million) 286 In 2000, WPD acquired Hyder. Subsequently, WPD sold the majority of Income from Discontinued Operations $307 $ 42 $ 37 Hyder's non-electricity delivery businesses and placed the remaining companies

( 2007 includes the impairments to the carrying value of the Bolivian businesses. Also included are in liquidation. In 2006, WPD received $28 million in proceeds as distributions fees associated with the sale of the LatinAmerican businesses of $12million, or $7million after tax.

Mb) 2007, 2006 and 2005 include $5million, $10 million and $10 million of interest expense allocated related to the planned ongoing liquidation of the remaining non-electricity pursuant to EITF 87-24, "Allocation of Interest to Discontinued Operations," based onthe discontinued delivery businesses, of which $27 million was credited to income. WPD received operation's share of the net assets of PPLEnergy Supply.

further distributions of $6million, which are included in the 2007 financial results. 2007 includes U.S. deferred tax charges of $7million. Asa result of PPLs decision to sellitsLatin These distributions are included in "Other Income - net" on the Statements of American businesses, itno longer qualified for the permanently reinvested exception to recording deferred taxes pursuant to APB Opinion No.23,"Accounting for Income Taxes-Special Areas."

Income. The Hyder non-electricity delivery businesses are substantially liquidated.

WPD expects to receive further liquidation distributions in 2008 of up to approxi-mately 53 million. WPD continues to operate the former Hyder electricity delivery business, now WPD (South Wales).

84 PPL Corporation 2007 Annual Report

Sale of Interest in Griffith Plant Anticipated Sale of Gas and Propane Businesses InJune 2006, a subsidiary of PPL Energy Supply, which isincluded inthe Supply InJuly 2007, PPL completed a review of strategic options for its natural gas segment, sold its 50% ownership interest inthe 600 MW Griffith power plant distribution and propane businesses and announced its intention to sell these located inKingman, Arizona, for $110 million incash, adjusted for the $5million businesses, which are included inthe Pennsylvania Delivery segment.

settlement of the steam turbine indemnifications inDecember 2006. The book Inaccordance with SFAS 144, "Accounting for the Impairment or Disposal of value of PPL's interest inthe plant was $150 million on the sale date. Long-Lived Assets," management assessed the carrying value of the assets and Following are the components of Discontinued Operations on the Statements liabilities held for sale at December 31, 2007. Based on the expectation that the of Income related to the sale of PPL's interest inthe Griffith plant. natural gas distribution and propane assets will be sold and based on an assess-2006 2005 ment of prevailing market conditions, an impairment charge of $22 million was recorded inthe fourth quarter of 2007 and isincluded in Discontinued Operations Operating revenues $ 5 $40 Operating expenses 10 43 on the Statements of Income. An associated income tax benefit of $1million was Operating loss before Income taxes (5) (3) also recorded inDiscontinued Operations.

Income tax benefit 1 1 Management isinthe process of reviewing bid information and negotiating Loss from operations after income taxes (4) (2) with interested parties, and expects to complete a sale of these businesses during Loss on sale of the interest (net of tax benefit of $16million) (23) the second half of 2008, following the execution of a sales agreement and the Acceleration of net unrealized gains on derivatives associated with the plant (net of tax expense of $4million) 7 receipt of all necessary regulatory approvals.

Loss from Discontinued Operations $(20) $(2) Proceeds of the sale are expected to be used to invest ingrowth opportunities inPPLs core electricity supply and delivery businesses and/or for the repurchase Sale of Sundance Plant of securities, including PPL common stock.

InMay 2005, a subsidiary of PPL Energy Supply, which isincluded inthe Supply Inaccordance with SFAS 144, the results of operations for the years 2005 segment, completed the sale of its 450 MW Sundance plant located inPinal County, through 2007 have been classified as Discontinued Operations on the Statements Arizona, to Arizona Public Service Company for $190 million incash. The book of Income. At December 31, 2007, the assets and liabilities are classified as held value of the plant was $260 million on the sale date. for sale on the Balance Sheet.

Following are the components of Discontinued Operations on the Statement Following are the components of Discontinued Operations on the Statements of Income related to the sale of the Sundance plant. There were no derivative of Income related to PPL's natural gas distribution and propane businesses.

contracts hedging the Sundance plant at the time of the sale. 2007 2006 2005 2005 Operating revenues $218 $214 $187 Operating revenues $4 Operating expenses ý11 211 201 171 Operating expenses 10 Operating income 7 13 16 Operating loss before income taxes (6) Other income - net 1 Income tax benefit 2 Interest expense 6 6 7 Loss on sale (net of tax benefit of $26 million) (47) Income before income taxes 1 8 9 Loss from Discontinued Operations $(51) Income tax expense ralrb) 33 4 (Loss) Income from Discontinued Operations $(32) $4 S9 See "Guarantees and Other Assurances" inNote 15 for more information on 01 Animpairment charge of $22 million was recorded at December 31,2007, inaccordance with PPL Energy Supply's indemnifications related to the sale. SFAS 144, and isincluded in"Operating expenses." Anassociated income tax benefit of $1million is included in"Income tax expense.'

(b) Asa result of classifying the natural gas distribution and propane businesses as Discontinued Opera-tions and inaccordance with EITF 93-17,"Recognition of Deferred Tax Assets for a Parent Company's ExcessTax Basis inthe Stock of aSubsidiaryThat IsAccounted for as a Discontinued Operation,"in 2007, PPLrecorded a deferred income tax liability and a corresponding charge of $23million related to itsexcess of financial reporting basis over outside tax basis inthe investment inthese businesses.

PPL Corporation 2007 Annual Report 85

Notes to Consolidated Financial Statements The major classes of "Assets held for sale" and "Liabilities held for sale" on the Other Leases Balance Sheet at December 31, 2007, were as follows (corresponding amounts at InSeptember 2006, PPL's subsidiaries terminated the master lease agreements December 31, 2006, are also noted for comparative purposes, but have not been under which they leased equipment, such as vehicles, computers and office reclassified on the Balance Sheet as of that period): equipment. Inaddition, PPL and its subsidiaries purchased the equipment from December 31, 2007 December 31, 2006 the lessors at a negotiated price. Prior to the buyout, PPL subsidiaries had been directly charged or allocated a portion of the rental expense related to the assets Current Assets Accounts receivable $ 18 $13 they utilized. Inconnection with the buyout, ownership of the purchased equip-Fuel,materials and supplies 18 16 ment was reviewed and attributed to the subsidiaries based on usage of the Other 7 5 equipment. As a result, "Property, Plant and Equipment" increased on the Total Current Assets 43 34 Balance Sheet by $107 million.

PP&E 213 224 The following rent expense for all operating leases, including the Colstrip gen-Goodwill and other noncurrent assets 62 83 erating plant; equipment under the master lease agreements prior to September Total assets held for sale $318 $341 2006; office space; land; buildings; and other equipment, was $37 million in2007, Current Liabilities

$18 $14 $56 million in2006 and $68 million in2005, and was primarily included in"Other Accounts payable Other 14 4 operation and maintenance" on the Statements of Income.

Total Current Liabilities 32 18 Total future minimum rental payments for all operating leases are estimated Long-term Debt 10 10 to be:

Deferred Credits and Other Noncurrent Liabilities 26 23 Total liabilities held for sale $ 68 $51 2008 $ 52 2009 54 2010 55 2011 55 Note 11. Leases 2012 54 Thereafter 329 Colstrip Generating Plant

$599 At December 31, 2007, PPL continued to participate ina significant sale/leaseback transaction. InJuly 2000, PPL Montana sold its interest inthe Colstrip generating Inconnection with the acquisition of certain fiber optic network assets in2003, plants to owner lessors who are leasing a50% interest inColstrip Units 1 and 2 and asubsidiary of PPL Telcom, LLC assumed a capital lease obligation through 2020.

a 30% interest inUnit 3 back to PPL Montana under four 36-year non-cancelable The balance outstanding at December 31, 2006, was $10 million. Inconnection leases. This transaction isaccounted for as an operating lease inaccordance with with the sale of the domestic telecommunication operations, this lease was assumed current accounting pronouncements related to sale/leaseback arrangements. in2007 by the buyer. See Note 9 for additional information on the sale of these These leases provide two renewal options based on the economic useful life of the operations. PPL no longer has substantial capital lease obligations.

generation assets. PPL Montana currently amortizes material leasehold improve-ments over no more than the remaining life of the original leases. PPL Montana is required to pay all expenses associated with the operations of the generation units. Note 12. Stock-Based Compensation The leases place certain restrictions on PPL Montana's ability to incur additional Effective January 1,2006, PPL and its subsidiaries adopted SFAS 123 (revised 2004),

debt, sell assets and declare dividends and require PPL Montana to maintain certain "Share-Based Payment," which isknown as SFAS 123(R), using the modified pro-financial ratios related to cash flow and net worth. There are no residual value spective application transition method. The adoption of SFAS 123(R) did not have guarantees inthese leases. However, upon an event of default or an event of loss, a significant impact on PPL and its subsidiaries, since PPL and its subsidiaries PPL Montana could be required to pay a termination value of amounts sufficient to adopted the fair value method of accounting for stock-based compensation, as allow the lessor to repay amounts owing on the lessor notes and make the lessor described by SFAS 123, "Accounting for Stock-Based Compensation," effective whole for its equity investment and anticipated return on investment. The events January 1,2003.

of default include payment defaults, breaches of representations or covenants, Under the PPL Incentive Compensation Plan (ICP) and the Incentive acceleration of other indebtedness of PPL Montana, change incontrol of PPL Compensation Plan for Key Employees (ICPKE) (together, the Plans), restricted Montana and certain bankruptcy events. The termination value was estimated shares of PPL common stock, restricted stock units and stock options may be to be $683 million at December 31, 2007.

granted to officers and other key employees of PPL, PPL Energy Supply, PPL Electric and other affiliated companies. Awards under the Plans are made by the Compensation Governance and Nominating Committee (CGNC) of the PPL Board 86 PPL Corporation 2007 Annual Report

of Directors, inthe case of the ICP, and by the PPL Corporate Leadership Council award isforfeited. Restricted stock units are subject to forfeiture or accelerated (CLC), inthe case of the ICPKE. The ICP limits the total number of awards that may payout under the Plan provisions for termination, retirement, disability and death be granted under it after April 23, 1999, to 15,769,430 awards, or 5%of the total of employees. Restricted stock units vest fully ifcontrol of PPL changes, as shares of PPL common stock that were outstanding at April 23, 1999. The ICPKE defined by the Plans.

limits the total number of awards that may be granted under itafter April 25, Restricted stock and restricted stock unit activity for 2007 was:

2003, to 16,573,608 awards, or 5%of the total shares of PPL common stock that Restricted Weighted-Average were outstanding at January 1,2003, reduced by outstanding awards of 2,373,812, Shares/Units GrantDateFairValue for which PPL common stock was not yet issued as of April 25, 2003, resulting ina Nonvested at January 1,2007 1,855,765 $25.97 limit of 14,199,796. Inaddition, each Plan limits the number of shares available for Granted 628,420 37.10 awards inany calendar year to 2%of the outstanding common stock of PPL on Vested (751,960) 26.32 Forfeited (27,590) 32.26 the first day of such calendar year. The maximum number of options that can be Nonvested at December 31,2007 1,704,635 29.81 awarded under each Plan to any single eligible employee inany calendar year is three million shares. Any portion of these options that has not been granted may Substantially all restricted stock and restricted stock unit awards are expected be carried over and used inany subsequent year. Ifany award lapses, isforfeited to vest.

or the rights of the participant terminate, the shares of PPL common stock under- The weighted-average grant date fair value of restricted stock and restricted lying such an award are again available for grant. Shares delivered under the Plans stock units granted during 2006 and 2005 was $30.95 and $27.08.

may be inthe form of authorized and unissued PPL common stock, common stock At December 31, 2007, unrecognized compensation cost related to nonvested held intreasury by PPL or PPL common stock purchased on the open market awards was $12 million with aweighted-average period for recognition of 2.5 years.

(including private purchases) inaccordance with applicable securities laws. The total fair value of restricted shares/units vesting was $32 million for 2007, Restricted Stock and Restricted Stock Units $13 million for 2006 and $10 million for 2005.

Restricted shares of PPL common stock are outstanding shares with full voting Stock Options and dividend rights. Restricted stock awards are granted as a retention award for Under the Plans, stock options may also be granted with an option exercise price key executives and have vesting periods as determined by the CGNC inthe case per share not less than the fair market value of PPL's common stock on the date of the ICP, and the CLC inthe case of the ICPKE, that range from seven to 25 years. of grant. The options are exercisable beginning one year after the date of grant, Inaddition, the shares are subject to forfeiture or accelerated payout under Plan assuming the individual isstill employed by PPL or a subsidiary, ininstallments provisions for termination, retirement, disability and death of employees. as determined by the CGNC inthe case of the ICP, and the CLC inthe case of the Restricted shares vest fully if control of PPL changes, as defined by the plans. ICPKE. Options outstanding at December 31, 2007, become exercisable inequal The Plans allow for the grant of restricted stock units. Restricted stock units installments over a three-year period from the date of grant. The CGNC and CLC are awards based on the fair market value of PPL common stock. Actual PPL com- have discretion to accelerate the exercisability of the options, except that the mon shares will be issued upon completion of a vesting period, generally three exercisability of an option issued under the ICP may not be accelerated unless the years, as determined by the CGNC inthe case of the ICP, and the CLC inthe case individual remains employed by PPL or a subsidiary for one year from the date of of the ICPKE. Recipients of restricted stock units may also be granted the right to grant. All options expire no later than ten years from the grant date. The options receive dividend equivalents through the end of the restriction period or until the become exercisable immediately ifcontrol of PPL changes, as defined by the Plans.

Stock option activity under the Plans for 2007 was:

Weighted-Number of Weighted-Average Average Remaining Aggregate Options Exercise Price Contractual Term Total Intrinsic Value Outstanding at January 1,2007 5,383,830 $24.68 Granted 1,158,840 35.12 Exercised (2,286,893) 22.74 Forfeited (57,470) 30.14 Outstanding at December 31,2007 4,198,307 28.55 7.0 years $99 Options exercisable at December 31,2007 2,159,617 24.94 6.4 years 59 Weighted-average fair value of options granted $7.08 PPL Corporation 2007 Annual Report 87

Notes to Consolidated Financial Statements Substantially all stock option awards are expected to vest. stock. There were 330,156 such stock units outstanding at December 31, 2007, The total intrinsic value of stock options exercised was $54 million in2007, which are accounted for as liabilities with changes infair value recognized currently

$15 million in2006 and $18 million in2005. in earnings based on PPL's common stock price at the end of each reporting period.

At December 31, 2007, unrecognized compensation cost related to stock options Compensation costs for directors stock units were $5 million, $2million and was $3million with a weighted-average period for recognition of 1.9 years. $1 million in 2007, 2006 and 2005. Income tax benefits related to these costs were PPL received cash from stock option exercises for 2007 of $32 million. $2 million, $1million and $1million in 2007, 2006 and 2005.

The estimated fair value of each option granted was calculated using a Awards paid during 2007, 2006 and 2005 were insignificant.

Black-Scholes option-pricing model. The weighted-average assumptions used Stock Appreciation Rights inthe model were:

WPD uses stock appreciation rights to compensate senior management employees.

2007 2006 2005 Stock appreciation rights are granted with a reference price to PPL's common stock Risk-free interest rate 4.85% 4.06% 4.09% at the date of grant. These awards vest over a three-year period and have a 10-year Expected option life 6.00 yrs. 6.25 yrs. 7.00 yrs. term, during which time employees are entitled to receive a cash payment of any Expected stock volatility 21.61% 19.86% 18.09% appreciation in the price of PPI's common stock over the grant date fair value. At Dividend yield 3.31% 3.76% 3.88%

December 31, 2007, there were 340,032 stock appreciation rights outstanding, Based on the above assumptions, the weighted-average grant date fair values which are accounted for as liabilities with changes in fair value recognized currently of options granted during 2007, 2006 and 2005 were $7.08, $4.86 and $3.99. in earnings based on updated Black-Scholes calculations.

PPL uses historical volatility and exercise behavior to value its stock options Compensation costs related to stock appreciation rights in 2007 were $5 million, using the Black-Scholes option pricing model. Volatility over the expected term with related income tax benefits of $2million. Compensation costs for 2006 and of the options isevaluated with consideration given to prior periods that may 2005 were insignificant.

need to be excluded based on events not likely to recur that had impacted PPL's Awards paid in2007 totaled $2million, and were insignificant for 2006 and 2005.

volatility inthose prior periods. Management's expectations for future volatility, considering potential changes to PPLs business model and other economic condi-tions, are also reviewed inaddition to the historical data to determine the final Note 113. Retirement and Postemployment Benefits volatility assumption.

Defined Benefits Compensation Costs PPL and certain of its subsidiaries sponsor various defined benefit plans.

Compensation costs for restricted stock, restricted stock units and stock options The majority of PPL's domestic employees are eligible for pension benefits accounted for as equity awards in2007, 2006 and 2005 were $26 million, $22 mil-under non-contributory defined benefit pension plans with benefits based on lion and $32 million (with related income tax benefits of $10 million, $9million length of service and final average pay, as defined by the plans. Employees of PPL and $12 million). Compensation costs for 2005 included an adjustment to record Montana are eligible for pension benefits under a cash balance pension plan and accelerated recognition of expense for employees at or near retirement age. See employees of certain of PPL's mechanical contracting companies are eligible for Note 1 for additional information.

benefits under multi-employer plans sponsored by various unions. The employees The income tax benefit PPL realized from stock-based arrangements for 2007 of PPL's U.K. subsidiary, WPD, are eligible for benefits from one pension scheme was $25 million, with $19 million attributed to stock option exercises.

with benefits based on length of service and final average pay.

Directors Stock Units PPL and certain of its subsidiaries also provide supplemental retirement Under the Directors Deferred Compensation Plan, a mandatory amount of the benefits to directors, executives and other key management employees through cash retainers of the members of the Board of Directors who are not employees unfunded nonqualified retirement plans.

of PPL isdeferred into stock units. Such deferred stock units represent the number The majority of employees of PPL's domestic subsidiaries will become eligible of shares of PPL's common stock to which the board members are entitled after for certain health care and life insurance benefits upon retirement through con-they cease serving as a member of the Board of Directors. Board members also are tributory plans. Postretirement benefits under the PPL Retiree Health Plan and entitled to defer any or all of their fees and cash retainers that are not part of the PPL Gas Retiree Health Plan are paid from funded VEBA trusts sponsored by the mandatory deferral into stock units. The stock unit accounts of each board member respective companies. Postretirement benefits under the PPL Montana Retiree are increased based on dividends paid or other distributions on PPL's common Health Plan are paid from company assets.

88 PPL Corporation 2007 Annual Report

The following disclosures distinguish between domestic and international pension plans.

Pension Benefits Domestic International Other Postnetirement Benefits 2007 2006 2005 2007 2006 2005 2007 2006 2005 Net periodic defined benefit costs Service cost $ 63 $ 62 $ 56 $ 24 $22 $ 17 $ 8 $ 7 $7 Interest cost 132 124 114 170 140 150 31 28 26 Expected return on plan assets (175) (164) (158) (227) (197) (202) (21) (20) (19)

Amortization of:

Transition (asset) obligation (4) (4) (4) 9 9 8 Prior service cost 19 15 15 5 5 5 9 5 4 Actuarial loss 2 3 2 55 49 29 6 8 4 Net periodic defined benefit costs (credits) prior to settlement charges and termination benefits 37 36 25 27 19 (1) 42 37 30 Settlement charges 3 4 Termination benefits ta)(b)t 6 3 3 5 Net periodic defined benefit costs $ 46 $ 43 $ 25 $ 30 $ 19 $ 4 $42 $37 $30 Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income - Gross Settlements $ (3)

Current year net gain (85) $(254) $ (3)

Current year prior service cost 5 3 Amortization of:

Transition obligation (asset) 3 (5)

Prior service cost (12) (5) (5)

Actuarial gain (2) (55) (4)

Amounts reclassified from regulatory assets:

Prior service cost 2 1 Actuarial loss 5 4 Total recognized inother comprehensive income (87) (314) (9)

Total recognized innet periodic benefit cost and other comprehensive income $ (41) $(284) $ 33 at The$5million cost oftermination benefits for2005 was related to theWPD approved staffreduction plan as a result ofthe merger of itstwo control rooms, metering reorganization and other staffefficiencies.

Additional pension costs were recognized due to early retirement and pension enhancement provisions granted tothe employees.

Ct The $3million cost of termination benefits for 2006 was related to the PPLSusquehanna approved staffreduction plan. Inaddition, severance of $2million was also recorded fora total charge of $5million

($3million after tax).

05 The $6million domestic and $3million international costs oftermination benefits for2007 were related primarily to the elimination of positions at PPCsMartins Creekplant due to the shutdown oftwo coal-fired units inSeptember 2007, and the closing ofWPD's meter test station. Inaddition, severance of $4million was also recorded for a total charge of $13miulion ($9million after tax).

The estimated amounts to be amortized from accumulated other comprehensive income into net periodic benefit costs over the next fiscal period are as follows:

Pension Benefits Domestic International Other Postretirement Benefits Transition (asset) obligation $(3) $5 Prior service cost 12 $6 5 Actuarial (qain) loss (5) 19 3 Prior service costs of $6 million and actuarial losses of $19 million related to the international pension plans are expected to be amortized from accumulated other comprehensive income into net periodic benefit costs over the next fiscal period.

Net periodic defined benefits costs charged to operating expense, excluding amounts charged to construction and other non-expense accounts, were:

Pension Benefits Domestic International Other Postretirement Benefits 2007 2006 2005 2007 2006 2005 2007 2006 2005

$40 $37 $21 $27 $17 $4 $35 $31 $26 PPL Corporation 2007 Annual Report 89

Notes to Consolidated Financial Statements The following assumptions were used inthe valuation of the benefit obligations at December 31 and determination of net periodic benefit cost for the years ended December31.

Pension Benefits Domestic International Other Postretirement Benefits 2007 2006 2005 2007 2006 2005 2007 2006 2005 Discount rate

- obligations 6.39% 5.94% 5370% 6.37% 5.17% 4.75% 6.26% 5.88% 5.70%

- cost 5.94% 5.70% 5.75% 5.17% 4.75% 5.50% 5.88% 5.70% 5.75%

Rate of compensation increase

- obligations 4.75% 4.75% 4.75% 4.25% 4.00% 3.75% 4.75% 4.75% 4.75%

- cost 4.75% 4.75% 4.00% 4.00% 3.75% 3.75% 4.75% 4.75% 4.00%

Expected return on plan assets

- obligationsrl) 8.25% 8.50% 8.50% 7.90% 8.09% 8.09% 7.80% 7.75% 8.00%

- cost r') 8.50% 8.50% 8.75% 8.09% 8.09% 8.30% 7.75% 8.00% 7.90%

r') Theexpected return onplan assets for PPLsDomestic Pension Plans includes a 25basis point reduction for management fees.

Assumed Health Care Cost Aone percentage point change in the assumed health care costs trend rate Trend Rates at December3 1, 2007 2006 2005 assumption would have had the following effects in2007.

Health care cost trend rate assumed for next year OnePercentage Point

- obligations 9.0% 9.0% 10.0%

Increase Decrease

- cost 9.0% 10.0% 10.0%

Rate to which the cost trend rate isassumed to Effect on service cost and interest cost components $2 $(2) decline (the ultimate trend rate) Effect on accumulated postretirement benefit obligation 21 (18)

- obligations 5.5% 5.5% 5.5%

- cost 5.5% 5.5% 5.0%

Year that the rate reaches the ultimate trend rate

- obligations 2014 2012 2011

- cost 2012 2011 2010 90 PPL Corporation 2007 Annual Report

The funded status of the PPL plans was as follows.

Pension Benefits Domestic International Other Postretirement Benefits 2007 2006 2007 2006 2007 2006 Change in Benefit Obligation Benefit Obligation, January I $2,199 $2,147 $3,339 $2,891 $530 $518 Service cost 63 62 24 22 8 8 Interest cost 132 124 170 140 31 28 Participant contributions 7 7 7 7 Plan amendments 9 46 5 38 Actuarial (gain) loss (122) (87) (203) 50 (8) (32)

Termination benefits 6 3 3 Actual expenses paid (1) (1)

Net benefits paid (88) (83) (191) (169) (34) (39)

Settlements (9) (12)

Federal subsidy 2 Currency conversion 146 398 Benefit Obligation, December 31 2,189 2,199 3,295 3,339 541 530 Change in Plan Assets Plan assets at fair value, January 1 2,081 1,905 3,094 2,540 289 258 Actual return on plan assets 190 211 268 251 17 25 Employer contributions 39 61 65 102 12 37 Participant contributions 7 7 2 8 Actual expenses paid (1) (1)

Net benefits paid (88) (83) (191) (169) (29) (39)

Settlements (9) (12)

Currency conversion 145 363 Plan assets at fair value, December 31 2,212 2,081 3,388 3,094 291 289 Funded Status at end of year $ 23 $ (118) $ 93 $ (245) $(250) $(241)

Amounts recognized in the Balance Sheets consist of:

Noncurrent asset $ 88 $ 7 $ 97 Current liability (r) (10) (6) $ (9) $ (1)

Noncurrent liability (55) (119) (4) $(245) (241) (240)

Net amount recognized at end of year $ 23 $ (118) $ 93 $(245) $(250) $(241)

Amounts recognized in accumulated other comprehensive loss (pre-tax) consist of:

Transition (asset) obligation $ (6) $ (8) $ 26 $ 31 Prior service cost 102 106 $ 28 $ 28 33 34 Net actuarial (gain) loss (196) (112) 407 602 69 72 Foreign currency translation adjustments (146) (27)

Total $ (100) $ (14) $ 289 $ 603 $128 $137 Total accumulated benefit obligation for defined benefit pension plans $1,951 $1,947 $3,129 $3,177 SIncludes $6million of pension and $8million of other postretirement benefit liabilities inc**ded in"Liabilities held forsale"on the Balance Sheet as of December 31,2007, related tothe PPLGasUtilities plansas a result of the planned sale of that business.

PPL Corporation 2007 Annual Report 91

Notes to Consolidated Financial Statements Information for pension plans with projected and accumulated benefit obligations inexcess of plan assets follows.

Plans WithProjected Benefit Obligations in Excessof Pan Assets Plans WithAccumulated Benefit Obligations inExcess of PlanAssets Domestic International Domestic International 2007 2006 2007 2006 2007 2006 2007 2006 Projected benefit obligation $107 S2,118 $3,339 $60 $112 $3,339 Accumulated benefit obligation 87 1,866 3,177 46 95 3,177 Fairvalue ofassets 42 1,993 3,094 46 3,094 Other postretirement benefit plans with accumulated postretirement benefit Plan Assets - Domestic Other Postretirement Benefit Plans obligations inexcess of plan assets had accumulated postretirement benefit obli- The asset allocation for the PPL other postretirement benefit plans by asset gations and fair value of assets of $541 million and $291 million at December 31, category isdetailed below.

2007, and $531 million and $289 million at December 31, 2006. Percentage of planassets At December 31, 2007, PPL Electric had a regulatory asset of $3million relat- at December 31, ing to the initial adoption of SFAS 106, which isbeing amortized and recovered in AssetCategory 2007 2006 rates, with a remaining life of five years. Equity securities 52% 56%

PPL Electric also maintains a liability for the cost of health care of retired min- Debt securities 36% 44%

Other 12%

ers of former subsidiaries that had been engaged incoal mining, as required by Total 100% 100%

the Coal Industry Retiree Health Benefit Act of 1992. PPL Electric accounts for this liability under EITF 92-13, "Accounting for Estimated Payments inConnection with PPL's investment strategy with respect to its other postretirement benefit the Coal Industry Retiree Health Benefit Act of 1992." PPL Electric's net liability obligations isto fund the VEBA trusts with voluntary contributions and to invest was $35 million at December 31, 2005. Inthe third quarter of 2006, PPL Electric inatax efficient manner utilizing a prudent mix of assets. Based on the current was able to fully offset the net liability, calculated at that time, of $36 million, VEBA and postretirement plan structure, PPL targets an asset allocation range of with excess Black Lung Trust assets as a result of the passage of the Pension 50% to 60% equity and 40% to 50% debt, with any difference held incash as a Protection Act of 2006. At December 31, 2007, the net liability continues to be result of contribution/investment timing and payment of postretirement benefits.

fully offset with excess Black Lung Trust assets. See "Pension Protection Act of The expected long-term rate of return for PPL's other postretirement benefit 2006" within this note for further discussion. plans isbased on the VEBA trusts' mix of assets and expectations for long-term Plan Assets - Domestic Pension Plans returns of those asset classes considering that a portion of those assets are taxable.

The asset allocation for the PPL Retirement Plan Master Trust and the target Plan Assets - International Pension Plans allocation, by asset category, are detailed below. WPD operates three defined benefit plans, the WPD Group segment of the Percentage of plan assets Targetasset Electricity Supply Pension Scheme (ESPS), the Western Power Utilities Pension AssetCategory at December 31, allocation Scheme and the Infralec 1992 Scheme. The assets of all three schemes are held 2007 2006 separately from those of WPD intrustee-administered funds.

Equity securities 68% 74% 7096 PPL's international pension plan asset allocation and target allocation is Debt securities 26% 21% 259%

detailed below.

Realestate and other 6% 5% 59/0 Total 100% 100% 1009 Percentage of planassets Target asset at December 31, allocation The domestic pension plan assets are managed by outside investment AssetCategory 2007 2006 managers and are rebalanced as necessary to maintain the target asset allocation Equity securities 68% 74% 70%

ranges. PPL's investment strategy with respect to the domestic pension assets is Debt securities 28% 22% 28%

Real estate and other 4% 4% 2%

to achieve a satisfactory risk-adjusted return on assets that, incombination with Total 100% 100% 100%

PPLs funding policy and tolerance for return volatility, will ensure that sufficient dollars are available to provide benefit payments. Inconsultation with its investment advisor and with WPD, the group trustees The expected long-term rate of return for PPL's domestic pension plans con- of the WPD Group of the ESPS have drawn up a Statement of Investment Principles siders the plans' historical experience, but isprimarily based on the plans' mix of to comply with the requirements of U.K.legislation.

assets and expectations for long-term returns of those asset classes.

92 PPL Corporation 2007 Annual Report

The group trustees' primary investment objective isto maximize investment Savings Plans returns within the constraint of avoiding excessive volatility inthe funding position. Substantially all employees of PPL's domestic subsidiaries are eligible to participate The expected rate of return for PPL and its subsidiaries' international pension indeferred savings plans (401(k)s). Employer contributions to the plans approxi-plans considers that a portfolio largely invested inequities would be expected to mated $16 million for 2007, $14 million for 2006 and $13 million for 2005.

achieve an average rate of return inexcess of a portfolio largely invested inlong-Employee Stock Ownership Plan term bonds. The historical experience has been an excess return of 2%to 4%per PPL sponsors a non-leveraged ESOP inwhich substantially all domestic employ-annum on average over the return on long-term bonds.

ees, excluding those of PPL Montana, PPL Gas Utilities and the mechanical con-Expected Cash Flows - Domestic Defined Benefit Plans tractors, are enrolled on the first day of the month following eligible employee There are no contributions required for PPL's primary domestic pension plan or status. Dividends paid on ESOP shares are treated as ordinary dividends by PPL.

any of PPL's other domestic subsidiary pension plans. However, PPL's domestic Under existing income tax laws, PPL ispermitted to deduct the amount of those subsidiaries expect to contribute approximately $17 million to their pension plans dividends for income tax purposes and to contribute the resulting tax savings in2008 to ensure future compliance with minimum funding requirements. (dividend-based contribution) to the ESOP.

PPL sponsors various non-qualified supplemental pension plans for which no The dividend-based contribution isused to buy shares of PPL's common stock assets are segregated from corporate assets. PPL expects to make approximately and isexpressly conditioned upon the deductibility of the contribution for federal

$4million of benefit payments under these plans in2008. income tax purposes. Contributions to the ESOP are allocated to eligible partici-PPL isnot required to make contributions to its other postretirement benefit pants' accounts as of the end of each year, based 75% on shares held inexisting plans but has historically funded these plans inamounts equal to the postretire- participants' accounts and 25% on the eligible participants' compensation.

ment benefit costs recognized. Continuation of this past practice would cause PPL Amounts charged as compensation expense for ESOP contributions were to contribute $42 million to its other postretirement benefit plans in2008. $7million, $7million and $6million for 2007, 2006 and 2005. These amounts The following benefit payments, which reflect expected future service, as were offset by the dividend-based contribution tax savings and had no impact appropriate, are expected to be paid and the following federal subsidy payments on PPLs earnings.

are expected to be received by the separate plan trusts. ESOP shares outstanding at December 31, 2007, were 7,984,554 or 2%of total common shares outstanding, and are included inall EPS calculations.

Other Postretirement Benefit Expected Postemployment Benefits Pension Payment Federal Subsidy Certain PPL subsidiaries provide health and life insurance benefits to disabled 2008 $95 $40 $2 employees and income benefits to eligible spouses of deceased employees. PPL 2009 104 45 3 2010 111 49 3 follows the guidance of SFAS 112, "Employers' Accounting for Postemployment 2011 119 55 3 Benefits," when accounting for these benefits. Postemployment benefits charged 2012 129 60 4 to operating expenses were not significant for 2007 and 2006. Postemployment 2013-2017 790 374 27 benefits charged to operating expense for 2005 were $8million primarily due to an updated valuation for Long-Term Disability benefits completed in2005.

Expected Cash Flows - International Pension Plans Prior to the sale of certain of PPL Global subsidiaries, including Emel, DelSur, The pension plans of WPD are subject to formal actuarial valuations every three Elfec and Integra, PPL Energy Supply provided limited non-pension benefits to years, which are used to determine funding requirements. Future contributions all employees. Allactive employees were entitled to benefits inthe event of were evaluated inaccordance with the latest valuation performed as of March 31, termination or retirement inaccordance with government-sponsored programs.

2007, inrespect of WPD's principal pension scheme, the ESPS, to determine con-These plans generally obligated a company to pay one month's salary per year of tribution requirements for 2008 and forward. WPD expects to make contributions service to employees inthe event of involuntary termination. Under certain plans, of approximately $97 million in2008.

employees with five or more years of service were entitled to this payment in The following benefit payments, which reflect expected future service, as the event of voluntary or involuntary termination.

appropriate, are expected to be paid by the separate plan trusts.

The liabilities for these plans were accounted for under the guidance of EITF Pension 88-1, "Determination of Vested Benefit Obligation for a Defined Benefit Pension 2008 $ 187 Plan," using what iscommonly referred to as the "shut down" method, where a 2009 192 company records the undiscounted obligation as if itwere payable at each balance 2010 198 sheet date. As of December 31, 2007, there were no recorded liabilities, as PPL had 2011 204 completed the sale of all Latin American subsidiaries. The combined liabilities for 2012 210 2013-2017 1,149 these plans at December 31, 2006, was $11million, and isrecorded in"Deferred Credits and Noncurrent Liabilities - Other" on the Balance Sheets.

PPL Corporation 2007 Annual Report 93

Notes to Consolidated Financial Statements Pension Protection Act of 2006 Inaddition to the interests mentioned above, PPL Montana isthe operator On August 17, 2006, the Pension Protection Act of 2006 (the Act) was signed by of the jointly-owned, coal-fired generating units comprising the Colstrip steam President Bush. The Act's changes, which will become effective in 2008, cover generation facility. At December 31, 2007 and 2006, PPL Montana had a 50%

current pension plan legislation and funding rules for defined benefit pension leasehold interest inColstrip Units I and 2 and a 30% leasehold interest in plans. Based on the current funded status of PPL's defined benefit pension plans, Colstrip Unit 3 under operating leases. See Note 11for additional information.

the Act is not expected to have a significant impact on the future funding of PPL Montana's share of direct expenses associated with the operation and these plans or have a significant financial impact on PPL in regard to these plans. maintenance of these facilities isincluded inthe corresponding operating expenses The Act does contain a provision that provides for excess assets held exclu- on the Statements of Income. Each joint-owner inthese facilities provides its sively in Black Lung Trust funds to be used to pay for health benefits other than own financing. As operator of all Colstrip Units, PPL Montana invoices each joint-black lung disease for retired coal miners. Prior to recognition of this provision owner for its respective portion of the direct expenses. The amount due from of the Act, PPL Electric had a net liability of $36 million for the medical costs of joint-owners was $10 million and $7million at December 31, 2007 and 2006.

retirees ofa PPL subsidiary represented by the United Mine Workers of America At December 31, 2007, NorthWestern owned a30% leasehold interest inColstrip (UMWA). This subsidiary had a Black Lung Trust that was significantly overfunded. Unit 4.PPL Montana and NorthWestern have a sharing agreement to govern each As a result of the Act and the ability to use the excess Black Lung Trust assets to party's responsibilities regarding the operation of Colstrip Units 3 and 4,and each make future benefit payments for the UMWA retiree medical costs, PPL Electric party isresponsible for 15% of the respective operating and construction costs, was able to fully offset the UMWA retiree medical liability on its Balance Sheet regardless of whether a particular cost isspecified to Colstrip Unit 3 or 4.However, and record a one-time credit to PPLs "Other operation and maintenance" expense each party isresponsible for its own fuel-related costs.

of $21 million (net of tax expense of $15 million).

Note 15. Commitments and Contingencies Note 14. .Jointly-Owned Facilities Energy Purchases, Energy Sales and Other Commitments At December 31, 2007 and 2006, subsidiaries of PPL owned interests inthe Energy PurchaseCommitments facilities listed below. The Balance Sheets of PPL include the amounts noted in PPL enters into long-term purchase contracts to supply the fuel requirements the following table. for generation facilities. These contracts include commitments to purchase Electric Construction coal, emission allowances, natural gas, oil and nuclear fuel and extend for terms Ownership Plant in Other Accumulated Work in Interest Service Property Depreciation Progress through 2019. PPL also enters into long-term contracts for the storage and trans-portation of natural gas which extend through 2014 and 2032. Additionally, PPL December 31, 2007 PPL Generation has entered into long-term contracts to purchase power that extend for terms Generating Stations through 2017, excluding long-term power purchase agreements for full output Susquehanna 90.00% $4,394 $3,449 $146 of two wind farms. These wind farm contracts extend for terms through 2027.

Conemaugh 16.25% 201 86 2 As part of the purchase of generation assets from Montana Power, PPL Keystone 12.34% 108 55 19 Montana assumed a power purchase agreement, which was still ineffect at Wyman Unit 4 8.33% 15 6 December 31, 2007. Inaccordance with purchase accounting guidelines, PPL Merrill Creek Reservoir 8.37% $22 14 Montana recorded a liability of $58 million as the estimated fair value of the December31, 2006 agreement at the acquisition date. The liability isbeing reduced over the term PPL Generation Generating Stations of the agreement, through 2010, as an adjustment to "Energy purchases" on the Susquehanna 90.00% $4,332 $3,449 $ 99 Statements of Income. The unamortized balance of the liability related to the Conemaugh 16.25% 198 87 1 agreement at December 31, 2007 and 2006, was $34 million and $42 million, Keystone 12.34% 100 54 7 of which $24 million and $34 million isincluded in"Deferred Credits and Other Wyman Unit 4 8.33% 15 6 Noncurrent Liabilities - Other" and $10 million and $8million isincluded in Merrill Creek Reservoir 8.37% $22 14 "Current Liabilities - Other" on the Balance Sheets.

In 1998, PPL Electric recorded a loss accrual for above-market contracts with Each PPL Generation subsidiary provided its own funding for its share of the NUGs of $879 million, due to the deregulation of its generation business. Effective facility. Each receives a portion of the total output of the generating stations equal January 1999, PPL Electric began reducing this liability as an offset to "Energy to its percentage ownership. The share of fuel and other operating costs associated purchases" on the Statements of Income. This reduction isbased on the estimated with the stations is included in the corresponding operating expenses on the timing of the purchases from the NUGs and projected market prices for this Statements of Income.

94 PPL Corporation 2007 Annual Report

generation. The final NUG contract expires in2014. Inconnection with the corpo- Under this arrangement, PPL Montana has a remaining commitment to spend rate realignment in2000, the remaining balance of this liability was transferred to $16 million between 2008 and 2015, inaddition to the annual rental it pays to the PPL EnergyPlus. At December 31, 2007 and 2006, the remaining liability associ- tribes. Between 2015 and 2025, the tribes have the option to purchase, hold and ated with the above-market NUG contracts was $71million and $136 million. operate the project for the remainder of the license term of 2035.

InJuly 2007, PPL Electric conducted the first of six competitive solicitations PPL Montana entered into two Memoranda of Understanding (MOUs) to purchase electricity generation supply in2010, after its existing PLR contract with state, federal and private entities related to the issuance in2000 of the FERC expires, for customers who do not choose a competitive supplier. Competitive renewal license for the nine dams for the Missouri-Madison project. The MOUs bids were solicited for 850 MW of generation supply, or one-sixth of PPL Electric's require PPL Montana to implement plans to mitigate the impact of its projects expected supply requirements for these customers in2010. For this solicitation, the on fish, wildlife and the habitat, and to increase recreational opportunities. The average generation supply price for 2010, including Pennsylvania gross receipts tax MOUs were created to maximize collaboration between the parties and enhance and an adjustment for line losses, is$101.77 per MWh for residential customers the possibility for matching funds from relevant federal agencies. Under this and $105.11 per MWh for small commercial and small industrial customers. arrangement, PPL Montana has a remaining commitment to spend $44 million InOctober 2007, PPL Electric conducted the second of six competitive solicita- between 2008 and 2040.

tions to purchase electricity generation supply in2010. Competitive bids were Settlement of Enron Receivables solicited for an additional 850 MW of generation supply. For this solicitation, the PPL had significant specific reserves related to receivables from Enron Corporation average generation supply price for 2010, including Pennsylvania gross receipts tax (Enron), which filed for bankruptcy in2001. The Enron reserves were for claims and an adjustment for line losses, is$105.08 per MWh for residential customers against Enron North America and Enron Power Marketing (Enron Subsidiaries),

and $105.75 per MWh for small commercial and small industrial customers.

and against Enron for certain guarantees of the Enron Subsidiaries' (Enron The third competitive solicitation will be held inMarch 2008.

Corporation Guarantees).

Energy Sales Commitments InMarch 2006, the U.S. Bankruptcy Court approved agreements between Inconnection with its marketing activities or associated with certain of its power Enron and PPL Energy Supply that settled litigation between PPL Energy Supply plants, PPL Energy Supply enters into long-term power sales contracts that extend and Enron regarding the validity and enforceability of the Enron Corporation for terms through 2017. All long-term contracts were executed at prices that Guarantees. As a result of the Bankruptcy Court's approval of the settlement of approximated market price at the time of execution. the Enron Corporation Guarantees litigation, an assessment of current market PPL Energy Supply has entered into full requirements and retail contracts price quotes for the purchase of Enron claims and the subsequent sale of its Enron with various counterparties. These contracts extend through 2014. Under these claims to an independent third party, PPL Energy Supply reduced the associated contracts, ifPPL Energy Supply's credit rating falls below investment grade or allowance for doubtful accounts in2006. The effect of this change was to increase PPL Energy Supply's contract exposure exceeds the established credit limit for the income from continuing operations and net income by $11million ($0.03 per contract, then the counterparty has the right to request collateral from PPL Energy share, basic and diluted). See "Guarantees and Other Assurances" for information Supply. At December 31, 2007 and 2006, an insignificant amount of collateral on PPL Energy Supply's potential repayment obligation related to the sale.

was posted under these contracts.

Legal Matters As a result of PPL Electric's first competitive solicitation process inJuly 2007, PPL and its subsidiaries are involved inlegal proceedings, claims and litigation in PPL EnergyPlus was one of the successful bidders for 671 MW, with unrelated the ordinary course of business. PPL and its subsidiaries cannot predict the outcome parties providing the remaining solicited generation supply.

of such matters, or whether such matters may result inmaterial liabilities.

PPL Montana HydroelectricLicense Commitments MontanaPower Shareholders'Litigation PPL Montana has 11hydroelectric facilities and one storage reservoir licensed by InAugust 2001, a purported class-action lawsuit was filed by a group of share-the FERC pursuant to the Federal Power Act under long-term licenses. Pursuant holders of Montana Power against Montana Power, the directors of Montana to Section 8(e) of the Federal Power Act, the FERC approved the transfer from Power, certain advisors and consultants of Montana Power, and PPL Montana.

Montana Power to PPL Montana of all pertinent licenses and any amendments The plaintiffs allege, among other things, that Montana Power was required to, inconnection with the Montana Asset Purchase Agreement.

and did not, obtain shareholder approval of the sale of Montana Power's genera-The Kerr Dam Project license was jointly issued by the FERC to Montana Power tion assets to PPL Montana in1999, and that the sale "was null and void ab initio."

and the Confederated Salish and Kootenai Tribes of the Flathead Reservation in Among the remedies that the plaintiffs are seeking isthe establishment of a 1985, and required Montana Power to hold and operate the project for 30 years. "resulting and/or constructive trust" on both the generation assets and all profits The license required Montana Power, and subsequently PPL Montana as a result earned by PPL Montana from the generation assets, plus interest on the amounts of the purchase of the Kerr Dam from Montana Power, to continue to implement subject to the trust. This lawsuit has been pending inthe U.S. District Court of a plan to mitigate the impact of the Kerr Dam on fish, wildlife and the habitat.

Montana, Butte Division, and the judge has placed this proceeding on hold PPL Corporation 2007 Annual Report 95

Notes to Consolidated Financial Statements pending the outcome of certain motions currently before the U.S. Bankruptcy Regulatory proceedings arising out of the California electricity supply situation Court for the District of Delaware, the resolution of which may impact this pro- have been filed at the FERC. The FERC has determined that all sellers of energy ceeding. The judge inthis case has not yet established a schedule to resume the into markets operated by the California ISO and the California Power Exchange, proceeding. InSeptember 2007, certain plaintiffs proposed a settlement of certain including PPL Montana, should be subject to refund liability for the period begin-claims not involving PPL and proposed a status conference to discuss their pro- ning October 2, 2000 through June 20, 2001, but the FERC has not yet ruled on posal. The judge held the status conference inJanuary 2008 and rejected the pro- the exact amounts that the sellers, including PPL Montana, would be required to posed settlement. PPL cannot predict the outcome of this matter. refund. Indecisions inSeptember 2004 and August 2006, the U.S. Court of Appeals for the Ninth Circuit held that the FERC had the additional legal authority to order Montana HydroelectricLitigation refunds for periods prior to October 2, 2000, and ordered the FERC to determine InNovember 2004, PPL Montana, Avista Corporation (Avista) and PacifiCorp whether or not it would be appropriate to grant such additional refunds. As part commenced an action for declaratory judgment inMontana First Judicial District of its August 2006 decision, the Court stayed the time to petition for rehearing Court seeking a determination that no lease payments or other compensation for of the decision and its mandate to the FERC in order to allow the parties time their hydropower facilities' use and occupancy of streambeds inMontana can be to conduct settlement discussions.

collected by the State of Montana. This request for declaratory judgment from InJune 2003, the FERC took several actions as a result of a number of related the Montana state court was brought following the dismissal of the State of investigations. The FERC terminated proceedings to consider whether to order Montana's federal lawsuit seeking such payments or compensation inthe U.S.

refunds for spot market bilateral sales made in the Pacific Northwest, including District Court of Montana, Missoula Division, on jurisdictional grounds. The State's sales made by PPL Montana, during the period December 2000 through June 2001.

federal lawsuit was founded on allegations that the beds of Montana's navigable In August 2007, the U.S. Court of Appeals for the Ninth Circuit reversed the FERC's rivers became state-owned trust property upon Montana's admission to statehood, decision and ordered the FERC to consider additional evidence. The FERC also and that the use of them for placement of dam structures, affiliated structures commenced additional investigations relating to "gaming" and bidding practices and reservoirs should, under a 1931 regulatory scheme enacted after all but one during 2000 and 2001, but neither PPL EnergyPlus nor PPL Montana believes it of the dams inquestion were constructed, trigger lease payments for use of land isa subject of these investigations.

beneath. InJuly 2006, the Montana state court approved a stipulation by the State Litigation arising out of the California electricity supply situation has been of Montana that it isnot seeking lease payments or other compensation from PPL filed in California courts against sellers of energy to the California ISO.The plaintiffs Montana for the period prior to PPL Montana's acquisition of the hydroelectric and intervenors in these legal proceedings allege, among other things, abuse of facilities inDecember 1999.

market power, manipulation of market prices, unfair trade practices and violations InOctober 2007, Avista announced that ithad entered into a settlement agree-of state antitrust laws, and seek other relief, including treble damages and attor-ment inits separate proceeding with the State of Montana providing, inpertinent neys' fees. While PPLs subsidiaries have not been named by the plaintiffs in these part, that Avista would make prospective lease payments of $4million per year for legal proceedings, one defendant in a consolidated court proceeding named PPL use of the State's streambeds (adjusted annually for inflation and subject to other Montana in its cross-complaint; this defendant denied any unlawful conduct but future adjustments). Under the settlement agreement, this prospective annual asserted that, ifit is found liable, the other generators and power marketers, payment by Avista resolves the State's claims for both past and future rent.

including PPL Montana, caused, contributed to and/or participated in the plain-Inthe October 2007 trial of this matter, the State of Montana asserted that tiffs' alleged losses. InJuly 2006, the Court dismissed this case as the result of a PPL Montana should make a prospective lease payment for use of the State's settlement under which PPL Montana was not required to make any payments streambeds of $6million per year (adjusted annually for inflation) and a retroactive or provide any compensation.

payment for the 2000-2006 period (including interest) of $41million.

In February 2004, the Montana Public Service Commission (PSC) initiated a PPL Montana continues to vigorously defend its position inthis proceeding.

limited investigation of the Montana retail electricity market for the years 2000 PPL cannot predict when a final decision may be rendered inthis proceeding or and 2001, focusing on how that market was affected by transactions involving the the ultimate outcome.

possible manipulation of the electricity grid in the western U.S. The investigation Regulatory Issues includes all public utilities and licensed electricity suppliers in Montana, including California ISO and Western Markets PPL Montana, as well as other entities that may possess relevant information. In Through its subsidiaries, PPL made $18 million of sales to the California ISO during June 2004, the Montana Attorney General served PPL Montana and more than the period from October 2000 through June 2001, of which $17 million has not 20 other companies with subpoenas requesting documents, and PPL Montana been paid to PPL subsidiaries. Given the myriad of electricity supply problems has provided responsive documents to the Montana Attorney General.

presently faced by the California electric utilities and the California ISO, PPL While PPL and its subsidiaries believe that they have not engaged in any cannot predict whether or when itwill receive payment. At December 31, 2007, improper trading or marketing practices affecting the California and western PPL continues to be fully reserved for underrecoveries of payments for these sales. markets, PPL cannot predict the outcome of the above-described investigations, 96 PPL Corporation 2007 Annual Report

lawsuits and proceedings or whether any PPL subsidiaries will be the target and used to serve PPL Electric's load. The complaint requested the FERC, among of any additional governmental investigations or named inother lawsuits or other things, to direct PPL Electric to refund to PJM $39 million, plus interest of refund proceedings. $8million, and for PJM to refund these same amounts to PECO.

InApril 2005, the FERC determined that PECO was entitled to reimbursement PJM Capacity Litigation for the transmission congestion charges that PECO asserted PJM erroneously billed InDecember 2002, PPL was served with a complaint against PPL, PPL EnergyPlus to itat the Elroy substation. The FERC set for additional proceedings before ajudge and PPL Electric filed inthe U.S. District Court for the Eastern District of the determination of the amount of the overcharge to PECO and which PJM market Pennsylvania by a group of 14 Pennsylvania boroughs that apparently alleged, participants were undercharged. PPL Electric recognized an after-tax charge of among other things, violations of the federal antitrust laws inconnection with the

$27 million inthe first quarter of 2005 for a loss contingency related to this matter.

pricing of installed capacity inthe PJM daily market during the first quarter of 2001 The pre-tax accrual was $47 million, with $39 million included in"Energy and certain breach of contract claims. These boroughs were wholesale customers purchases" on the Statement of Income, and $8million in"Interest Expense."

of PPL Electric. InApril 2006, the Court dismissed all of the federal antitrust claims InDecember 2006, PPL Electric and Ecelon filed with the FERC, pursuant to a and all of the breach of contract claims except for one breach of contract claim by November 2006 order, a modified offer of settlement (Compliance Filing). Under one of the boroughs. InMay 2007, the Court withdrew its April 2006 decision as to the Compliance Filing, PPL Electric would make a single payment through its one of the federal antitrust claims, but directed additional briefing on alternative monthly PJM bill of $38 million, plus interest through the date of payment, and grounds for dismissal of that claim. InSeptember 2007, the Court dismissed the PJM would include a single credit for this amount inPECO's monthly PJM bill.

one remaining federal antitrust claim. Such dismissals are subject to the plaintiffs' Through December 31, 2006, the estimated interest on this payment was $4 mil-right to appeal. PPL cannot predict the outcome of this proceeding.

lion, for a total PPL Electric payment of $42 million. Based on the Compliance Each of the U.S. Department of Justice - Antitrust Division, the FERC and the Filing, PPL reduced the recorded loss accrual by $5million at December 31, 2006.

Pennsylvania Attorney General conducted investigations regarding PP~s PJM InMarch 2007, the FERC entered an order approving the Compliance Filing.

capacity market transactions inearly 2001 and did not find any reason to take InApril 2007, PPL Electric paid PJM the full settlement amount of $43 million, action against PPL.

including additional interest of $1million recorded during the three months New EnglandInvestigation ended March 31, 2007. This proceeding isnow terminated.

InJanuary 2004, PPL became aware of an investigation by the Connecticut FERCMarket-Based Rate Authority Attorney General and the FERC's Office of Market Oversight and Investigation InDecember 1998, the FERC issued an order authorizing PPL EnergyPlus to make (OMOI) regarding allegations that natural gas-fired generators located inNew wholesale sales of electric power and related products at market-based rates. In England illegally sold natural gas instead of generating electricity during the that order, the FERC directed PPL EnergyPlus to file an updated market analysis week of January 12, 2004. PPL has responded to a data request of OMOI that indi-within three years of the date of the order, and every three years thereafter.

cated that PPL was not under suspicion of a regulatory violation, but that OM01 Market-based rate filings with the FERC were made in November 2004 by PPL was conducting an initial investigation. PPL also has responded to data requests EnergyPlus, PPL Electric, PPL Montana and most of PPL Generation's subsidiaries.

of ISO New England and data requests served by subpoena from the Connecticut These filings consisted of a Western market-based rate filing for PPL Montana and Attorney General. Both OMOI and ISO New England have issued preliminary an Eastern market-based rate filing for most of the other PPL subsidiaries inthe reports finding no regulatory or other violations concerning these matters. While PJM region.

PPL does not believe that itcommitted any regulatory or other violations concern-InSeptember 2005, the FERC issued an order conditionally approving the ing the subject matter of these investigations, PPL cannot predict the outcome of Eastern market-based rate filing, subject to PPL subsidiaries making a compliance these investigations.

filing providing further support that they cannot erect other non-transmission PJM Billing barriers to entry into the generation market. The PPL subsidiaries made this com-InDecember 2004, Fuelon Corporation, on behalf of its subsidiary, PECO Energy, pliance filing inOctober 2005, which the FERC accepted.

Inc. (PECO), filed a complaint against PJM and PPL Electric with the FERC alleging InMay 2006, the FERC issued an order rejecting the claims of the various that PJM had overcharged PECO from April 1998 through May 2003 as a result of parties inthe proceeding regarding PPL's Western market-based rate filing and an error by PJM inthe State Estimator Model used inconnection with billing all granting PPL Montana market-based rate authority inNorthWestern's control PJM customers for certain transmission, spot market energy and ancillary services area. InJuly 2007, the FERC denied two outstanding requests for rehearing of the charges. Specifically, the complaint alleged that PJM mistakenly identified PPL FERC order. Subsequently, various parties inthis proceeding filed appeals of the Electric's Elroy substation transformer as belonging to PECO and that, as a conse- FERC order with the U.S. Court of Appeals for the Ninth Circuit. InSeptember quence, during times of congestion, PECO's bills for transmission congestion from 2007, a party also filed a complaint with the FERC seeking additional refunds in PJM erroneously reflected energy that PPL Electric took from the Elroy substation the event that the U.S. Court of Appeals overturns or reverses the FERC order.

PPL Corporation 2007 Annual Report 97

Notes to Consolidated Financial Statements While PPL Montana continues to believe that it does not have market power in based rate authority for certain of the suppliers. PPL EnergyPlus is not identified in NorthWestern's control area and that ithas no obligations to make additional the complaint as a supplier which allegedly engaged in market manipulation or sales of power to NorthWestern regardless of the outcome of this proceeding, which should have its market-based rate authority revoked.

itcannot predict the outcome of these proceedings. In June 2007, PPL EnergyPlus filed an answer requesting dismissal of the InJanuary 2008, pursuant to the schedule established by FERC orders, PPL's complaint. In July 2007, the Illinois Attorney General asked the FERC to hold this subsidiaries made another market-based rate renewal filing for all Eastern subsid- proceeding in abeyance pending a possible settlement among the Illinois parties, iaries inthe PJM, New England and New York regions, including PPL Electric, stating that such a settlement, iffinalized, would result in dismissal of its FERC PPL EnergyPlus and most of PPL Generation's subsidiaries. complaint. In August 2007, the Illinois Attorney General, along with other parties, Currently, if aseller isgranted market-based rate authority by the FERC, it filed a motion to dismiss the complaint with prejudice due to a retail rate and may enter into power contracts during the time period for which such authority procurement procedure settlement agreement reached among a number of has been granted. Ifthe FERC determines that the market isnot workably compet- interested parties inthe State of Illinois. In October 2007, the FERC dismissed the itive or the seller possesses market power or isnot charging "just and reasonable" complaint with prejudice and terminated the proceeding.

rates, the FERC institutes prospective action. Any contracts entered into pursuant Subsequent to the Illinois Attorney General's complaint, two class actions to the FERC's market-based rate authority remain ineffect and are generally sub- were filed in Illinois State Court in Cook County against all successful bidders in ject to a high standard of review before the FERC can order any changes. Recent the Illinois auction, including PPL EnergyPlus, alleging violations of unfair trade court decisions by the U.S. Court of Appeals for the Ninth Circuit have raised issues practices laws. The factual allegations appear similar to those in the Attorney that may make itmore difficult for the FERC to continue its program of promoting General's complaint. InDecember 2007, the judge issued an order dismissing the wholesale electricity competition through market-based rate authority. These class action cases without prejudice to seek relief from either the FERC or the court decisions permit retroactive refunds and a lower standard of review by the Illinois Commerce Commission. While PPL does not currently believe that these FERC for changing power contracts, and could have the effect of requiring the matters will have a material adverse impact on the financial condition of PPL, FERC to review inadvance most, ifnot all, power contracts. The FERC has not yet it cannot predict the outcome of this matter.

taken action inresponse to these recent court decisions, and the U.S. Supreme Wallingford Cost-Based Rates Court has decided to review one of these decisions. At this time, PPL cannot predict In January 2003, PPL Wallingford and PPL EnergyPlus sought from the FERC the impact of these court decisions on the FERC's future market-based rate cost-based payments based upon the RMR status of four units at the Wallingford, authority program or on PPL's business.

Connecticut generating facility. The FERC initially denied RMR status for the units, Illinois Auction Complaints and PPL appealed to the U.S. Court of Appeals for the District of Columbia Circuit.

As a result of the Electric Service Customer Choice and Rate Relief Law of 1997, the Upon remand by the Court, the FERC reconsidered its decision and in April 2006, Illinois General Assembly provided the opportunity for power suppliers to compete conditionally approved the RMR agreement effective February 1, 2003, subject to to supply power to Illinois electric utilities to meet the full requirements of all refund and hearing or settlement procedures to resolve whether the Wallingford non-shopping Illinois electricity customers. The Illinois Commerce Commission units needed the RMR agreement, the proposed cost-based rates under the (ICC) conducted an auction for supply of up to 25,474 MW of peak load and hired RMR agreement and the amounts to be recovered for past periods under the an independent Auction Monitor for this purpose. PPL EnergyPlus submitted bids RMR agreement.

inthis Illinois auction process and, as a result, inSeptember 2006 entered into In September 2006, PPL and certain of the parties filed a written settlement three agreements with Commonwealth Edison Company to supply a portion of with the FERC. Under the terms of the settlement, PPL would receive a total of its full requirements service. These agreements commenced inJanuary 2007 and $44 million in settlement of amounts due under the RMR agreement for the expire after 17, 29 and 41 months. During peak hours, PPL EnergyPlus' obligation period February 1,2003 through May 31, 2006, and would receive prospective to supply Commonwealth Edison may reach 700 MW. At the conclusion of the RMR payments until the agreement terminated. The $44 million in past payments auction process, the Auction Monitor and the ICC Staff both concluded that the (plus interest) would be paid to PPL in approximately equal monthly installments auction process was competitive. over a two-year period. In March 2007, the FERC issued an order approving the InMarch 2007, the Illinois Attorney General filed a complaint at the FERC settlement agreement, subject to the condition that the parties file revisions to against all of the successful bidders inthis auction process, including PPL provide that the FERC will be bound to the "just and reasonable" and not the "public interest" standard of review in its consideration of modifications to the EnergyPlus and fifteen other suppliers, alleging market manipulation and request-ing that the FERC investigate such allegations, requesting refunds for sales at agreement. InOctober 2007, the FERC approved the parties' compliance filing prices above just and reasonable rates and seeking revocation of the FERC market- for the March 2007 order.

98 PPL Corporation 2007 Annual Report

In June 2007, the RMR agreement terminated in accordance with the settle- ISO New England and MEPCO request that authorized appointment of a settle-ment to allow the four Wallingford RMR units to participate in ISO New England's ment judge and deferred the effective date of the MEPCO roll-in proposal to a locational forward reserve market. The ISO New England locational forward future date to be determined.

reserve market provides revenues to peaking generation units that can quickly In December 2007, PPL recorded an additional $2million ($1million after tax) come on line from reserve status to meet reliability requirements. charge to fully impair these transmission rights. This charge isincluded in"Other In September 2007, both PPL and ISO New England agreed to start making operation and maintenance" on the Statement of Income.

payments inaccordance with the settlement agreement. Consequently, PPL Montana PublicService Commissioner'sLitigation paid ISO New England $10 million for amounts overcollected from June 2006 to InMay 2006, one of the commissioners of the Montana PSC commenced an action May 2007 and ISO New England started paying PPL monthly installments of inMontana First Judicial District Court against PPL Montana and the Montana PSC approximately $2 million, which will be received for 24 months. During the third seeking to cause the Montana PSC to reverse its 1999 order consenting to EWG quarter of 2007, PPL recognized $55 million of revenue and $4 million of interest status for PPL Montana's power plants. In1999, the FERC had granted the plants income related to the settlement agreement, of which $21 million had been previ-EWG status and the authority to sell electricity produced at market-based rates, ously collected. Of the total amounts recognized during the quarter, $57 million, and the Montana PSC consented to this status for PPL Montana's plants under a or $33 million after tax (or $0.09, basic and diluted, per share), related to periods provision of federal law. InSeptember 2006, the Court granted PPL Montana's and prior to 2007.

the Montana PSC's motions to dismiss this action. The plaintiff has appealed the Maine Transmission Line Rates dismissal of the lawsuit to the Montana Supreme Court. InFebruary 2008, the PPL currently holds 100 MW of firm point-to-point transmission service rights Montana Supreme Court upheld the lower court's decision inthis matter.

associated with an existing transmission line owned by Maine Electric Power IRS Synthetic Fuels Tax Credits Company, Inc. (MEPCO). MEPCO is owned by Central Maine Power Company, PPL, through its subsidiaries, has interests intwo synthetic fuel production Bangor Hydro Electric Company and Maine Public Service Company. These trans-facilities: the Somerset facility located inPennsylvania and the Tyrone facility mission rights enable PPL to sell energy and capacity from New Brunswick, located inKentucky. PPL has received tax credits pursuant to Section 29/45K of the Canada into ISO New England.

Internal Revenue Code based on the sale of synthetic fuel from these facilities. The In August 2007, MEPCO, ISO New England and other New England transmis-Section 29/45K tax credit program expired at the end of 2007, and production of sion owners (the Filing Parties) submitted a filing to the FERC seeking to roll the synthetic fuel at these facilities and all other synthetic fuel operations ceased as of revenue requirement of the MEPCO transmission facilities into the regional trans-December 31, 2007. PPL isinthe process of retiring its interests inthese facilities.

mission rates in New England and to change the ISO New England market rules To qualify for the Section 29/45K tax credits, synthetic fuel must have been concerning the use of the transmission line for energy and capacity. PPL protested produced and sold prior to December 31, 2007, and satisfied three primary this proposal because it fails to preserve and protect pre-existing firm transmission conditions: (i)there must have been a significant chemical change inthe coal rights currently held on the MEPCO transmission facilities by PPL EnergyPlus. Ifthe feedstock, (ii)the product must have been sold to an unaffiliated entity, and proposal were accepted by the FERC as filed, the value of PPL's pre-existing rights (iii)the production facility must have been placed inservice before July 1,1998.

on the MEPCO line would be adversely affected.

Inaddition, Section 29/45K provided for the synthetic fuel tax credit to begin In September 2007, PPL recorded a $21 million ($12 million after tax) impair-to phase out when the relevant annual reference price for crude oil, which isthe ment of the transmission rights based on their estimated fair value as determined domestic first purchase price (DFPP), fell within a designated range and to be by an internal model and other analysis. This charge is included in"Other operation eliminated when the DFPP exceeds the range. The phase-out range was adjusted and maintenance" on the Statement of Income. These transmission rights are a annually for inflation. Currently, the DFPP ispublished by the IRSinApril for the component of the Supply segment.

prior year and iscalculated based on the annual average wellhead price per barrel In October 2007, the FERC issued an order accepting the Filing Parties' proposal, for all unregulated domestic crude oil.

subject to modification of certain matters presented in the filing. Based on the PPL currently estimates the phase-out range for 2007 to begin at about October 2007 Order, PPL EnergyPlus opted to terminate its contractual rights on

$57 per barrel (DFPP) and the tax credits to be totally eliminated at about $71 per the MEPCO line upon effectiveness of the MEPCO roll-in. Due to complications barrel (DFPP). PPL currently expects a phase-out of approximately 56% of the implementing the proposal as modified by the FERC, in November 2007, ISO New gross tax credits produced in2007, based on its estimate of the DFPP reference England and MEPCO filed with the FERC an expedited motion to delay the effec-price and the phase-out range applicable for 2007. PPL cannot currently predict or tiveness and hold a technical conference or, in the alternative, cancel the MEPCO estimate with certainty the final DFPP reference price for crude oil or the phase-roll-in. On February 4, 2008, the FERC issued a further order in response to the out range for 2007.

PPL Corporation 2007 Annual Report 99

Notes to Consolidated Financial Statements The synthetic fuel produced at the Somerset and Tyrone facilities resulted o The Price-Anderson Amendments Act of 1988, which provides the framework in an aggregate estimated recognition of tax credits of $321 million for Somerset for nuclear liability protection, was extended to 2025.

and $118 million for Tyrone through December 31, 2007, including estimated " Federal support will be available for certain clean coal power initiatives, nuclear amounts for 2007. After considering the estimated 2007 phase-out of approxi- power projects and renewable energy technologies.

mately 56%, PPL recognized tax credits of $29 million for Somerset and $23 mil-The implementation of the 2005 Energy Act requires proceedings at the state lion for Tyrone for 2007.

level and the development of regulations, some of which have not been finalized, PPL had economic hedge transactions in 2007 that mitigated PPL's tax by the FERC, the DOE and other federal agencies. PPL cannot predict when all of credit phase-out risk due to an increase of the DFPP reference price in 2007. The these proceedings and regulations will be finalized.

mark-to-market value of these hedges is reflected in "Energy-related businesses" The implemented Reliability Standards have the force and effect of law, and revenues on the Statement of Income. The hedge transactions were settled in apply to certain users of the bulk power electricity system, including electric utility December 2007.

companies, generators and marketers. The FERC has indicated that it intends to PPL performed impairment reviews of both its synthetic fuel production vigorously enforce the Reliability Standards using, among other means, civil penalty facilities during the second quarter of 2006. The reviews were prompted by the authority. Under the Federal Power Act, the FERC may assess civil penalties of up temporary suspension of operations at Somerset in April 2006, the uncertainty to $1million per day for certain violations. The first group of Reliability Standards surrounding the future operations of each of the facilities and continued observed approved by the FERC became effective in June 2007. In September 2007, PPL and forecasted high crude oil prices at that time. PPL determined that the net book Electric self-reported to the RFC, a regional reliability entity designated to enforce value of the facilities exceeded the projected undiscounted cash flows. Therefore, the Reliability Standards, that it had identified a potential violation of certain in the second quarter of 2006, PPL recorded charges totaling $10 million ($6 mil-reliability requirements and submitted an accompanying mitigation plan. In lion after tax) to fully impair its synfuel-related assets based on an internal model December 2007, RFC notified PPL Electric that it had completed its initial review and other analysis. The impairment charges were reflected in "Energy-related and found an "Alleged Violation" of one NERC Reliability Standard requirement.

businesses" expenses on the Statements of Income. The assets of the facilities PPL Electric cannot predict the final outcome of the RFC's inquiry into the are a component of the Supply segment.

Alleged Violation or what, if any, penalties may be assessed ifa violation is deter-PPL also purchased synthetic fuel from unaffiliated third parties, at prices mined in fact to have occurred. PPL and its subsidiaries cannot predict the impact below the market price of coal, for use at its coal-fired power plants. Fuel cost generally that the Reliability Standards will have on PPL and its subsidiaries, savings in2007, 2006, and 2005 were $24 million, $18 million and $24 million.

including on its capital and operating expenditures, however, compliance costs In October 2003, it was reported that the U.S. Senate Permanent could be significant.

Subcommittee on Investigations, of the Committee on Governmental Affairs, PPL also cannot predict with certainty the impact of the other provisions of had begun an investigation of the synthetic fuel industry and its producers.

the 2005 Energy Act and any related regulations on PPL and its subsidiaries.

That investigation is ongoing. PPL cannot predict when the investigation will be completed or the potential results of the investigation. Environmental Matters - Domestic Due to the environmental issues discussed below or other environmental matters, Energy Policy Act of 2005 PPL subsidiaries may be required to modify, curtail, replace or cease operating In August 2005, President Bush signed into law the Energy Policy Act of 2005 certain facilities to comply with statutes, regulations and actions by regulatory (the 2005 Energy Act). The 2005 Energy Act is comprehensive legislation that bodies or courts. In this regard, PPL subsidiaries also may incur capital expendi-substantially affects the regulation of energy companies. The Act amends federal tures or operating expenses inamounts which are not now determinable, but energy laws and provides the FERC with new oversight responsibilities. Among could be significant.

the important changes that have been or will be implemented as a result of this legislation are: Air

" The Public Utility Holding Company Act of 1935 was repealed. PUHCA signif- The Clean Air Act deals, in part, with emissions causing acid deposition, attainment icantly restricted mergers and acquisitions inthe electric utility sector. of federal ambient air quality standards and toxic air emissions and visibility in the

" The FERC has appointed the NERC as the organization to establish and enforce U.S. Amendments to the Clean Air Act requiring additional emission reductions mandatory reliability standards (Reliability Standards) regarding the bulk power are likely to continue to be proposed in the U.S. Congress. The Clean Air Act allows system, and the FERC will oversee this process and independently enforce the states to develop more stringent regulations and insome instances, as discussed Reliability Standards, as further described below. below, Pennsylvania and Montana have chosen to do so.

" The FERC will establish incentives for transmission companies, such as Clean Air InterstateRule performance-based rates, recovery of the costs to comply with reliability rules Citing its authority under the Clean Air Act, in 1997, the EPA developed new and accelerated depreciation for investments in transmission infrastructure.

standards for ambient levels of ozone and fine particulates in the U.S. These stan-dards have been upheld following court challenges. To facilitate attainment of 100 PPL Corporation 2007 Annual Report

these standards, the EPA has promulgated the Clean Air Interstate Rule (CAIR) for Pennsylvania has adopted its own, more stringent mercury rules.

28 midwestern and eastern states, including Pennsylvania, to reduce sulfur diox- Pennsylvania's rules establish mercury emission limits for each coal-fired generat-ide emissions by about 50% by 2010 and to extend the current seasonal program ing facility beginning in2010, and require that mercury emission allowances for reduction innitrogen oxides emissions to a year-round program starting in under the EPA's cap-and-trade program under CAMR be met at each unit without 2009. The CAIR requires further reductions inthe CAIR region, starting in2015, the benefit of an emissions trading program, and that tighter emission limits insulfur dioxide of 30% from 2010 levels, and nitrogen oxides during the ozone based on the second phase of the CAMR requirements be accelerated to begin in season of 17% from 2009 levels. The CAIR allows these reductions to be achieved 2015. PPL cannot predict what Pennsylvania may do with the mercury allowances through cap-and-trade programs. provisions, as the CAMR cap-and-trade program on which those allowances were Inaddition, the EPA has recently proposed tightening the ambientair quality based has now been overturned.

standard for ozone. Amore stringent standard could result inrequirements to PPL expects that itcan achieve the 2010 requirements under Pennsylvania's reduce emissions of nitrogen oxides beyond those required under the CAIR. If mercury rules with only the addition of chemical injection systems. This expecta-additional reductions were required, the costs are not now determinable, but tion isbased on the co-benefits of mercury removal from the scrubbers expected could be significant. to be inplace at its Pennsylvania plants as of 2010, and the SCRs already inplace at Inorder to continue meeting existing sulfur dioxide reduction requirements Montour. PPL currently estimates that the capital cost of such chemical injection of the Clean Air Act, including the CAIR, PPL isinstalling flue gas desulfurization systems at its Pennsylvania plants will be approximately $23 million.

systems (scrubbers) at its Montour and Brunner Island plants. The scrubbers for To meet Pennsylvania's 2015 requirements, adsorption/absorption technology both Montour units and Unit 3 at Brunner Island are expected to be in-service with fabric filters may be required at most PPL Pennsylvania coal-fired generating during 2008 and the scrubber for Units 1 and 2 at Brunner Island isexpected to units. Based on current analysis and industry estimates, PPL estimates that ifthis be in-service during 2009. Based on expected levels of generation and projected technology were required at every one of its Pennsylvania units the aggregate emission allowance prices, PPL has determined that itismore cost effective to capital cost of compliance would be approximately $530 million.

install these scrubbers than to purchase significant additional emission allow- Montana also has finalized its own more stringent rules that would require ances to make up the emission allowance shortfalls that would otherwise occur. by 2010 every coal-fired generating plant inthe state to achieve reduction levels Inorder to meet the year-round reductions innitrogen oxides under the CAIR, more stringent than the CAMR's 2018 requirements. PPL presently plans to install PPL's current plan isto operate the SCRs at Montour Units 1 and 2 year-round, chemical injection systems to meet these requirements. PPL estimates its share of optimize emission reductions from the existing combustion controls and purchase the capital cost for these systems inMontana would be approximately $8million.

any needed emission allowances on the open market. PPL's current installation Because enhanced chemical injection technologies may not be sufficiently devel-plan for the scrubbers and other pollution control equipment (primarily aimed at oped to meet this level of reductions by 2010, there isa risk that adsorption/

sulfur dioxide, particulate and nitrogen oxides with co-benefits for mercury emis- absorption technology with fabric filters at both Colstrip and Corette would be sions reduction) through 2012 reflects a total cost of approximately $1.6 billion, required. Based on current analysis and industry estimates, PPL estimates that of which $0.9 billion has already been spent. PPL expects a 30 MW reduction in ifthis technology were required, its capital cost to achieve compliance at its net generation capability at each of the Brunner Island and Montour plants, due to Montana units would be approximately $140 million.

the estimated increases instation service usage during the scrubber operation. PPL expects both Pennsylvania's and Montana's mercury rules to be challenged incourt. PPL cannot predict the outcome of such actions.

Mercury As PPL continues to explore what mercury control technology(s) will be Also citing its authority under the Clean Air Act, the EPA issued the Clean Air selected for installation at its units, one concern that needs to be assessed along Mercury Regulations (CAMR) that affect coal-fired plants. These regulations with the effectiveness of mercury reductions isthe unintended potential increase established acap-and-trade program to take effect intwo phases, with a first inparticulate emissions and whether that increase would trigger Prevention of phase to begin inJanuary 2010, and a second phase with more stringent require-Significant Deterioration/New Source Review (PSD/NSR).

ments to begin inJanuary 2018. However, inFebruary 2008 the U.S. Court of This concern arises because certain technologies use chemical additives to Appeals for the District of Columbia Circuit overturned the EPA's rule. Under this "collect" and or convert mercury so that the existing pollution controls will more opinion, the EPA must either properly remove mercury from regulation under the effectively remove mercury. Use of such additives, depending on the amount used hazardous air pollutant provisions of the Clean Air Act or develop standards and the performance of existing particulate controls, could result inan increase requiring maximum achievable control technology for mercury emissions.

The ruling isnot expected to affect PPLs current plans to comply with state inthe particulate emissions and might trigger PSD/NSR. IfPSD/NSR istriggered, then controls cannot be installed until a new source permit isobtained, which regulations inPennsylvania and Montana as discussed below. PPL continues to would include extensive modeling, analysis and implementation of best available review the federal court opinion to determine whether it has any effect on state control technology for particulates. This issue isundergoing further internal regulations inthe long term.

review and analysis.

PPL Corporation 2007 Annual Report 101

Notes to Consolidated Financial Statements Regional Haze and Visibility believes itisunlikely the EPA will pursue the information requests issued to PPL Inaddition to the above rules, the Clean Air Visibility Rule was issued by the EPA Montana's Corette and Colstrip plants by EPA Region 8 in2000 and 2003, respec-on June 15, 2005, to address regional haze or regionally-impaired visibility caused tively, and to PPL Generation's Martins Creek plant by EPA Region 3 in2002.

by multiple sources over awide area. The rule defines Best Available Retrofit However, states and environmental groups also have been bringing enforcement Technology (BART) requirements for electric generating units, including presump- actions alleging violations of "New Source" requirements by coal-fired plants, tive limits for sulfur dioxide and nitrogen oxides controls for large units. Under the and PPL isunable to predict whether such state or citizens enforcement actions BART rule, PPL has submitted to the Pennsylvania DEP and the EPA (Region 8), will be brought with respect to any of its affiliates' plants.

which administers the BART program for Montana, its analyses of the visibility Finally, ifthe EPA regulates carbon dioxide emissions pursuant to the recent impacts of sulfur dioxide, nitrogen oxides and particulate matter emissions from U.S. Supreme Court decision on global climate change, then carbon dioxide emis-plants covered by the BART rule inPennsylvania and Montana, respectively. In sions could become subject to the PSD/NSR provisions of the Clean Air Act. The Pennsylvania, this includes Martins Creek Units 3 and 4,Brunner Island Units 2 implications are uncertain, as currently no permitting authorities have imple-and 3 and Montour Units 1and 2.InMontana, this includes Colstrip Units 1and 2 mented the PSD/NSR program for carbon dioxide emissions.

and Corette. PPL's analyses have shown that further reductions are not needed.

Opacity The Pennsylvania DEP has not yet acted on the reports. However, the EPA has The New Jersey DEP and some New Jersey residents have raised environmental responded to PPL's reports for Colstrip and Corette and has requested further infor-concerns with respect to the visible opacity of emissions from the oil-fired units mation and analysis. PPL cannot predict whether any additional reductions will be at the Martins Creek plant. Similar issues also are being raised by the Pennsylvania required in Pennsylvania or Montana. Ifadditional reductions are required, the DEP. PPL iscontinuing to study and negotiate the matter with the Pennsylvania costs are not now determinable, but could be significant.

DEP. Ifitisdetermined that actions must be taken to address the visible opacity of New Source Review these emissions, such actions could result incosts that are not now determinable, In1999, the EPA initiated enforcement actions against several electric generators, but could be significant. InSeptember 2007, inaccordance with a 2003 agreement asserting that older, coal-fired power plants operated by those generators have, with the New Jersey DEP and the Pennsylvania DEP, PPL shut down Martins Creek's over the years, been modified inways that subjected them to more stringent two 150 MW coal-fired generating units, but may replace or repower them at any "New Source" requirements under the Clean Air Act. The EPA subsequently issued time so long as it complies with all applicable state and federal requirements.

notices of violation and commenced enforcement activities against other generators.

Global Climate Change However, inrecent years, the EPA has shifted its position on New Source There isa growing concern nationally and internationally about global climate Review. In2003, the EPA issued changes to its regulations that clarified what change and the contribution of greenhouse gas emissions including, most projects are exempt from "New Source" requirements as routine maintenance significantly, carbon dioxide. This concern has led to increased federal legislative and repair. However, these regulations were stayed and subsequently struck down proposals, actions at state or local levels, as well as litigation relating to green-by the U.S. Court of Appeals for the District of Columbia Circuit. Furthermore, in house gas emissions, including an April 2007 U.S. Supreme Court decision holding April 2007, the U.S. Supreme Court upheld the annual emissions test under which that the EPA has the authority to regulate greenhouse gas emissions from new the EPA had found emissions increases at the plants included inits enforcement motor vehicles under the Clean Air Act. The EPA has also agreed following this initiative. PPL istherefore continuing to operate under the "New Source" regula-decision to a remand of New Source Performance Standards (NSPS) applicable tions as they existed prior to the EPA's 2003 clarifications.

to stationary sources to reconsider its approach to including greenhouse gases InOctober 2005, the EPA proposed changing its rules on how to determine under such rules. Ifthe EPA concludes greenhouse gases from motor vehicles whether a project results inan emissions increase and istherefore subject to pose an endangerment to public health or welfare, this could lead to regulation of review under the "New Source" regulations. The EPA's proposed tests are consistent stationary source carbon dioxide emissions. The EPA might also proceed directly with the position of energy companies and industry groups and, ifadopted, would under the NSPS to regulate greenhouse gases from stationary sources. Also, increased substantially reduce the uncertainties under the current regulations. PPL cannot pressure for carbon dioxide emissions reduction isbeing initiated by investor predict whether these proposed new tests will be adopted. Inaddition to proposing and environmental organizations and the international community. Inaddition, these new tests, the EPA also announced inOctober 2005 that it will not bring a nuisance claim brought by a number of states against other large electric new enforcement actions with respect to projects that would satisfy the proposed generating companies was dismissed by a federal district court inNew York but new tests or the EPA's 2003 clarifications referenced above. Accordingly, PPL remains pending on appeal inthe U.S. Court of Appeals for the Second Circuit.

102 PPL Corporation 2007 Annual Report

PPL believes future governmental legislation and regulations that caps or The Pennsylvania DEP filed a complaint in Commonwealth Court against PPL taxes carbon dioxide emissions from power plants are likely, although technology Martins Creek and PPL Generation, alleging violations of various state laws and to efficiently capture and sequester carbon dioxide emissions is not presently regulations and seeking penalties and injunctive relief. The Delaware Riverside available. At the federal level such regulation has received support from the Conservancy and several citizens have been granted the right, without objection majority leadership in both the U.S. Senate and U.S. House of Representatives. PPL from PPL, to intervene inthe Pennsylvania DEP's action. PPL and the Pennsylvania supports a national program and has publicly supported the key concepts of the DEP have reached a tentative settlement for the alleged violations. The Intervenors "Low Carbon Economy Act of 2007" introduced inthe Senate inJuly 2007, including have objected to this settlement. The proposed settlement requires PPL to pay an economy-wide approach, a gradual phase-in of targets and timetables and $1.5 million in penalties and reimbursement of the DEP's costs, and requires PPL cost containment measures to cap the cost to the economy. to submit a report on the completed studies of possible natural resource damages.

At the regional level, ten northeastern states signed a Memorandum of PPL submitted the assessment report to the agencies inJune 2007. However, the Understanding (MOU) agreeing to establish a cap-and-trade program, called the agencies may require additional studies. Inaddition, PPL expects the trustees and Regional Greenhouse Gas Initiative (RGGI). The program commences inJanuary the Delaware River Basin Commission to seek to recover their costs and/or any 2009 and calls for stabilization of carbon dioxide emissions, at base levels estab- damages they determine were caused by the release.

lished in 2005, from electric power plants larger than 25 MW in capacity. The During 2005, PPL Energy Supply recognized a $48 million charge ($31 million MOU also provides for a 10% reduction incarbon dioxide emissions from base after tax) inconnection with the then-expected on-site and off-site costs relating levels by 2019. Asimilar effort is under way in the western U.S. (the Western to the remediation. Based on its ongoing assessment of the expected remediation Regional Climate Action Initiative or "WCO"), and Midwestern states have recently costs, in 2006, PPL Energy Supply reduced the estimate inconnection with the agreed to form another regional climate change program. current expected costs of the leak by $11million, of which $10 million related to Pennsylvania and Montana have not, at this time, established mandatory off-site costs and the remainder to on-site costs. The reduction was included in programs to regulate carbon dioxide and other greenhouse gases. Pennsylvania "Other operation and maintenance" expense on the Statement of Income. At has not stated an intention to join RGGI, but has declared support for state action December 31, 2007, management's best estimate of the probable loss associated on climate change and Montana has expressed an interest injoining WCI. PPL has with the Martins Creek ash basin leak remained at $37 million, of which $31mil-conducted an inventory of its carbon dioxide emissions and is continuing to evalu- lion relates to off-site costs, and the balance to on-site costs. Based on actual ate various options for reducing, avoiding, off-setting or sequestering its carbon costs incurred and recorded to date, at December 31, 2007, the remaining contin-dioxide emissions, In 2007, PPL's power plants emitted in excess of approximately gency for this remediation was $9 million. PPL cannot be certain of the outcome 31 million tons of carbon dioxide (based on PPLs equity share of these assets). of the action initiated by the Pennsylvania DEP, the outcome of the natural PPL believes that the regulation of greenhouse gas emissions may have a resource damage assessment, the outcome of any lawsuit brought by the citizens material impact on its capital expenditures and operations, but the costs are not and businesses and the exact nature of any other regulatory or other legal actions now determinable. PPL also cannot predict the impact that any pending or future that may be initiated against PPL, PPL Energy Supply or their subsidiaries as a federal or state legislation regarding more stringent environmental standards result of the disposal basin leak.

could have on PPL or its subsidiaries.

Basin Seepage - Pennsylvania Water/Waste Seepages have been detected at active and retired wastewater basins at various Martins Creek Fly Ash Release PPL plants, including the Montour, Brunner Island and Martins Creek generating In August 2005, there was a release of approximately 100 million gallons of water facilities. PPL has completed an assessment of some of the seepages at the containing fly ash from a disposal basin at the Martins Creek plant used in con- Montour and Brunner Island facilities and is working with the Pennsylvania DEP to nection with the operation of the two 150 MW coal-fired generating units at the implement abatement measures for those seepages. PPL is continuing to conduct plant. This resulted inash being deposited onto adjacent roadways and fields, and assessments of other seepages at the Montour and Brunner Island facilities as well into a nearby creek and the Delaware River. The leak was stopped, and PPL has as seepages at the Martins Creek facility to determine the appropriate abatement determined that the problem was caused by a failure in the disposal basin's dis- actions. PPL's 2008 - 2012 capital budgets include $50 million to upgrade and/or charge structure. PPL has conducted extensive clean-up and completed studies, replace certain wastewater facilities in response to the seepage and for other facil-in conjunction with a group of natural resource trustees and the Delaware River ity changes. The potential additional cost to address the identified seepages or Basin Commission, evaluating the effects of the release on the river's sediment, other seepages at all of PPL's Pennsylvania plants is not now determinable, but water quality and ecosystem. These studies do not show any environmental could be significant.

damage attributable to the release.

PPL Corporation 2007 Annual Report 103

Notes to Consolidated Financial Statements Basin Seepage - Montana Superfund and Other Remediation InMay 2003, approximately 50 plaintiffs brought an action now pending at the PPL Electric isa potentially responsible party at several sites listed by the EPA Montana Sixteenth Judicial District Court, Rosebud County, against PPL Montana under the federal Superfund program, including the Columbia Gas Plant Site.

and the other owners of the Colstrip plant alleging property damage from seep- Clean-up actions have been or are being undertaken at all of these sites, the costs age from the freshwater and wastewater ponds at Colstrip. In February 2007, six of which have not been significant. However, should the EPA require significantly plaintiffs filed a separate lawsuit inthe same court against the Colstrip plant own- different or additional measures inthe future, the costs of such measures are not ers asserting similar claims. PPL Montana has undertaken certain groundwater determinable, but could be significant.

investigation and remediation measures at the Colstrip plant to address ground- PPL Electric and PPL Gas Utilities have been remediating several sites that water contamination alleged by the plaintiffs as well as other groundwater con- were not being addressed under another regulatory program such as Superfund, tamination at the plant. These measures include proceeding with extending city but for which PPL Electric or PPL Gas Utilities may be liable for remediation. These water to certain residents who live near the plant, some of whom are plaintiffs in include a number of coal gas manufacturing facilities formerly owned or operated the original litigation. Based on a revised settlement offer at a September 2007 by PPL Electric; coal gas manufacturing facilities and potential mercury contami-mandatory mediation session with the original 2003 plaintiffs, PPL Montana has nation from gas meters and regulators at PPL Gas Utilities' sites and plugging of recorded an additional reserve of $1million for its share of the proposed settle- abandoned wells by PPL Gas Utilities.

ment cost. Atrial isscheduled for June 2008. PPL Montana may incur further Depending on the outcome of investigations at sites where investigations costs based on the outcome of the lawsuits and its additional groundwater inves- have not begun or have not been completed, the costs of remediation and other tigations and any related remedial measures, which costs are not now determin- liabilities could be substantial. PPL and its subsidiaries also could incur other non-able, but could be significant. remediation costs at sites included inthe consent orders or other contaminated sites, the costs of which are not now determinable, but could be significant.

Other Issues The EPA has significantly increased the water quality standard for arsenic. The The EPA isevaluating the risks associated with naphthalene, a chemical by-revised standard became effective inJanuary 2006 and at this time applies only product of coal gas manufacturing operations. As a result of the EPA's evaluation, individual states may establish stricter standards for water quality and soil clean-to drinking water. The revised standard may result inaction by individual states up. This could require several PPL subsidiaries to take more extensive assessment that could require several PPL subsidiaries to further treat wastewater or take and remedial actions at former coal gas manufacturing facilities. The costs to PPL abatement action at their power plants, or both. The cost of complying with any such requirements isnot now determinable, but could be significant. of complying with any such requirements are not now determinable, but could The EPA finalized requirements in2004 for new or modified cooling water be significant.

intake structures. These requirements affect where generating facilities are built, Under the Pennsylvania Clean Streams Law, subsidiaries of PPL Generation are establish intake design standards, and could lead to requirements forcooling obligated to remediate acid mine drainage at former mine sites and may be towers at new and modified power plants. Another rule finalized in2004 that required to take additional measures to prevent potential acid mine drainage at previously capped refuse piles. One PPL Generation subsidiary ispumping mine addressed existing structures has been withdrawn following aJanuary 2007 water at two mine sites, and treating water at one of these sites. Another PPL decision by the U.S. Court of Appeals for the Second Circuit. Depending on what changes the EPA makes to the rule inaccordance with this decision, and/or what Generation subsidiary has installed a passive wetlands treatment system at athird actions the states may take on their own, the impacts of the actions could result site, At December 31, 2007, PPL Energy Supply had accrued a discounted liability instricter standards for existing structures that could impose significant costs of $34 million to cover the costs of pumping and treating groundwater at the two mine sites for 50 years and for operating and maintaining passive wetlands treat-on PPL subsidiaries.

The EPA plans to finalize the 2008 Effluent Guidelines Plan by August 2008, ment at the third site. PPL Energy Supply discounted this liability at a rate of 5.74%. Expected undiscounted payments are estimated at $1million for each of inwhich the EPA will make a decision about whether to revise the steam electric effluent guidelines. The EPA ispresently conducting a sampling study of industry the years from 2008 through 2012, and the expected payments for the work after discharges to obtain information needed to make that decision. 2012 are $135 million.

Future cleanup or remediation work at sites currently under review, or at sites not currently identified, may result inmaterial additional operating costs for PPL subsidiaries that cannot be estimated at this time.

104 PPL Corporation 2007 Annual Report

Gas Seepage the design of new transmission and distribution facilities. PPL and its subsidiaries PPL Gas Utilities owns and operates the Meeker gas storage field and has a partial are unable to predict what effect, ifany, the EMF issue might have on their opera-ownership interest inthe Tioga gas storage field, both located innorth-central tions and facilities either inthe U.S. or the U.K., and the associated cost, or what, Pennsylvania. There continues to be an issue with natural gas observed inseveral ifany, liabilities they might incur related to the EMF issue.

drinking water wells that the Pennsylvania DEP has been working to address. The Environmental Matters - International Pennsylvania DEP has raised concerns that potential leakage of natural gas from U.K the Tioga gas storage field could be contributing to this issue. To help determine WPD's distribution businesses are subject to environmental regulatory and the cause of the natural gas inthe potable water wells, the Pennsylvania DEP statutory requirements. PPL believes that WPD has taken and continues to take enlisted the services of the U.S. Geological Survey Department. The results of measures to comply with the applicable laws and governmental regulations for the U.S. Geological Survey study were published inmid-2007 and indicate that the protection of the environment. There are no material legal or administrative gas inthe groundwater inthe area, including incertain residential wells, may be proceedings pending against WPD with respect to environmental matters.

due inpart to gas stored inthe storage fields. PPL Gas Utilities isworking with See "Environmental Matters - Domestic - Electric and Magnetic Fields" for a the Pennsylvania DEP and the co-owner/operator of the Tioga field to develop discussion of EMFs.

a comprehensive study to determine whether gas inthe wells is,infact, due to storage field operations. Inthe interim, pending completion of a more detailed Latin America study of the issue, PPL Gas Utilities and the co-owner of the Tioga storage field InNovember 2007, PPL completed the sale of its Chilean business, substantially have offered to sample potable water wells and install water treatment systems completing its exit from Latin America. PPL believes that its Latin American affiliates on any wells inwhich natural gas exceeds 20 parts per million within an agreed- took measures to comply with applicable laws and governmental regulations for upon program area. The cost of the actions inthe program area offered by PPL the protection of the environment. There were no material legal or administrative Gas Utilities and the co-owner are not expected to be significant. The costs of proceedings pending against PPL's affiliates inLatin America with respect to envi-the broader study and any required mitigation actions are not now determinable, ronmental matters prior to the completion of the sale of each of the businesses.

but could be significant. Other Electric andMagnetic Fields Nuclear Insurance Concerns have been expressed by some members of the public regarding potential PPL Susquehanna isa member of certain insurance programs that provide coverage health effects of power frequency EMFs, which are emitted by all devices carrying for property damage to members' nuclear generating stations. Facilities at the electricity, including electric transmission and distribution lines and substation Susquehanna station are insured against property damage losses up to $2.75 billion equipment. Government officials inthe U.S. and the U.K. have reviewed this issue. under these programs. PPL Susquehanna isalso a member of an insurance program The U.S. National Institute of Environmental Health Sciences concluded in2002 that provides insurance coverage for the cost of replacement power during pro-that, for most health outcomes, there isno evidence that EMFs cause adverse longed outages of nuclear units caused by certain specified conditions. Under the effects. The agency further noted that there issome epidemiological evidence property and replacement power insurance programs, PPL Susquehanna could be of an association with childhood leukemia, but that the evidence isdifficult to assessed retroactive premiums inthe event of the insurers' adverse loss experience.

interpret without supporting laboratory evidence. The U.K. National Radiological At December 31, 2007, this maximum assessment was about $38 million.

Protection Board (part of the U.K. Health Protection Agency) concluded in2004 Inthe event of a nuclear incident at the Susquehanna station, PPL that, while the research on EMFs does not provide a basis to find that EMFs cause Susquehanna's public liability for claims resulting from such an incident would any illness, there isa basis to consider precautionary measures beyond existing be limited to about $10.8 billion under provisions of The Price-Anderson Act exposure guidelines. InApril 2007, the Stakeholder Group on Extremely Low Amendments to the Energy Policy Act of 2005. PPL Susquehanna isprotected Frequency EMF, set up by the U.K. Government, issued its interim assessment against this liability by a combination of commercial insurance and an industry which describes a number of options for reducing public exposure to EMFs. This assessment program. Inthe event of a nuclear incident at any of the reactors assessment isbeing considered by the U.K. Government. PPL and its subsidiaries covered by The Price-Anderson Act Amendments to the Energy Policy Act of believe the current efforts to determine whether EMFs cause adverse health 2005, PPL Susquehanna could be assessed up to $201 million per incident, effects should continue and are taking steps to reduce EMFs, where practical, in payable at $30 million per year.

PPL Corporation 2007 Annual Report 105

Notes to Consolidated Financial Statements Guarantees and OtherAssurances PPL fully and unconditionally guarantees all of the debt securities of PPL Inthe normal course of business, PPL enters into agreements that provide financial Capital Funding.

performance assurance to third parties on behalf of certain subsidiaries. Such PPL provides certain guarantees that are required to be disclosed inaccor-agreements include, for example, guarantees, stand-by letters of credit issued dance with FIN45, "Guarantor's Accounting and Disclosure Requirements for by financial institutions and surety bonds issued by insurance companies. These Guarantees, Including Indirect Guarantees of Indebtedness of Others, an agreements are entered into primarily to support or enhance the creditworthiness Interpretation of FASB Statements No. 5,57, and 107 and Rescission of FASB attributed to a subsidiary on a stand-alone basis or to facilitate the commercial Interpretation No. 34." The table below details guarantees provided as of activities in which these subsidiaries enter. December 31, 2007.

Recorded Liability at Exposure at December 31, December 31, Expiration 2007 2006 2007 ar Date Description Letters of credit issued on behalf $9 2008 Standby letter of credit arrangements under PPLEnergy Supply's 5300 million five-year credit facility for the of affiliates purposes of protecting various third parties against nonperformance byPPLand PPLGasUtilities. Thisisnot a guarantee of PPLon, a consolidated basis.

Retroactive premiums under 38 PPLSusquehanna iscontingently obligated to pay this amount related to potential retroactive premiums nuclear insurance programs that could be assessed under its nuclear insurance programs. See"Nuclear Insurance"for a'dditional informa-tion.

Nuclear claims underThe Price- 201 This isthe maximum amount PPLSusquehanna could be assessed for each incident at any of the nuclear Anderson Act Amendments under reactors covered bythis Act. See"Nuclear Insurance"for additional information.

the Energy Policy Act of 2005 Indemnifications for entities in $1 51 314 2008 PPLEnergy Supply's maximum exposure with respect to certain indemnifications and the expiration of the liquidation and sales of assets to 2012 indemnifications cannot be estimated because, inthe case of certain of the indemnification provisions, the maximum potential liability isnot capped bythe transaction documents and the expiration date isbased on the applicable statute of limitations. The exposure noted isonly for those cases inwhich the agreements provide for a specific limit on the amount of the indemnification.

Inconnection with the liquidation of wholly-owned subsidiaries that have been deconsolidated upon turning the entities over to the liquidators, certain affiliates of PPLGlobal have agreed to indemnity the liquidators, directors and/or the entities themselves for any liabilities or expenses arising during the liquida-tion process, including liabilities and expenses of the entities placed into liquidation. insome cases, the in-demnifications are limited to a maximum amount that isbased on distributions made from the subsidiary to its parent either prior or subsequent to being placed into liquidation. Inother 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 only includes those cases inwhich the agreements provide for a specific limit on the amount of the indemnification, and the expiration date was based on an estimate of the dissolution date of the entities.

PPLEnergy Supply has provided indemnification to the purchaser of the Sundance facility for losses arising out of any 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. The indemnification other than for pre-closing environmental and tort liabilities are triggered only ifthe purchaser's losses reach $1million inthe aggregate, are capped at 50% of the purchase price (or $95 million), and either expired inMay 2007 or will expire pursuant to applicable statutes of limitations. The indemnification provision for unknown environmental and tort liabilities related to periods prior to PPLEnergy Supply's ownership of the real property on which the facility islocated are capped at $4million inthe aggregate and survive for a maximum period of five years after the transaction closing.

Indemnification to operators of 6 InDecember 2007, PPLEnergy Supply executed revised owners agreements for two jointly-owned facilities, jointly-owned facilities the Keystone and Conemaugh generating stations. The agreements require that inthe event of any default by an owner, the other owners fund contributions for the operation of the generating stations, based upon their ownership percentage. The maximum obligation among allowners, for each station, iscurrently

$20 million. The non-defaulting owners, who make up the defaulting owner's obligations, are entitled to the generation entitlement of the defaulting owner, based upon their ownership percentage. The agree-ments do not have an expiration date.

Assignment of Enron claims 4 InJuly 2006, two subsidiaries of PPLEnergy Supply assigned their Enron claims to an independent third party (claims purchaser). Inconnection with the assignment, the subsidiaries agreed to repay a pro rata share of the purchase price paid bythe claims purchaser, plus interest, inthe event that any of the assigned claims are disallowed under certain circumstances. The bankruptcy court overseeing the Enron bankruptcy approved the assigned claims prior to their assignment to the claims purchaser. The subsidiaries'repayment obligations will remain ineffect until the claims purchaser has received alldistributions with respect to the assigned claims. See"Settlement of Enron Receivables"within this Note for additional information regarding the assignment of the claims.

106 PPL Corporation 2007 Annual Report

Recorded Liability at Exposureat December 31, December 31, Expiration 2007 2006 2007 ar Date Description WPD guarantee of pension and 4 4 33 2017 Asa result of the privatization of the utility industry inthe U.K., certain electric associations'roles and other obligations of unconsoli- responsibilities were discontinued or modified. Asa result, certain obligations, primarily pension-related, dated entities associated with these organizations have been guaranteed by the participating members. Costs are al-located to the members based on predetermined percentages as outlined in specific agreements. However, ifa member becomes insolvent, costs can be reallocated to and are guaranteed by the remaining members.

AtDecember 31, 2007, 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.

Taxindemnification related to 10 2012 TwoWPD unconsolidated affiliates were refinanced during 2005. Under the terms of the refinancing, WPD unconsolidated WPD affiliates has indemnified the lender against certain tax and other liabilities. Atthis time, WPD believes that the likelihood of such liabilities arising is remote.

Guarantee ofa portion ofan 7 2008 The exposure at December 31, 2007, reflects principal payments only.

unconsolidated entity's debt (a) Represents the estimated maximum potential amount of future payments that could be required to be made under the guarantee.

PPL and its subsidiaries provide other miscellaneous guarantees through con- credit agreement, PPL Electric's activities as servicer with respect to the pledged tracts entered into in the normal course of business. These guarantees are primarily accounts receivable and any dispute by PPL Electric's customers with respect inthe form of indemnifications or warranties related to services or equipment and to payment of the accounts receivable.

vary induration. The obligated amounts of these guarantees often are not explicitly o As a participant inthe PJM, PPL Electric has exposure to other participants' stated, and the overall maximum amount of the obligation under such guarantees failure to pay under the indemnification provision of PPL Electric's agreement cannot be reasonably estimated. Historically, PPL and its subsidiaries have not with PJM, which allocates the loss to other participants.

made any significant payments with respect to these types of guarantees. As of " PPL EnergyPlus isparty to numerous energy trading or purchase and sale December 31, 2007, the aggregate fair value of these indemnifications related to agreements pursuant to which the parties indemnify each other for any damages arrangements entered into subsequent to December 31, 2002, was insignificant. arising from events that occur while the indemnifying party has title to the Among these guarantees are: electricity or natural gas. For example, ifa party isdelivering the product, that o The companies' or their subsidiaries' leasing arrangements, which contain certain party would be responsible for damages arising from events occurring prior to indemnifications infavor of the lessors (e.g., tax and environmental matters). delivery. Similarly, interconnection agreements indemnify the interconnection

" Inconnection with their issuances of securities, the companies and their sub- owner for other interconnection participants' failure to pay, allocating the loss sidiaries engage underwriters, purchasers and purchasing agents to whom to the other participants.

they provide indemnification for damages incurred by such parties arising from o In connection with their sales of various businesses, WPD and its affiliates the companies' material misstatements or omissions inthe related offering have provided the purchasers with indemnifications that are standard for such documents. Inaddition, inconnection with these securities offerings and other transactions, including indemnifications for certain pre-existing liabilities and financing transactions, the companies also engage trustees or custodial, escrow environmental and tax matters. Inaddition, inconnection with certain of these or other agents to act for the benefit of investors or to provide other agency sales, WPD and its affiliates have agreed to continue their obligations under services. The companies and their subsidiaries typically provide indemnification existing third-party guarantees, either for a set period of time following the to these agents for liabilities or expenses incurred by them inperforming their transactions or upon the condition that the purchasers make reasonable efforts obligations. to terminate the guarantees. Finally, WPD and its affiliates remain secondarily

o. Inconnection with certain of their credit arrangements, the companies provide responsible for lease payments under certain leases that they have assigned the creditors or credit arrangers with indemnification that isstandard for each to third parties.

particular type of transaction. For instance, under the credit agreement for the PPL, on behalf of itself and certain of its subsidiaries, maintains insurance asset-backed commercial paper program, PPL Electric and its special purpose that covers liability assumed under contract for bodily injury and property dam-subsidiary have agreed to indemnify the commercial paper conduit, the spon-age. The coverage requires a $4million deductible per occurrence and provides soring financial institution and the liquidity banks for damages incurred by maximum aggregate coverage of $185 million. This insurance may be applicable such parties arising from, among other things, a breach by PPL Electric or the to certain obligations under the contractual arrangements discussed above.

subsidiary of their various representations, warranties and covenants inthe PPL Corporation 2007 Annual Report 107

Notes to Consolidated Financial Statements Note 16. Related Party Transactions Note 18. Derivative Instruments and Hedging Activities Affiliate Trust At December 31, 2006, PPL's Balance Sheets reflected $89 million of "Long-term Management of Market Risk Exposures Debt with Affiliate Trust." This debt represented obligations ofWPD LLP under Market risk isthe potential loss PPL may incur as a result of price changes 8.23% Subordinated Debentures maturing inFebruary 2027 that were held by associated with a particular financial or commodity instrument. PPL isexposed SIUK Capital Trust I,a variable interest entity whose common securities were to market risk from:

owned by WPD LLP but which was not consolidated by WPD LLR InFebruary o commodity price risk for energy and energy-related products associated with 2007, WPD LLP redeemed all of the 8.23% Subordinated Debentures that were the sale of electricity from its generating assets and other electricity marketing held by SIUK Capital Trust I.Interest expense on this obligation was $2million, activities, the purchase of fuel for the generating assets and energy trading

$11million and $12million in2007, 2006 and 2005. The redemption resulted activities, and the purchase of certain metals necessary for the scrubbers PPL ina pre-tax loss of $2million being recorded in2007. This interest and loss are Energy Supply isinstalling at some of its coal-fired generating stations; reflected in"Interest Expense" on the Statements of Income. See Note 8 for a o interest rate risk associated with variable-rate debt and the fair value of fixed-discussion of the redemption of the Subordinated Debentures and the trust's rate debt used to finance operations, as well as the fair value of debt securities common and preferred securities inFebruary 2007 and Note 22 for additional invested inby PPL Energy Supply's nuclear decommissioning trust funds; information on the trust. " foreign currency exchange rate risk associated with investments inaffiliates inthe U.K., as well as purchases of equipment incurrencies other than U.S.

Sale of Bolivian Businesses dollars; and See Note 10 for details about the July 2007 sale of PPLs Bolivian businesses to a

• equity securities price risk associated with the fair value of equity securities group organized by their local management and employees of the companies.

invested inby PPL Energy Supply's nuclear decommissioning trust funds.

PPL has a risk management policy approved by the Board of Directors to manage Note 17. Other Income - Net market risk and counterparty credit risk. The RMC, comprised of senior manage-ment and chaired by the Vice President-Risk Management, oversees the risk man-The breakdown of "Other Income - net" was:

agement function. Key risk control activities designed to ensure compliance with 2007 2006 2005 the risk policy and detailed programs include, but are not limited to, credit review Other Income and approval, validation of transactions and market prices, verification of risk and Interest income $ 61 $33 $17 transaction limits, sensitivity analyses, and daily portfolio reporting, including Earnings on nuclear decommissioning trust 13 6 5 open positions, mark-to-market valuations, and other risk measurement metrics.

Gain on sale of real estate 12 Hyder liquidation distributions (Note 9) 6 27 PPL utilizes forward contracts, futures contracts, options, swaps and struc-Gain on transfer of international equity tured deals such as tolling agreements as part of its risk management strategy to investment (Note 9) 5 5 minimize unanticipated fluctuations inearnings caused by commodity price, Equity earnings 4 4 3 interest rate and foreign currency volatility. All derivatives are recognized on the Gain on sale of investment inan unconsolidated affiliate (Note 9) 3 balance sheet at their fair value, unless they meet criteria for exclusion under Miscellaneous - Domestic 7 8 7 SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as Miscellaneous - International 4 5 amended and interpreted. See discussion in"Accounting Designations" below.

Total 112 86 37 Fair Value Hedges Other Deductions PPL enters into financial contracts to hedge fluctuations inthe market value of Hedging activity 8 Charitable contributions 4 4 4 existing debt issuances, which range inmaturity through 2047. PPL also enters Non-operating taxes, other than income 2 2 1 into foreign currency forward contracts to hedge the exchange rates associated Impairment of investment inU.K. realestate with firm commitments denominated inforeign currencies. These forward (Note 9) 8 contracts range inmaturity through 2008.

Miscellaneous - Domestic 6 6 Miscellaneous - International 3 4 2 PPL did not recognize significant gains or losses resulting from hedges of firm Other Income - net $ 95 $62 $24 commitments that no longer qualified as fair value hedges for 2007, 2006 or 2005.

PPL also did not recognize any gains or losses resulting from the ineffective portion of fair value hedges for these years.

108 PPL Corporation 2007 Annual Report

Cash Flow Hedges At December 31,2007, the accumulated net unrealized after-tan losses on PPL enters into financial and physical contracts, including forwards, futures, swaps qualifying derivatives that are expected to be reclassified into earnings during and options, to hedge the price risk associated with electric, gas, oil and other the next twelve months is$10 million. Amounts are reclassified asthe energy commodities. These contracts range inmaturity through 2017. Additionally, PPL contracts go to delivery and as interest payments are made.

enters into financial interest rate swap contracts to hedge floating interest rate Normal Purchase / Normal Sale Exception risk associated with both existing and anticipated debt issuances. These interest PPI~s "normal" portfolio includes derivative contracts for full requirements energy, rate swap contracts range inmaturity through 2018. PPL also enters into foreign emission allowances, gas and capacity; these contracts range inmaturity through currency contracts to hedge the cash flows associated with foreign currency-2027. Due to the "normal" election permitted bySEAS 133, these contracts receive denominated debt, the euchange rates associated with firm commitments accrual accounting. The net fair value of these contracts was a loss of $140 million denominated inforeign currencies and the net investment inforeign operations.

for 2007 and again of $162 million for 2006.

These contracts range in maturity through 2028.

Net investment hedge activity isreported inthe foreign currency translation Economic Activity adjustment component of other comprehensive income. These contracts range in PPL has entered into energy derivative transactions that economically hedge a maturity through 2011. During 2007, PPL recognized net investment hedge gains, specific risk, but do not qualify for hedge accounting under SEAS 133. The unreal-after tax, of $2million inother comprehensive income. Daring 2006 and 2005, ized gains and losses on these transactions are considered non-trading activities PPL recognized insignificant amounts inother comprehensive income (loss) related and are reflected on the Statements of Income in"Wholesale energy marketing" or to net investment hedge activity. At December 31,2007, $4million of accumulated "Energy-related businesses" revenues, or "Fuel" or "Energy purchases" expenses.

net investment hedge losses, after tan, were included inthe foreign currency Eor 2007, the pre-tax net gain reflected inearnings from these transactions, translation adjustment component of accumulated other comprehensive loss including the amortization of premiums on options, was $58 million. For 2006, compared to $6million at December 31,2006. the pre-tax net loss reflected inearnings was $19 million. The impact of these Cash flow hedges are discontinued if it isno longer probable that the original transactions was insignificant for 2005.

forecasted transaction will occur by the end of the originally specified time periods. The net gain recorded for 2007 resulted primarily from a$41million increase Incertain instances, amounts previously recorded inaccumulated other compre- inelectricity positions and a$16 million increase inoil positions due to favorable hensive loss are reclassified to earnings. Such reclassifications were losses of changes inmarket prices. Included inthe electricity amount are gains totaling

$3million, after tax, in2007, gains of $5million, after tau, in2006, and not signifi- $19 million for the fair value of capacity contracts inPJM. This change increased cant in2005. income from continuing operations and net income by $11million ($0.03 per For 2007, 2006 and 2005, hedge ineffectiveness associated with energy share, basic and diluted). PJM implemented its Reliability Pricing Model (RPM) in derivatives was, after tax, aloss of $3million, again of $8million and aloss of April 2007. Prior to the RPM, PPL recorded valuation reserves for capacity contracts

$3million. due nothe lack of liquidity and reliable, observable prices inthe marketplace.

For 2007, 2006 and 2005, hedge ineffectiveness associated with interest rate With the implementation of the RPM and the completion of PJM capacity auctions, and foreign currency derivatives was non significant. forward capacity prices became sufficiently observable and PPL no longer This table shows the accumulated net unrealized after-tan losses on qualifying reserves for capacity contracts inPJM.

derivatives (excluding net investment hedges), which are included inaccumulated Accounting Designations other comprehensive loss. For energy contracts that meet the definition of aderivative, the circumstances 2007 2tt6 and intent existing at the time that energy transactions are entered into determine Beginning of year $(51) $(246) their accounting designation, which issubsequently verified by an independent Netchange associated with current period hedging internal group on adaily basis. The following summarizes the electricity guide-activities anduther (191) 43 lines that have been provided to the marketers who are responsible for contract Netchange from reclassificatiun into earnings (1r 50 152 designation for derivative energy contracts inaccordance with SEAS 133.

End nf year $(192) $(51)

" Any wholesale and retail contracts to sell electricity and the related capacity SThe year 20t6 includes $7million furtheaccelecationof unrealized gainsasxociated wirhrhe Griffith plant that have heen recvrded ivDiscontinued Operations. 10tforadditiunal infurmationo. that do nonmeet the definition of aderivative receive accrual accounting.

SeeNote

" Physical electricity-only transactions can receive cash flow hedge treatment if all of the qualifications under SEAS 133 are met.

PPL Corporation 2007 Annual Report 109

Notes to Consolidated Financial Statements

" Physical capacity-only transactions to sell excess capacity from PPL's generation " Transactions entered into to hedge fluctuations inthe value of existing debt are considered "normal." The forward value of these transactions isnot recorded can be designated as fair value hedges. To the extent that the change inthe inthe financial statements and has no earnings impact until delivery. fair value of the derivative offsets the change inthe fair value of the existing

" Any physical energy sale or purchase deemed to be a "market call" is debt, there isno earnings impact, as both changes are reflected ininterest considered speculative, with unrealized gains or losses recorded immediately expense. Realized gains and losses over the life of the hedge are reflected in through earnings. interest expense.

" Financial transactions, which can be settled incash, cannot be considered

• Transactions entered into to hedge the value of a net investment of foreign "normal" because they do not require physical delivery. These transactions operations can be designated as net investment hedges. To the extent that the can receive cash flow hedge treatment ifthey lock inthe price PPL will receive derivatives are highly effective at hedging the value of the net investment, or pay for energy expected to be sold or purchased inthe spot market. gains and losses are recorded inthe foreign currency translation adjustment

• FTRs, although economically effective as electricity basis hedges, do not component of other comprehensive income/loss and will not be recorded in currently qualify for hedge accounting treatment. Unrealized and realized gains earnings until the investment issubstantially liquidated.

and losses from FTRs that were entered into to offset probable transmission " Derivative transactions that do not qualify for hedge accounting treatment are congestion expenses are recorded in"Energy purchases" on the Statements marked to market through earnings.

of Income. However, PPL records a reserve on the unrealized value of FTRs to Credit Concentration take into account the illiquidity of the external market to value the contracts.

PPL and its subsidiaries enter into contracts with many entities for the purchase

" Physical and financial transactions for gas and oil to meet fuel and retail and sale of energy. Many of these contracts are considered a normal part of requirements can receive cash flow hedge treatment ifthey lock-in the price doing business and, as such, the fair value of these contracts isnot reflected in PPL will pay and meet the definition of a derivative.

the financial statements. However, the fair value of these contracts isconsidered

" Certain option contracts may receive hedge accounting treatment. Those that when committing to new business from a credit perspective.

are not eligible are marked to market through earnings.

PPL and its subsidiaries have credit exposure to energy trading partners.

Any unrealized gains or losses on transactions receiving cash flow hedge treat- The majority of these exposures are the fair value of multi-year contracts for ment to the extent they are highly effective are recorded inother comprehensive energy sales and purchases. Therefore, ifthese counterparties fail to perform their income. These unrealized gains and losses become realized when the contracts obligations under such contracts, PPL and its subsidiaries would not experience settle and are recognized inincome when the hedged transactions occur. an immediate financial loss but would experience lower revenues or higher costs Inaddition to energy-related transactions, PPL enters into financial interest rate infuture years to the extent that replacement sales or purchases could not be and foreign currency swap contracts to hedge interest rate and foreign currency made at the same prices as those under the defaulted contracts.

risk associated with both existing and anticipated debt issuances. PPL also enters PPL and its subsidiaries generally have the right to request collateral, inthe into foreign currency swap contracts to hedge the fair value of firm commitments forms of cash or letters of credit, from their counterparties inthe event that the denominated ina foreign currency and net investments inforeign operations. As counterparties' credit ratings fall below investment grade or their exposure with energy transactions, the circumstances and intent existing at the time of the exceeds an established credit limit. Itisalso the policy of PPL and its subsidiaries transaction determine a contract's accounting designation, which issubsequently to enter into netting agreements with their counterparties to limit credit exposure.

verified by an independent internal group on a daily basis. The following isa sum- At December 31, 2007, PPL had credit exposure of $491 million to energy mary of certain guidelines that have been provided to PPL's Finance Department, trading partners, excluding the effects of netting arrangements. One of the which isresponsible for contract designation. counterparties accounted for 37% of this exposure and no other individual

• Transactions to lock inan interest rate prior to a debt issuance can be designated counterparty accounted for more than 8%of the exposure. Ten counterparties as cash flow hedges. Any unrealized gains or losses on transactions receiving accounted for $344 million, or 70%, of the total exposure. Seven of these counter-cash flow hedge treatment are recorded inother comprehensive income and parties had an investment grade credit rating from S&P and accounted for 37%

are amortized as a component of interest expense over the life of the debt. of the top 10 exposure. The three counterparties that are not rated investment grade have posted collateral inthe form of a letter of credit as per the terms and conditions of their respective contracts and all three counterparties are current on their obligations. As a result of netting arrangements, PPL's credit exposure was reduced to $433 million.

110 PPL Corporation 2007 Annual Report

In 2006, the increase of $84 million in the International Delivery segment Note 19. Restricted Cash and Cash Equivalents was attributable to an increase of $100 million due to the effect of changes in foreign currency exchange rates, offset by $16 million of adjustments pursuant The following table details the components of restricted cash and cash equivalents to EITF Issue 93-7. The $16 million of adjustments includes a $12 million adjust-by type. ment to decrease goodwill related to the transfer of WPD tax items (see Note 5), a December 31, $9million net increase based upon actions taken by the U.K. taxing authority and 2007 2006 an $8million decrease associated with monetary indexation of assets at WPD.

Current:

Other Intangible Assets Collateral for letters of credit 01 $ 41 $ 42 The gross carrying amount and the accumulated amortization of other intangible Deposits for trading purposes with NYMEX broker 119 42 Counterparty collateral 26 6 assets were:

Client deposits 16 9 December 31, 2007 December 31,2006 Miscellaneous 1 3 Gross Gross Carrying Accumulated Carrying Accumulated Total current 203 102 Amount Amortization Amount Amortization Noncurrent: Subject to amortization:

Required deposits of WPD (hi 18 20 Land and transmission rights ix $235 $108 $270 $109 PPLlTransition Bond Company Indenture reserves (1) 42 33 191 Emission allowances (hi 123 Escrowed funds related to Exempt Facility Revenue Bonds 19 Licenses and other 109 41 104 46 Total noncurrent 79 53 Not subject to

$282 $155 amortization due to indefinite life:

'a Adeposit with a financial institution of funds from the asset-backed commercial paper program to fully collateralize $41million and $42 million of letters of credit at December 31,2007 and 2006. Land and transmission rights 15 17 See Note 8for further discussion on the asset-backed commercial paper program. Easements 78 64 hi Includes insurance reserves of $17million and $19million at December 31, 2007 and 2006. $560 $149 $646 $155 i'i Credit enhancement forPPLTransition Bond Company's $2.4 billion Series 1999-1 Bonds to protect (a)In2007, PPLrecorded a $23million impairment of certain transmission rights. These rights are a against losses ordelays inscheduled payments. component of the Supply segment. See Note15for additional information.

Mb)Removed from the Balance Sheets and expensed when consumed or sold. Consumption expense was $108 million, $34 million and $31million in2007, 2006 and 2005. Consumption of emission allowances isestimated at $34 million for 2008, $49 million for 2009, $26 million for 2010, Note 20. Goodwill and Other $22 million for 2011, and $14million for 2012.

Intangible Assets Current intangible assets and long-term intangible assets are included in Goodwill "Other intangibles" in their respective areas on the Balance Sheets.

Goodwill by segment at December 31 was:

Amortization expense, excluding consumption of emission allowances, was 2007 2006 2005 $7 million for 2007 and $9million for 2006 and 2005. Amortization expense, Supply $ 94 $ 94 $ 94 excluding consumption of emission allowances, isestimated at $7million per year International Delivery 897 1,005 921 for 2008 through 2012.

Pennsylvania Delivery 55 55 The annual provisions for amortization have been computed principally in PPL $991 $1,154 $1,070 accordance with the following weighted-average assets lives (inyears):

Weighted-In2007, the decrease of $108 million inthe International Delivery segment AverageLife reflects a $160 million decrease due to the sale of the Latin American businesses. Land and transmission rights 65 This decrease was partially offset by increases of $51 million due to the effect Emission allowances 3 of changes inforeign currency exchange rates and a $1million tax adjustment Licenses and other 35 pursuant to EITF 93-7, "Uncertainties Related to Income Taxes ina Purchase Business Combination." The decrease of $55 million inthe Pennsylvania Delivery Following are the weighted-average rates of amortization at December 31.

segment was attributable to the transfer of goodwill associated with the natural 2007 2006 gas distribution and propane businesses to "Assets held for sale" on the Balance Land and transmission rights 1.22% 1.22%

Sheet as a result of the anticipated sale of these businesses. See Note 10 for Emission allowances ix additional information. Licenses and other 4.91% 4.01%

(i) Expensed when consumed.

PPL Corporation 2007 Annual Report 111

Notes to Consolidated Financial Statements Note 2¶. Asset Retirement Obligations The changes inthe carrying amounts of AROs were:

and Nuclear Decommissioning 2007 2006 Asset Retirement Obligations ARO at beginning of year $336 $298 Based on the requirements of SFAS 143, "Accounting for Asset Retirement Accretion expense 27 24 New obligations incurred 9 4 Obligations," PPL identified various legal obligations to retire long-lived assets, Change inestimated cash flow or settlement date 11 14 the largest of which relates to the decommissioning of the Susquehanna plant. Obligations settled (7) (4)

PPL identified and recorded other AROs related to significant interim retirements ARO at end of year $376 $336 at the Susquehanna plant, and various environmental requirements for coal piles, ash basins and other waste basin retirements at Susquehanna and other facilities. Costs and settlement dates of retirement obligations, which affect the carrying PPL adopted FIN47, "Accounting for Conditional Asset Retirement Obligations, value of AROs, are reviewed periodically to ensure that any material changes are an Interpretation of FASB Statement No. 143," effective December 31, 2005. incorporated into the latest estimate of the obligations. PPL changed estimated FIN47 clarifies that an entity isrequired to recognize a liability for the fair value settlement dates on several AROs, the most significant being the ash basin at the of a conditional ARO when incurred ifthe fair value of the ARO can be reasonably Martins Creek plant in2007 and the ash basins at the Brunner Island and Montour estimated. FIN47 also clarifies when an entity would have sufficient information plants in 2006. In addition, revised estimates were obtained of asbestos-containing to reasonably estimate the fair value of an ARO. material expected to be remediated infuture years. The effect of these changes PPL identified several conditional AROs. The most significant of these related was to increase the ARO liability and related plant balances by $11million for 2007 to the removal and disposal of asbestos-containing material at various generation and $14 million for 2006. The 2007 and 2006 income statement impact of these plants. The fair value of the portion of these obligations that could be reasonably changes was insignificant.

estimated was recorded at December 31, 2005, and resulted inAROs of $14 million Nuclear Decommissioning and a cumulative effect of adoption that decreased net income by $8million (net The expected cost to decommission the Susquehanna plant is based on a 2002 of tax benefit of $6million), or $0.02 per share.

site-specific study that estimated the cost to dismantle and decommission each PPL Global identified and recorded conditional AROs that related to treated unit immediately following final shutdown. PPL Susquehanna's 90% share of the wood poles and fluid-filled cables, which had an insignificant impact on the total estimated cost of decommissioning the Susquehanna plant was approximately financial statements.

$936 million measured in 2002 dollars. This estimate includes decommissioning Inaddition to the AROs that were recorded for asbestos-containing material, the radiological portions of the station and the cost of removal of non-radiological PPL identified other asbestos-related obligations, but were unable to reasonably structures and materials.

estimate their fair values. These retirement obligations could not be reasonably Beginning inJanuary 1999, in accordance with the PUC Final Order, estimated due to indeterminable settlement dates. The generation plants, where approximately $130 million of decommissioning costs are being recovered from significant amounts of asbestos-containing material are located, have been well PPL Electric's customers through the CTCover the 11-year life of the CTCrather maintained and large capital and environmental investments are being made than the remaining life of Susquehanna. The recovery includes a return on unamor-at these plants. During the previous five years, the useful lives of the plants had tized decommissioning costs. Under the power supply agreements between PPL been reviewed and inmost cases significantly extended. See Note 1for further Electric and PPL EnergyPlus, these revenues are passed on to PPL EnergyPlus.

discussion related to the extension of the useful lives of these assets. Due to Similarly, these revenues are passed on to PPL Susquehanna under a power supply these circumstances, PPL management was unable to reasonably estimate a agreement between PPL EnergyPlus and PPL Susquehanna.

settlement date or range of settlement dates for the remediation of all of the Accrued nuclear decommissioning expenses, as determined under the asbestos-containing material at the generation plants. Ifeconomic events or provisions of SFAS 143, "Accounting for Asset Retirement Obligations," were other circumstances change that enable PPL to reasonably estimate the fair value

$298 million and $276 million at December 31, 2007 and 2006, and are included of these retirement obligations, they will be recorded at that time.

in"Asset retirement obligations" on the Balance Sheets. Accretion expense, as PPL also identified legal retirement obligations that could not be reasonably determined under the provisions of SFAS 143, was $22 million in 2007, $21 million estimated at that time. These items included requirements associated with the in2006 and $19 million in 2005, and is included in "Other operation and mainte-retirement of a reservoir and certain transmission assets. These retirement obliga-nance" on the Statements of Income.

tions could not be reasonably estimated due to indeterminable settlement dates.

Amounts collected from PPL Electric's customers for decommissioning, less applicable taxes, are deposited in external trust funds for investment and can only be used for future decommissioning costs. To the extent that the actual costs for decommissioning exceed the amounts in the nuclear decommissioning trust funds, PPL Susquehanna would be obligated to fund 90% of the shortfall.

112 PPL Corporation 2007 Annual Report

Inaccordance with SFAS 115, "Accounting for Certain Investments inDebt December 31,2006 and Equity Securities," securities held by the nuclear decommissioning trust funds Gross Unrealized Gains Fair Value are classified as available-for-sale. Available-for-sale securities are carried on Cash and cash equivalents $ 7 the balance sheet at fair value. Unrealized gains and losses on available-for-sale Equity securities $122 339 securities are reported, net of tax, inother comprehensive income or are recog-Debt securities nized currently inearnings when a decline infair value isdetermined to be other U.S. Treasury 2 78 than temporary. Municipality 1 52 InNovember 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, "The Corporate 20 Meaning of Other-Than-Temporary Impairment and Its Application to Certain Other 14 Investments" (FSP 115-1), which was effective for PPL and PPL Energy Supply Totaldebt securities 3 164 Total $125 $510 beginning January 1,2006. Among other things, FSP 115-1 indicated that existing guidance, particularly SEC Staff Accounting Bulletin Topic 5M, "Other Than Of the $189 million of government obligations and other debt securities held Temporary Impairment of Certain Investments inDebt and Equity Securities" at December 31, 2007, $9million mature within one year, $79 million mature after (SAB Topic 5M), should be used to determine ifa decline ina security's value is one year through five years, $48 million mature after five years through ten years other than temporary. Clarification related to applying the guidance inSAB Topic and $53 million mature after ten years.

5M has established the ability to hold an investment until it recovers its value as a The following table shows proceeds from and realized gains and (losses) on required element indetermining ifan individual security isother than temporarily sales of securities held in the trust.

impaired. Based on this clarification and as a result of NRC requirements that nuclear decommissioning trusts be managed by independent investment man- 2007 2006 2005 agers, with discretion to buy and sell securities inthe trusts, PPL Susquehanna Proceeds from sales $175 $211 $223 has concluded that during 2007 and 2006 itwas unable to demonstrate the ability Gross realized gains 15 10 10 Gross realized losses (10) (6) (12) to hold an impaired security until it recovers its value. Accordingly, for 2007 and 2006, unrealized losses represented other than temporary impairments, which The proceeds from the sales of securities are reinvested in the trust. These required a current period charge to earnings. Unrealized gains continued to be funds, along with deposits of amounts collected from customers, are used to pay recorded to other comprehensive income. income taxes and fees related to managing thetrust. Due to the restricted nature In2006, PPL recorded a charge of $6million ($3 million after tax, or $0.01 of these investments, they are not included in cash and cash equivalents.

per share) to reflect the cumulative impact of the other-than-temporary impair- Unrealized gains (net of unrealized losses for 2005) associated with the period ment of affected securities. decreased accumulated other comprehensive loss by:

For 2007, PPL recorded a charge of $3million to reflect the impact for 2007 20007 2006 2005 of the other-than-temporary impairment of affected securities. The impairment Pre-tax 23 $49 $12 charge isreflected in"Other Income-net" on PPL's Statements of Income. 7 After-tax 11 13 The following tables show the gross unrealized gains recorded inOCI and the related fair values for the securities held inthe nuclear decommissioning trust funds. Gains (net of losses for 2005) reclassified from accumulated other comprehen-December 31, 2007 sive loss and realized in "Other Income - net" on the Statements of Income were:

Gross 2007 2006 2005 Unrealized Gains Fair Valu e Cash and cash equivalents $10 Pre-tax $5 $6 $(2)

Equity securities $136 356 After-tax 3 3 (1)

Debt securities In 2006, PPL Susquehanna applied to the NRC for 20-year license renewals for U.S. Treasury 5 Municipality 1 53 each of the Susquehanna units to extend their expiration dates from 2022 to 2042 Corporate 1 31 for Unit 1and from 2024 to 2044 for Unit 2. PPL cannot predict whether or when Other 12 the NRC approval will be obtained.

Total debt securities 189 Total $143 $555 PPL Corporation 2007 Annual Report 113

Notes to Consolidated Financial Statements Note 22. Variable Interest Entities Note 23. New Accounting Standards PPL Energy Supply isthe primary beneficiary of the Lower Mt. Bethel generation SFAS 141(R) facility, and therefore consolidates this variable interest entity. InDecember 2001, InDecember 2007, the FASB issued SFAS 141 (revised 2007), "Business Combinations,"

a subsidiary of PPL Energy Supply entered into a $455 million operating lease which isknown as SFAS 141(R) and replaces SFAS 141, "Business Combinations."

arrangement, as lessee, for the development, construction and operation of a PPL and its subsidiaries will adopt SFAS 141(R) prospectively, effective January 1, 582 MW gas-fired combined-cycle generation facility located inLower Mt. Bethel 2009. The most significant changes to business combination accounting pursuant Township, Northampton County, Pennsylvania. The lessor was created for the sole to SFAS 141(R) includes requirements or amendments to:

purpose of owning the facilities and incurring the related financing costs. The initial o recognize with certain exceptions, 100% of the fair values of assets acquired, lease term commenced on the date of commercial operation, which occurred in liabilities assumed, and noncontrolling interests inacquisitions of less than a May 2004, and ends inDecember 2013. The lease financing, which isincluded in 100% controlling interest when the acquisition constitutes achange incontrol "Long-term Debt" and "Minority Interest," issecured by, among other things, the of the acquired entity; generation facility. At December 31, 2007 and 2006, the facility had a carrying o measure acquirer shares issued inconsideration for a business combination at value of $441 million and $448 million, including leasehold improvements, net of fair value on the acquisition date; accumulated depreciation and amortization of $40 million and $27 million, and o recognize contingent consideration arrangements at the acquisition-date was included in"Property, Plant and Equipment" and "Other intangibles" on the fair values, with subsequent changes infair value generally reflected through Balance Sheets. earnings; Prior to February 2007, a subsidiary of PPL Energy Supply, WPD LLP, held a o recognize pre-acquisition loss and gain contingencies at their acquisition-date significant variable interest inthe SIUK Capital Trust I;however itwas not consoli- fair values, with certain exceptions; dated because WPD LLP was not the primary beneficiary. SIUK Capital Trust I o capitalize in-process research and development assets acquired; issued $82 million of 8.23% preferred securities maturing inFebruary 2027 and o expense, as incurred, acquisition-related transaction costs; invested the proceeds in8.23% Subordinated Debentures maturing in February o capitalize acquisition-related restructuring costs only ifthe criteria inSFAS 146, 2027 issued by SIUK Limited. Thus, the preferred securities were supported by a "Accounting for Costs Associated with Exit or Disposal Activities," are met as corresponding amount of subordinated debentures. SIUK Limited owned all of the of the acquisition date; common securities of SIUK Capital Trust Iand guaranteed all of SIUK Capital Trust o recognize changes that result from a business combination transaction in I's obligations under the preferred securities. In2003, SIUK Limited transferred an acquirer's existing income tax valuation allowances and tax uncertainty its assets and liabilities, including the common securities of SIUK Capital Trust I accruals as adjustments to income tax expense; and the obligations under the subordinated debentures, to WPD LLP Therefore, o recognize changes inunrecognized tax benefits acquired ina business combi-WPD LLP guaranteed all of SIUK Capital Trust I's obligations under the preferred nation, including business combinations that have occurred prior to January 1, securities. InFebruary 2007, WPD LLP redeemed all-of the 8.23% subordinated 2009, inincome tax expense rather than ingoodwill; and debentures due 2027 that were held by SIUK Capital Trust I.The SIUK Capital Trust o provide guidance on the impairment testing of acquired research and develop-Iwas formally terminated inMay 2007. See Note 8 for a discussion of the redemp- ment intangible assets and assets that the acquirer intends not to use.

tion of the Subordinated Debentures, as well as the common and preferred securi-The adoption of SFAS 141(R) will impact the accounting for business combi-ties of SIUK Capital Trust I inFebruary 2007. See Note 16 fora discussion of the nations for which the acquisition date ison or after January 1,2009. As noted presentation of the related party transactions.

above, itwill also impact all changes to tax uncertainties and income tax valuation allowances established for business combinations that have occurred prior to January 1,2009. Early adoption isprohibited. The potential impact of adoption to the financial statements isnot yet determinable, but it could be material.

114 PPL Corporation 2007 Annual Report

SFAS 157, as amended SFAS 159 also establishes presentation and disclosure requirements designed InSeptember 2006, the FASB issued SFAS 157, "Fair Value Measurements." to facilitate comparisons between similar assets and liabilities measured using SFAS 157 provides a definition of fair value as well as a framework for measuring different attributes. Upon adoption of SFAS 159, an entity may elect the fair value fair value. Inaddition, SFAS 157 expands the fair value disclosure requirements of option for eligible items that exist at that date and must report the effect of the other accounting pronouncements to require, among other things, disclosure of first remeasurement to fair value as a cumulative-effect adjustment to the opening the methods and assumptions used to measure fair value as well as the earnings balance of retained earnings.

impact of certain fair value measurement techniques. SFAS 157 does not expand PPL and its subsidiaries will adopt SFAS 159 effective January 1,2008.

the use of fair value measurements inexisting accounting pronouncements. PPL and its subsidiaries do not plan to elect the fair value option for any existing InFebruary 2008, the FASB amended SFAS 157 through the issuance of FSP items; therefore, the January 1,2008 adoption of SFAS 159 isnot expected to have FAS 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 an impact on PPL and its subsidiaries. However, ifthe fair value option iselected and Other Accounting Pronouncements That Address Fair Value Measurements for for eligible items inperiods subsequent to the initial adoption, the impact could Purposes of Lease Classification or Measurement under Statement 13" and FSP be material.

FAS 157-2, "Effective Date of FASB Statement No. 157." FSP FAS 157-1 iseffective SFAS 160 upon the initial adoption of SFAS 157 and amends SFAS 157 to exclude from its InDecember 2007, the FASB issued SFAS 160, "Noncontrolling Interests in scope, certain accounting pronouncements that address fair value measurements Consolidated Financial Statements, an amendment of ARB No. 51." The objective associated with leases. FSP FAS 157-2 iseffective upon issuance and delays the of SFAS 160 isto improve the relevancy, comparability, and transparency of the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for financial information an entity provides when it has a noncontrolling interest in nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed a subsidiary and when it deconsolidates asubsidiary. SFAS 160 requires that:

at fair value inthe financial statements on a recurring basis (at least annually). o The ownership interests insubsidiaries held by parties other than the parent As permitted by this guidance, PPL and its subsidiaries will partially adopt be clearly identified, labeled, and presented inthe consolidated statement of SFAS 157, as amended, prospectively, effective January 1,2008; limited retro-financial position within equity, but separate from the parent's equity.

spective application for financial instruments that were previously measured at o The amount of consolidated net income attributable to the parent and to the fair value inaccordance with footnote 3 of EITF Issue No. 02-3, "Issues Involved noncontrolling interest be clearly identified and presented on the face of the inAccounting for Derivative Contracts Held for Trading Purposes and Contracts consolidated statement of income.

Involved inEnergy Trading and Risk Management Activities," is not expected to o Changes ina parent's ownership interest while the parent retains its controlling be required. The January 1,2008 adoption of SFAS 157, as amended, isnot financial interest inits subsidiary be accounted for consistently. Aparent's expected to have a significant impact on PPL and its subsidiaries; however, the ownership interest ina subsidiary changes ifthe parent purchases additional impact inperiods subsequent to the adoption could be material.

ownership interests inits subsidiary or ifthe parent sells some of its ownership As permitted by this guidance, PPL and its subsidiaries will adopt SFAS 157, as interests inits subsidiary. It also changes ifthe subsidiary reacquires some of amended, effective January 1,2009 for nonfinancial assets and nonfinancial liabil-its ownership interests or the subsidiary issues additional ownership interests.

ities that are not recognized or disclosed at fair value inthe financial statements Allof those transactions are economically similar, and SFAS 160 requires that on a recurring basis. PPL and its subsidiaries are inthe process of evaluating the they be accounted for similarly, as equity transactions.

impact of adopting SFAS 157, as amended, for these items. The potential impact o When a subsidiary isdeconsolidated, any retained noncontrolling equity of this adoption isnot yet determinable, but itcould be material.

investment inthe former subsidiary be initially measured at fair value. The SFAS 159 gain or loss on the deconsolidation of the subsidiary ismeasured using the InFebruary 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial fair value of any noncontrolling equity investment rather than the carrying Assets and Financial Liabilities, including an amendment of FASB Statement amount of that retained investment.

No. 115." SFAS.159 provides entities with an option to measure, upon adoption of o Entities provide sufficient disclosures that clearly identify and distinguish between this pronouncement and at specified election dates, certain financial assets and the interests of the parent and the interests of the noncontrolling owners.

liabilities at fair value, including available-for-sale and held-to-maturity securities, PPL and its subsidiaries will adopt SFAS 160 prospectively, effective January 1, as well as other eligible items. The fair value option (I)may be applied on an 2009, concurrent with the adoption of SFAS 141(R), except for the presentation instrument-by-instrument basis, with a few exceptions, (ii)isirrevocable (unless and disclosure requirements, which require retrospective application. The poten-a new election date occurs), and (iii)isapplied to an entire instrument and not to tial impact of adoption to the financial statements isnot yet determinable, but it only specified risks, cash flows, or portions of that instrument. An entity shall could be material.

report unrealized gains and losses on items for which the fair value option has been elected inearnings at each subsequent reporting date..

PPL Corporation 2007 Annual Report 115

Reconciliation of Financial Measures (Unaudited)

Millions of dollars, except per share data "Net Income" is a financial measure determined inaccordance with generally "Earnings from Ongoing Operations" excludes the impact of special items.

accepted accounting principles (GAAP). "Earnings from Ongoing Operations," as Earnings from ongoing operations should not be considered as an alternative to referenced inthis Annual Report, is a non-GAAP financial measure. However, PPL's net income, which isan indicator of operating performance determined inaccor-management believes that it provides useful information to investors, as a supple- dance with GAAP. PPL believes that earning from ongoing operations, although a ment to the comparable GAAP financial measure. Following is additional informa- non-GAAP measure, isalso useful and meaningful to investors because it provides tion on this non-GAAP financial measure, including a reconciliation to Net Income. them with PPL's underlying earnings performance as another criterion inmaking their investment decisions. PPL's management also uses earnings from ongoing operations inmeasuring certain corporate performance goals. Other companies may use different measures to present financial performance.

Reconciliation of Earnings from Ongoing Operations and Net Income*

(Millions of Dollars) (PerShare - Diluted) (PerShare - Basic) 2007 2006 2007 2006 2007 2006 Earnings from Ongoing Operations $1,000 $869 $2.60 S2.25 $2.63 $ 2.28 Special Items (net of taxes):

Mark-to-market adjustments from energy-related, non-trading economic hedges 32 (11) 0.08 (0.03) 0.08 (0.03)

Sale of Latin American businesses 259 0.67 0.68 Impairment of domestic telecommunication operations (23) (0.06) (0.06)

Anticipated sale of gas and propane businesses (44) (0.11) (0.11)

Settlement of Walingford cost-based rates 33 0.09 0.09 Impairment of certain transmission rights (13) (0.04) (0.04)

Change inU.K. tax rate 54 0.14 0.14 Workforce reductions (9) (3) (0.02) (0.01) (0.02) (0.01)

Realization of benefits related to Black Lung Trust assets 21 0Z0 0.05 Reversal of cost recovery - Hurricane Isabel (7) (0.02) (0.02)

Impairment of synfuel-related assets (6) (0.01) (0.01)

Sale of interest inthe Griffith plant (16) (0.04) (0.04)

Reduction inEnron reserve 12 0.03 0.03 Impairment of nuclear decommissioning trust investments (3) (0.01) (0.01)

Off-site remediation of ash basin leak 6 0.02 0.02 PJMbilling dispute (1) 3 0.01 0.01 Total Special Items 288 (4) 0.75 (0.01) 0.76 (0.01)

Net Income $1,288 $865 $ 3.35 $2.24 $3.39 $ 2.27

• Seepages32,33 and34 in Managemenr's Discussion andAnalysis forfinancial statement notereferences foreachofthesespecialitemsfor2007and2006, Key Earnings Forecast Assumptions For 2010 forecast:

For 2008 forecast: o Expiring wholesale energy contracts replaced by new contracts at current

• Higher-valued wholesale energy contracts forward prices, most importantly the Pennsylvania PLR contract expiring at

" Increased generation prices under the Pennsylvania PLR contract the end of 2009.

" Higher base-load generation o Assumptions about forward energy prices, capacity prices, fuel and emission

• Lower operation and maintenance expenses allowance prices, fuel transportation costs and other costs of operating the

• Increased revenues from the Pennsylvania delivery business segment as a result business.

of PPL Electric Utilities' distribution rate increase effective Jan. 1,2008 o Completion of planned capacity increases at several existing generating facilities.

• Loss of synfuel-related earnings as a result of the expiration of synfuel tax o Higher generation output.

credits at the end of 2007 o Anticipated benefits from the installation of scrubbers at the Montour and

" Reduced earnings resulting from the divestiture of Latin American operations Brunner Island generating plants.

in2007 o Higher operational and maintenance expenses.

" Higher depreciation due to the scrubbers coming on-line o Higher interest expense.

• Higher U.S. taxes o Higher depreciation.

o Stable electricity regulatory environment at federal and state levels.

o Continued growth of marketing and trading activities.

116 PPL Corporation 2007 Annual Report

Glossary of Terms and Abbreviations PPL Corporation and its current and former subsidiaries PPL Generation - PPL Generation, LLC, a subsidiary of PPL Energy Supply that owns and operates U.S. generating facilities through DelSur - Distribuidora de Electricidad Del Sur, S.A. de CV., an various subsidiaries.

electric distribution company in El Salvador, a majority of which was owned by EC until the sale of this interest in May 2007. PPL Global - PPL Global, LLC, a subsidiary of PPL Energy Supply that primarily owns and operates a business in the U.K. that is EC - Electricidad de Centroamerica, S.A. de C.V., an El Salvadoran focused on the regulated distribution of electricity.

holding company and the majority owner of DelSur. PPL Global had 100% ownership of EC until the sale of this interest in May 2007. PPL Holtwood - PPL Holtwood, LLC, a subsidiary of PPL Generation that owns PPL's hydroelectric generating operations in Pennsylvania.

Elfec - Empresa de Luz y Fuerza Electrica Cochabamba S.A., a Bolivian electric distribution company in which PPL Global had PPL Maine - PPL Maine, LLC, a subsidiary of PPL Generation that a majority ownership interest until its sale in July 2007. owns generating operations in Maine.

Emel - Empresas Emel S.A., a Chilean electric distribution holding PPL Martins Creek - PPL Martins Creek, LLC, a subsidiary of company in which PPL Global had a majority ownership interest PPL Generation that owns generating operations in Pennsylvania.

until its sale in November 2007.

PPL Montana - PPL Montana, LLC, an indirect subsidiary of PPL Griffith - a 600 MW gas-fired station in Kingman, Arizona, that Generation that generates electricity for wholesale sales in Montana was jointly owned by an indirect subsidiary of PPL Generation and the Pacific Northwest.

and LS Power Group until the sale of PPL Generation's interest PPL Services - PPL Services Corporation, a subsidiary of PPL that in June 2006.

provides shared services for PPL and its subsidiaries.

Hyder - Hyder Limited, a subsidiary of WPDL that was the previous PPL Susquehanna - PPL Susquehanna, LLC, the nuclear owner of South Wales Electricity plc. In March 2001, South Wales generating subsidiary of PPL Generation..

Electricity plc was acquired by WPDH Limited and renamed WPD (South Wales). PPL Transition Bond Company - PPL Transition Bond Company, LLC, a subsidiary of PPL Electric that was formed to issue transition Integra - Empresa de Ingenieria y Servicios Integrales Cochabamba bonds under the Customer Choice Act.

S.A., a Bolivian construction and engineering services company in which PPL Global had a majority ownership interest until its sale in SIUK Capital Trust I - a business trust created to issue preferred July 2007. securities, the common equity of which was held by WPD LLP.

The preferred securities were redeemed in February 2007.

PPL - PPL Corporation, the parent holding company of PPL Electric, PPL Energy Funding and other subsidiaries. SIUK Limited - a former intermediate holding company within the WPDH Limited group. In January 2003, SIUK Limited transferred PPL Capital Funding - PPL Capital Funding, Inc., a wholly owned its assets and liabilities to WPD LLP.

financing subsidiary of PPL.

WPD - refers collectively to WPDH Limited and WPDL.

PPL Electric - PPL Electric Utilities Corporation, a regulated utility subsidiary of PPL that transmits and distributes electricity in its WPD LLP - Western Power Distribution LLP, a wholly owned service territory and provides electric supply to retail customers in subsidiary of WPDH Limited, which owns WPD (South West) and this territory as a PLR. WPD (South Wales).

PPL Energy Funding - PPL Energy Funding Corporation, a WPD (South Wales) - Western Power Distribution (South Wales) subsidiary of PPL and the parent company of PPL Energy Supply. plc, a British regional electric utility company.

PPL EnergyPlus - PPL EnergyPlus, LLC, a subsidiary of PPL Energy WPD (South West) - Western Power Distribution (South West) plc, Supply that markets and trades wholesale and retail electricity, and a British regional electric utility company.

supplies energy and energy services in deregulated markets.

WPDH Limited - Western Power Distribution Holdings Limited, PPL Energy Supply - PPL Energy Supply, LLC, a subsidiary of an indirect, wholly owned subsidiary of PPL Global. WPDH Limited PPL Energy Funding and the parent company of PPL Generation, owns WPD LLP.

PPL EnergyPlus, PPL Global and other subsidiaries.

WPDL - WPD Investment Holdings Limited, an indirect wholly PPL Gas Utilities - PPL Gas Utilities Corporation, a regulated owned subsidiary of PPL Global. WPDL owns 100% of the common utility subsidiary of PPL that specializes in natural gas distribution, shares of Hyder.

transmission and storage services, and the competitive sale of propane.

PPL Corporation 2007 Annual Report 117

Other Terms and Abbreviations

£ - British pounds sterling. Fitch - Fitch, Inc.

1945 First Mortgage Bond Indenture - PPL Electric's Mortgage FSP - FASB Staff Position.

and Deed of Trust, dated as of October 1, 1945, to Deutsche Bank Trust Company Americas, as trustee, as supplemented. FTR - financial transmission rights, which are financial instruments established to manage price risk related to electricity transmission 2001 Senior Secured Bond Indenture - PPL Electric's Indenture, congestion. They entitle the holder to receive compensation or require dated as of August 1, 2001, to The Bank of New York (as successor to the holder to remit payment for certain congestion-related transmission JPMorgan Chase Bank), as trustee, as supplemented. charges that arise when the transmission grid is congested.

AFUDC (Allowance for Funds Used During Construction) - GAAP - generally accepted accounting principles in the U.S.

the cost of equity 'and debt funds used to finance construction projects of regulated businesses, which is capitalized as part of GWh - gigawatt-hour, one million kilowatt-hours.

construction cost. IBEW - International Brotherhood of Electrical Workers.

APB - Accounting Principles Board. ICP - Incentive Compensation Plan.

ARB - Accounting Research Bulletin. ICPKE - Incentive Compensation Plan for Key Employees.

ARO - asset retirement obligation. IRS - Internal Revenue Service, a U.S. government agency.

Bcf - billion cubic feet. ISO - Independent System Operator.

Black Lung Trust - a trust account maintained under federal and ITC - intangible transition charge on customer bills to recover state Black Lung legislation for the payment of claims related to intangible transition costs associated with securitizing stranded disability or death due to pneumoconiosis. costs under the Customer Choice Act.

Clean Air Act - federal legislation enacted to address certain kVA - kilovolt-ampere.

environmental issues related to air emissions, including acid rain, ozone and toxic air emissions. kWh - kilowatt-hour, basic unit of electrical energy.

COLA - combined construction and operating license application. LIBOR - London Interbank Offered Rate.

CTC - competitive transition charge on customer bills to recover Montana Power - The Montana Power Company, a Montana-based allowable transition costs under the Customer Choice Act. company that sold its generating assets to PPL Montana in December 1999. Through a series of transactions consummated during the first Customer Choice Act - the Pennsylvania Electricity Generation quarter of 2002, Montana Power sold its electricity delivery business Customer Choice and Competition Act, legislation enacted to to NorthWestern.

restructure the state's electric utility industry to create retail access to a competitive market for generation of electricity. Moody's - Moody's Investors Service, Inc.

DEP - Department of Environmental Protection, a state government MVA - megavolt-ampere.

agency.

MW - megawatt, one thousand kilowatts.

DOE - Department of Energy, a U.S. government agency.

MWh - megawatt-hour, one thousand kilowatt-hours.

EITF - Emerging Issues Task Force, an organization that assists the NERC - North American Electric Reliability Corporation.

FASB in improving financial reporting through the identification, discussion and resolution of financial accounting issues within the NorthWestern - NorthWestern Energy Division, a Delaware framework of existing authoritative literature. corporation and a subsidiary of NorthWestern Corporation and successor in interest to Montana Power's electricity delivery EMF - electric and magnetic fields.

business, including Montana Power's rights and obligations under EPA - Environmental Protection Agency, a U.S. government agency. contracts with PPL Montana.

EPS - earnings per share. NPDES - National Pollutant Discharge Elimination System.

ESOP - Employee Stock Ownership Plan. NRC - Nuclear Regulatory Commission, the federal agency that regulates the operation of nuclear power facilities.

EWG - exempt wholesale generator.

NUGs (Non-Utility Generators) - generating plants not owned FASB - Financial Accounting Standards Board, a rulemaking by public utilities, whose electrical output must be purchased by organization that establishes financial accounting and reporting utilities under the PURPA if the plant meets certain criteria.

standards.

NYMEX - New York Mercantile Exchange.

FERC - Federal Energy Regulatory Commission, the federal agency that regulates interstate transmission and wholesale sales of Ofgem - Office of Gas and Electricity Markets, the British agency electricity and related matters. that regulates transmission, distribution and wholesale sales of electricity and related matters.

FIN - FASB Interpretation.

118 PPL Corporation 2007 Annual Report

OSM - Office of Surface Mining, a U.S. government agency. RMC - Risk Management Committee.

PCB - polychlorinated biphenyl, an oil additive used in certain RMR - reliability must run.

electrical equipment up to the late-1970s. It is now classified as RTO - Regional Transmission Organization.

a hazardous chemical.

SAB - Staff Accounting Bulletin.

PJM (PJM Interconnection, L.L.C.) - operator of the electric transmission network and electric energy market in all or parts Sarbanes-Oxley - Sarbanes-Oxley Act of 2002, which sets of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, requirements for management's assessment of internal controls New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, for financial reporting. It also requires an independent auditor Virginia, West Virginia and the District of Columbia. to make its own assessment.

PLR (Provider of Last Resort) - the role of PPL Electric in SCR - selective catalytic reduction, a pollution control process.

providing default electricity supply to retail customers within its delivery territory who have not chosen to select an alternative Scrubber - an air pollution control device that can remove electricity supplier under the Customer Choice Act. particulates and/or gases (such as sulfur dioxide) from exhaust gases.

PP&E - property, plant and equipment. SEC - Securities and Exchange Commission, a U.S. government agency whose primary mission is to protect investors and maintain Preferred Securities - company-obligated mandatorily redeemable the integrity of the securities markets.

preferred securities issued by SIUK Capital Trust I, which solely held debentures of WPD LLP. The securities of SIUK Capital Trust I were SFAS - Statement of Financial Accounting Standards, the redeemed in February 2007. accounting and financial reporting rules issued by the FASB.

PUC - Pennsylvania Public Utility Commission, the state agency that S&P - Standard & Poor's Ratings Services.

regulates certain rate making, services, accounting and operations Superfund - federal environmental legislation that addresses of Pennsylvania utilities. remediation of contaminated sites; states also have similar statutes.

PUC Final Order - final order issued by the PUC on August 27, Synfuel projects - production facilities that manufacture synthetic 1998, approving the settlement of PPL Electric's restructuring fuel from coal or coal byproducts. Favorable federal tax credits, which proceeding.

expired effective December 31, 2007, were available on qualified PUHCA - Public Utility Holding Company Act of 1935, legislation synthetic fuel products.

passed by the U.S. Congress. Repealed effective February 2006 by the Tolling agreement - agreement whereby the owner of an electric Energy Policy Act of 2005.

generating facility agrees to use that facility to convert fuel provided PURPA - Public Utility Regulatory Policies Act of 1978, legislation by a third party into electric energy for delivery back to the third party.

passed by the U.S. Congress to encourage energy conservation, VaR - value-at-risk.

efficient use of resources and equitable rates.

VEBA - Voluntary Employee Benefit Association Trust, trust RFC - ReliabilityFirst Corporation, the regional transmission reliability accounts for health and welfare plans for future benefit payments entity that replaced the Mid-Atlantic Area Coordination Council.

for employees, retirees or their beneficiaries.

PPL Corporation 2007 Annual Report 119

PPL Board of Directors Washington, D.C. Philadelphia,Pa. Lancaster,Pa. Mexico City, Mexico Hershey,Pa.

President Chairmanof the Board, FormerExecutive Vice Presidentand Chief Former ChiefExecutive UniversitiesResearch Presidentand Chief Presidentand Director Executive Officer Officer Association Executive Officer Armstrong World Ford of Mexico GeisingerHealth System A consortium of 90 Crown Holdings, Inc. Industries,Inc. Manufacturerof cars, A nonprofit health-care universitiesengaged A leadinginternational Manufacturerof interior trucks and related parts provider in the construction manufactureroflpackaging furnishingsand specialty and accessories Age 68 and operation of major products for consumer goods products Age 54 Director since 1991 researchfaciities Age 62 Age 72 Directorsince 2003 Age 65 Directorsince 2000 Directorsince 1991 Directorsince 1997 Lead director since 2003 Dr. Bernthal has served as Mr. Conway has served Mr. Deaver retired from Ms. Goeser served as vice Dr. Heydt retired in 2000 president of URA since as Crown's top executive Armstrong in 1998, after a president, Global Quality, at as chief executive officer 1994. Prior to joining that since 2001. Prior to that, career of 37 years, spanning Ford Motor Company for five of the Geisinger Health organization, he was deputy he had been president and a number of key management years before being named System, an institution that director of the National chief operating officer of the positions. He also serves as to her present position with he directed for eight years.

Science Foundation. He also company. Mr. Conway joined a director of the Geisinger Ford's Mexican subsidiary in He is past president and a has served as a member of Crown, Cork & Seal in 1991 Health System. He earned a 2005. Previously, she headed Distinguished Fellow of the U.S. Nuclear Regulatory as a result of its acquisition of Bachelor of Science degree in Whirlpool Corporation's the American College of Commission and as assistant Continental Can International mechanical engineering from quality and refrigeration Physician Executives. Dr.

secretary of state for Oceans, Corporation, where he served the University of Tennessee. units. Ms. Ooeser started her Heydt attended Dartmouth Environment and Science. as president and in various career with Westinghouse College and received an Dr. Bernthal earned a management positions. He Electric Corporation, where M.D. from the University Bachelor of Science degree earned a Bachelor of Arts - over a 20-year period - she of Nebraska.

in chemistry from Valparaiso degree in economics from the held a variety of key positions University and a Ph.D. in University of Virginia and a in the Energy Systems and nuclear chemistry from the law degree from Columbia Environmental businesses.

University of California Law School. She earned a bachelor's at Berkeley. degree in mathematics from Pennsylvania State Univer-sity and a Master of Business Administration degree from the University of Pittsburgh.

120 PPL Corporation 2007 Annual Report

Allentown, Pa. Wilmington, Del Pittsburgh,Pa. Wilmington, Del. St. Louis, Mo.

Chairman, President Presidentand Chief Chief Executive Officer Vice Presidentand Treasurer Senior Vice President, and Chief Executive Executive Officer West Penn Allegheny E.1, du Pont de Nemours Secretary and General Officer HerculesIncorporated Health System and Company Counsel PPL Corporation Manufacturerand marketer Health-carenetwork of six Manufacturerof pharmaceu- Centeno Corporation Age 59 of specialty chemicals affiliated hospitals that ticals, specialty chemicals, Multi-line health-careenter-Directorsince 2005 and related services serve Pittsburgh and the biotechnology and high- prise that providesprograms Age 51 surroundingfive-state area. performancematerials and related services to Directorsince 2005 Age 73 Age 55 individuals receiving benefits Directorsince 2000 Directorsince 2001 underMedicaid, including Supplemental Security Income and the State Mr. Miller served as Mr. Rogerson has served Mr. Smith assumed his Ms. Stalnecker served Children'sHealth Insurance president before being as the top executive at current position in July 2007. as vice president-Risk Program named to his current Hercules since 2003. He He previously served as vice Management from June Age 55 position in October 2006. joined Hercules in 1979 chairman of Mellon Financial 2005 to September 2006, Directorsince 2005 He also serves on the and served in a number Corporation and senior vice vice president- Government boards of PPL Electric of management positions, chairman of Mellon Bank, and Consumer Markets, Mr. Williamson previously Utilities Corporation and including president of several N.A., before his retirement in DuPont Safety & Protection served as president of the PPL Energy Supply, LLC. Hercules subsidiaries, 1998. He also is a director of for over two years, and as Capital Services Division of Mr. Miller joined PPL in before being named to DENTSPLY International Inc., vice president-Finance Pitney Bowes Inc. for over February 2001 as president his current position. From West Penn Allegheny Health and treasurer for over four seven years and assumed his of PPL Generation and was 1997 to 2000, he served as System, Baytree Bancorp, years before being named current position at Centene named executive vice president and chief executive Inc., Baytree National Bank to her current position in in November 2006. He joined president of PPL Corporation officer of Wacker Silicones and Trust Co. and LED September 2006. She also Pitney Bowes in 1988 and in January 2004 and chief Corporation. He also serves Medical Diagnostics, Inc. serves on the board of Duke held a series of positions in operating officer in as a director of Hercules, Mr. Smith earned a Bachelor University. Ms. Stalnecker the company's tax, finance September 2004, a position and serves on the boards of Commerce degree from the earned a bachelor's degree and legal operations, he held until the end of June of the American Chemistry University of Saskatchewan from Duke University including oversight of the 2006. He earned a bachelor's Council, the Delaware and a Master of Business and a Master of Business treasury function and degree in electrical engi- Business Roundtable and Administration degree from Administration degree rating agency activity. Mr.

neering from the University First State Innovation. Mr. the Unidersity of Western from the Wharton School Williamson earned a Bachelor of Delaware and served in Rogerson earned a chemical Ontario, and is a Chartered of Graduate Business at the of Arts degree from Brown the U.S. Navy nuclear engineering degree from Accountant. University of Pennsylvania.

University, Juris Doctor submarine program. Michigan State University.

and Master of Business Administration degrees from Harvard University, and a Master of Law degree C> in taxation from New York University Law School.

Compensation, Governance Nuclear Oversight Executive Committee Audit Committee and Nominating Committee Finance Committee Committee James H. Miller, Chair Stuart Heydt, Chair E. Allen Deaver, Chair W. Keith Smith, Chair Frederick M. Bernthal, Chair Frederick M. Bernthal Frederick M. Bernthal John W. Conway John W. Conway E. Allen Deaver E. Allen Deaver W. Keith Smith Louise K. Goeser E. Allen Deaver Stuart Heydt Stuart Heydt Susan M. Stalnecker Stuart Heydt Susan M. Stalnecker Craig A. Rogerson Keith H. Williamson PPL Corporation 2007 Annual Report 121

Management and Officers Corporate Leadership Council Officers James H. Miller James E. Abel Edward T. Novak Chairman, President and CEO VP-Finance and Treasurer VP-Corporate Information Officer PPL Corporation PPL Corporation PPL Services Paul A. Farr Robert W. Burke Jr. Joanne H. Raphael Executive VP and CFO VP and Chief Counsel VP-External Affairs PPL Corporation PPL Global PPL Services William H. Spence Neil J. Gannon Stephen R. Russo Executive VP and COO VP-Nuclear Operations VP-Human Resources and Services PPL Corporation PPL Susquehanna PPL Services Robert J. Grey Robert M. Geneczko J. Matt Simmons Jr.

Senior VP, General Counsel VP-Customer Services VP and Controller and Secretary PPL Electric Utilities PPL Corporation PPL Corporation President Vijay Singh PPL Gas Utilities VP-Risk Management Major Subsidiary Presidents PPL Services Michael E. Kroboth VP-Energy Services Paul T. Champagne Bradley E. Spencer PPL Energy Services PPL Energy Services VP and COO-Western Fossil and Hydro Victor N. Lopiano David G. DeCampli PPL Generation President PPL Electric Utilities PPL Nuclear Development Robert A. Symons (effective June 1, 2008)

Clarence (Joe) Hopf Jr. Chief Executive PPL EnergyPlus Western Power Distribution Britt T. McKinney Senior VP and Chief Nuclear Officer VP-United Kingdom Rick L. Klingensmith PPL Susquehanna PPL Global PPL Global Dennis J. Murphy Bryce L. Shriver VP and COO-Eastern Fossil PPL Generation and Hydro PPL Generation 122 PPL Corporation 2007 Annual Report

Shareowners are invited to attend the annual meeting to be held on Shareowners can access PPL Securities and Exchange Commission Wednesday, May 21, 2008, at the Holiday Inn in Fogelsville, Pennsylvania, filings, corporate governance materials, news releases, stock quotes and in Lehigh County. The meeting will begin at 10 a.m. (EDT). historical performance. Visitors to our Web site can provide their e-mail address and indicate their desire to receive future earnings or news releases automatically.

PPL Corporation common stock is listed on the New York and Philadelphia stock exchanges. The symbol is PPL. The company has filed with the SEC, as exhibits to its 2007 Annual Report on Form 10-K, the certifications Registered shareowners can access account information by visiting of the company's Chief Executive Officer and its Chief Financial Officer www.shareowneronline.com, required under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

In addition, in 2007 the company submitted to the New York Stock Exchange (NYSE) and the Philadelphia Stock Exchange (PHLX) the PPL Investor Services For any questions about PPL subsidiaries or information concerning:

required annual certifications of the company's Chief Executive Officer that he was not aware of any violation by the company of the NYSE's or PHLX's corporate governance listing standards. Lost Dividend Checks Bond Interest Checks Direct Deposit of Dividends Dividends Bondholder Information High Low Declared 1st quarter $41.53 $34.43 $.305 Please contact:

2nd quarter 49.44 - 40.87 .305 Manager-PPL Investor Services 45.40 .305 Two North Ninth Street (GENTW8) 3rd quarter 52.79 Allentown, PA 18101 4th quarter 54.58 46.36 .305 Dividends Toll-free: 1-800-345-3085 High Low Declared Fax: 610-774-5106 1st quarter $32.16 $29.21 $.275 Via e-mail: invserv@pplweb.com 2nd quarter 32.31 27.83 .275 3rd quarter 35.23 32.20 .275 Dividend checks lost by investors, or those that may be lost in the mail, 4th quarter 37.34 32.39 .275 will be replaced if the check has not been located by the 10th business day following the payment date.

The company has paid quarterly cash dividends on its common stock in every year since 1946. The dividends declared per share in 2007 and 2006 were $1.22 and $1.10, respectively. The most recent regular Shareowners may choose to have their dividend checks deposited quarterly dividend paid by the company was 30-1/2 cents per share, directly into their checking or savings account.

paid Jan. 1, 2008. On Feb. 22, 2008, the company increased its quarterly dividend to $0.335 per share (equivalent to $1.34 per year), effective with the quarterly dividend payable April 1, 2008, to shareowners of record on March 10, 2008. Wells Fargo Shareowner Services For information concerning:

The planned dates for consideration of the declaration of dividends by PPL's Dividend Reinvestment Plan the board of directors or its Executive Committee for the balance of 2008 Stock Transfers are May 21, Aug. 22 and Nov. 21. Subject to the declaration, dividends are Lost Stock Certificates paid on the first day of April, July, October and January. Dividend checks Certificate Safekeeping are mailed in advance of those dates with the intention that they arrive as Please contact:

close as possible to the payment dates. The record dates for dividends for Wells Fargo Bank, N.A.

the balance of 2008 are expected to be June 10, Sept. 10 and Dec. 10.

Shareowner Services 161 North Concord Exchange C2 If you have more than one account, or if there is more than one investor South St. Paul, MN 55075-1139 in your household, you may contact PPL Investor Services to request Toll-free: 1-866-280-0245 that only one annual report be delivered to your address. Please provide Outside U.S.: 651-453-2129 account numbers for all duplicate mailings.

Shareowners may choose to have dividends on their PPL Corporation PPL Corporation's annual report on Form 10-K, filed with the Securities and common stock or PPL Electric Utilities preferred and preference stock Exchange Commission, is available in March. Investors may obtain a copy, reinvested in PPL Corporation common stock instead of receiving the at no cost, by calling the PPL Shareowner Information Line or by accessing dividend by check. Participants in PPL's Dividend Reinvestment Plan the report via the company's Web site.

may choose to have their common stock certificates deposited into their Plan account.

Shareowners can get detailed corporate and financial information 24 hours2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> a day using the PPL Shareowner Information Line. They can hear PPL Corporation and PPL Electric Utilities Corporation participate in the timely recorded messages about earnings, dividends and other company Direct Registration System (DRS). Shareowners may choose to have their news releases; request information by fax; and request printed materials E common or preferred stock certificates deposited into DRS.

in the mail. Other PPL publications, such as the annual and quarterly reports to the Securities and Exchange Commission (Forms 10-K and PPL and the PPL logo are trademarks of PPL Corporation or an affiliate.

a 10-0), will be mailed upon request.

S&P 500 is a registered trademark of McGraw-Hill, Inc.

©PPL Corporation. All Rights Reserved

v a I Two North Ninth Street Allentown, PA 18101-1179 1-800-345-3085 www.pplweb corn

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Continuing a tradition of progressive thinking, Allegheny Electric Cooperative, Inc. (Allegheny) in 2007 began putting the pieces together for its power supplyfuture, assembling U a "Patchwork Quilt" of diversified options that will meet the energy needs of tomorrow. U Along with a lo percent ownership U P roviding electric consumers with cooperative a reliable supply share of the 2,355-megawatt Susque-of energy at a competitive price - that hanna Steam Electric Station (SSES) i has been the goal of Allegheny Electric nuclear power plant, Allegheny also U Cooperative, Inc. since its formation operates the Raystown Hydroelectric in 1946. In 2007, Allegheny continued Project/William F Matson Generating Ul to meet this goal - and did it while Station. Additional hydropower is delivering electricity at wholesale rates secured through long-term contracts U lower than they were in 1987. with the New York Power Authority.

U This record of reliability and value Investment in these nuclear and stands in stark contrast to the power hydropower resources has kept U

picture most electric utilities are Allegheny largely shielded from ml looking at today. An ever-increasingly skyrocketing fossil-fuel prices, thus Lowell Friedline Board Chairman volatile energy market - marked allowing us to keep our rates stable. mm by soaring fossil fuel prices, envi- And since these generating resources ronmental regulation, increasing do not pollute the air, we are not in ml demand mixed with decreasing ca- the "carbon spotlight" being shone pacity - has many utilities forecast- on many fossil-fuel burning utilities. UN ing unprecedented rate increases. Today, as lawmakers contemplate legislation to confront climate change, U Despite such market instability, the Allegheny's early investment in clean energy outlook for Allegheny and energy continues to pay dividends.

ml its 14 member electric distribution Ul cooperatives in Pennsylvania and With the benefit of that experience New Jersey remains highly favor- in mind, Allegheny is making deci- UN able. This is owed in large part to sions now to secure its future power decisions made 30 years ago, when supply needs. While approximately U Allegheny invested in nuclear and 70 percent of our energy comes from hydropower plants. Today, nearly self-owned generation resources and U 70 percent of our energy supply long-term contracts, the remainder Frank Betley President & CEO comes from these clean, stable is acquired through a power supply U and relatively low-cost nuclear and agreement established in 2001 with hydropower resources. the Williams Power Company. That U

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agreement, later assumed by Bear. baaseload generaton.,Plant owner- ,.) Load Management Systern(LMS).

U Energy LP/JPMorgan Chase expires. ship would'further reduce Aliegh- ' This system .a demand-side;mea-:

at the end of 2oo8. To ensure an eny s exposure-tomarket~vtatility sure that has-been in place since U adequate, reliable and diversi- by locking in a portion of our future 1986, helps shift electricity use of fled supply of power beyond this requirements under a known set hot water heaters and other appli-U agreement, Allegheny has been of factors. Thanks to our positive ances from times of peak demand actively engaged in power plan- partnership with SSES co-owner PPL to off-peak hours. By doing so, our 0

ning and procurement. Corporation, along with our strong CLMS improves system efficiency, wi U

relationships with other generation cuts costly demand charges and In development for a number of and transmission cooperatives, we reduces the need for new gener- I-mU years, Allegheny in 2007 initiated have greater flexibility in exploring ating capacity. The upgrade will its "Patchwork Quilt" strategy of a number of baseload options. further enhance the capabilities of power supply management by Allegheny's CLMS and its members' z securing a number of resources.for Infurther diversifying our resources, advanced metering systems, hailed future power and energy needs. Allegheny is looking into distrib- by both legislators and governmen-This strategy involves entering uted generation systems that tal agencies as the "right approach" into multiple energy and capacity could help meet local peak loads, to addressing energy issues.

U agreements for different amounts These systems could prove highly and for different lengths of time. beneficial by reducing transmis- As we look beyond 2007, Allegh-U By diversifying in this way, we sion peaks and by lessening our eny is again well positioned to U.

are not dependent on any single capacity obligations. They could make decisions that will have a U source for our power supply. And also serve as an emergency positive impact on our future.

because Allegheny is in such a source of energy, helping to get With stable rates, a solid financial U favorable position with respect to our power back to members in the outlook, and a clean, diversified Ui own power resources, we are able event of transmission outages. power portfolio, we have remained 4a U to evaluate a number of different strong in a turbulent market. That VI possibilities and take advantage of As we prepare for the future, strength allows us to focus on U the best opportunities that arise. Allegheny remains committed to our long-standing commitment U enhancing our current resources. of providing our members with Allegheny is also exploring the In 2007, we moved forward with a a reliable supply of electricity at U option of investing in additional plan to upgrade our Coordinated a competitive price.

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,* ms-decmanagementacapabilities by securing i ourgeneratinh portfolio powerfesources treplace the Williams. th'at allows us greater flexibility in securing Power Company power supply agreement, our future wholesale power supply needs -

due to expire at the end of 2008. That helping Allegheny achieve its core mission agreement, later assumed by Bear Energy of stable and affordable wholesale power U LP/JPMorgan Chase, has worked effectively rates for our member cooperatives in U to help stabilize Allegheny's rates to its Pennsylvania and New Jersey. m member distribution cooperatives.

HERE IS A LOOK AT ALLEGHENY'S Susquehanna Steam both are in the process of being POWER PLANT PORTFOLIO:

Electric Station: uprated by approximately 14 per- U cent. The uprate is scheduled to be completed in 2010. Addition- U Raystown Allegheny owns io percent of ally, PPL Corporation announced Hydroelectric Project: the Susquehanna Steam Electric Station (SSES), a 2,355-megawatt, in 2007 its intention to pursue a new unit at the Berwick site.

n Allegheny's Raystown Hydroelec- two-unit nuclear power plant located in Luzerne County, Pa. PPL mm tric Project/William F Matson Generating Station (Raystown) is a Susquehanna, a division of Allen-two-unit, 21-megawatt, run-of-river town, Pa.-based PPL Corporation, New York Power m hydropower facility located at Ray- owns the remaining 9o percent Authority:

stown Lake and Dam in Huntingdon and operates the boiling water mm County, Pa. In 2007, Raystown reactor facility. Since 1966, Allegheny has pur-provided 73.7 million kilowatt-hours chased power generated by fed- mu at delivery, equating to approxi- In 2007, this lo percent share of eral hydroelectric projects located mately 2.5 percent of Allegheny's SSES provided a near-record 1.8 along the Niagara and St. Lawrence U~

requirements for the year. The plant billion kilowatt-hours of electricity rivers in upstate New York. Both maintained 98.9 percent availability. at delivery to Pennsylvania and facilities are operated by the New U New Jersey electric cooperatives. York Power Authority (NYPA).

Allegheny staff operates the hydro The capacity factor of SSES Unit m project in close cooperation with was 92.1 percent; Unit 2 was 85.1 In 2007, Allegheny received an the Baltimore District of the U.S. percent. This works out to an aver- allocation of 33.1 megawatts from m Army Corps of Engineers, which age annual composite capacity fac- the projects for the benefit of its controls water releases from Ray- tor for the facility of 88.6 percent. 14 member cooperatives in Penn- mm stown Lake, the largest man-made Both Unit 1 and Unit 2 run on a sylvania and New Jersey.

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Since 1966, NYPA generation has By shifting use of residential water achieved since December 4Z U saved Pennsylvania and New Jer- heaters, electric thermal stor- 1986 to more than $86 CN sey electric distribution coopera- age units, dual fuel home heating million. Currently, 195 U tives an estimated $316 million, systems, and other special equip- substations are being compared to the cost of purchas- ment inthe homes of volunteer utilized for load control U ing the same amount of electric- cooperative consumers to off-peak with more than 46,50o load ity from other sources. hours, the CLMS improves system ef- control receivers installed on U ficiency, cuts costly demand charges appliances (mostly water heaters) cooperatives must pay for purchased in the homes of electric coopera-U Load Management: power, and reduces the need for new tive consumers.

generating capacity. The system is U In 1986, Allegheny and its also used during summer peaks to After moo're than 20 years of helping reduce Allegheny's capacity obliga- Allegheny and its member coopera-member electric distribution U cooperatives in Pennsylvania tions under procedures established tives reduce peak consumption, the by the PJM Interconnection. system is ready for an upgrade. Al-and New Jersey launched the U Coordinated Load Management legheny took steps in 2oo0 to begin In 2007, the CLMS reduced coop- updating CLMS-related equipment.

System (CLMS) to reduce electric-U ity consumption during peak erative purchased power costs New equipment is expected to be demand periods. by more than $4 million, bring- on-line in 2008, helping provide for U ing total net power cost savings greater system efficiencies.

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Independent Accountants' Report Board of Directors Allegheny Electric Cooperative, Inc.

Harrisburg, Pennsylvania We have audited the accompanying consolidated balance sheets of Allegheny Electric Cooperative, Inc.

(Cooperative) as of December 31, 2007 and 2006, and the related consolidated statements of margin, members' equities, and cash flows for the years then ended. These financial statements are the 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 of America. Those standards require that we plan and perform the audit to obtain reasonable assurance Uabout whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also Uincludes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable Ubasis for our opinion.

U In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Allegheny Electric Cooperative, Inc. as of December 31, 2007 and

• 2006, and the results of its operations and its cash flows for the years then ended in conformity with

- accounting principles generally accepted in the United States of America.

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225 N. Water Street, Sufte 400 P.O. Box 1580 Decatur, IL62525-1580 217.429.2411 Fax 217.429.6109 Praxitx' MEMBER *"

• ~com GLOBAL ALLIANCE OF Beyond Your Numbers INDEPENDENT FIRMS A

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U Assets 2007 2006 U Electric Utility Plant, at cost U In service (see Note 2) $ 805,891 $ 785,108 Less, accumulated depreciation (695,664) (685,330) U 110,227 99,778 Construction work in progress 16,771 11,002 U Nuclear fuel in process (see Note 1 and 3) 19,421 20,375 U

Net electric utility plant (see Note 1, 2 and 3) 146,419 131,155 U

Investments and Other Assets Investments in associated organizations (see Note 4) 24,833 24,421 U Nuclear Decommissioning Trust (see Note 1 and 6) 60,858 54,521 Notes receivable, members, less current portion (see Note 5) . 5 27 U Non-utility property, at cost (net of accumulated depreciation of

$6,665 in 2007 and $6,182, in 2006) 4,125 4,164 U Deferred tax asset, net (see Note 11) 18,013 Other noncurrent assets 28 61 U 107,862 83,194 U Current Assets Cash and cash equivalents 36,474 57,377 U

• Investments (see Note 4) 35,395 14,664 Derivative investment (see Note 7) 4,236 6,446 U

Accounts receivable, members (see Note 1) 15,869 22,125 Accounts receivable, affiliated organizations 82 34 U

Other receivables 280 265 Inventories (see Note 1) 7,087 6,931 U Other current assets 4,736 *2,161 U

Total current assets 104,159 110,003 U

Deferred Charges (see Note 8)

Capital retirement asset 10,900 36,610 U Other 61 . 309 U

10,961 36,919 U

$ 369,401 $ 361,271 U U

U U

U See Notes to Financial Statements

Members' Equities and Liabilities 2007 2006 Members' Equities (see Note 1)

Membership fees $ 3 $ 3 Patronage capital 32,151 30,430 Donated capital 38 38 Unrestricted net assets 100 100 Retained earnings 14,861 5,659 Members' equities 47,153 36,230 Accumulated other comprehensive income 6,096 5,358 U]

Total equities 53,249 41,588

[]

Asset Retirement Obligation (see Note 9) 126,553 121,686 Long-Term Debt (see Note 10) 128,186 138,891 Current Liabilities Current installments of long-term debt 10,705 32,357 Accounts payable arid accrued expenses 12,771 15,552

[] Accounts payable, affiliated organization 103 169

[]

Total current liabilities 23,579 48,078 Other Liabilities and Deferred Revenue Deferred income tax obligation from safe harbor lease (see Note 16) 1,543 1,852 Financial transmission rights (see Note 7) 4,236 6,446 Deferred credits (see Note 17) 32,055 2,730 37,834 11,028 IM I-

$ 369,401 $ 361,271

Allegheny Electric Cooperative, Inc.

UI Ul 2007 2006 U

Operating Revenues $ 177,701 $ 181,417 UI Operating Expenses Operations Purchased capacity and energy costs 52,525 56,198 Transmission Operation 19,183 14,638 Maintenance 480 370" Production Operation 22,128 20,461 Maintenance 10,853 11,291 Fuel 9,165 8,552 114,334 111,510 Depreciation 6,823 6,632 Accretion of asset retirement obligation 4,867 4,680 Amortization of capital retirement asset 25,710 26,919 Administrative and general 9,848 8,759 Property and other taxes 571 579 162,153 159,079 Operating Margin Before Interest and Other Expenses 15,548 22,338 Other Revenues and (Expenses)

Gain on debt refinancing (see Note 10) 8,082 Interest expense (10,133) (9,399)

(1,310)

Other deductions, net (1,306)

(11,443) (2,623)

I4~

Operating Margin 4,105 19,715 0 Non-operating Margins Net nonoperating rental income 1,310 1,214 Interest income 6,825 5,396 Other income (expense) 2,621 (39) 10,756 6,571 a wU Net Margin 14,861 26,286 W1 UI Other Comprehensive Margin Z

Unrealized appreciation in investments 738 1,988 I1 Comprehensive Margin $ 15,599 $ 28,274 See Notes to FinancialStatements

m m

U Allegheny Electric Cooperative, Inc.

nn U

m m

m Membership Donated Patronage U Fees Capital Capital U]

Balance, January 1, 2006 $ 3 $ 38 $ 34,122 U

Patronage capital retirement (3,692)

Consolidation of variable interest entity HI Comprehensive margin Net margin n Change in unrealized appreciation on investments Balance, December 31, 2006 3 38 30,430 Patronage capital retirement -(3,938)

Patronage capital assignment 5,659 Comprehensive margin Net margin U

Change in unrealized appreciation on investments mm Balance, December 31, 2007 $ 3 $ 38 $ 32,151 hi n

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nm Accumulated nm Retained Total Other Unrestricted Earnings Members' Comprehensive Total U] Net Assets (Deficits) Eauities Marcin EQuities U] .$ $ (20,627) $ 13,536 $ 3,370 $ 16,906 U] (3,692) (3,692) 100 100 100 U

26,286 26,286 - 26,286 1,988 1,988 100 5,659 36,230 5,358 41,588 (3,938) (3,938)

(5,659) 14,861 14,861 14,861 738 738 U $ 100 $ 14,861 $ 47,153 $ 6,096 $ 53,249 LA I-U]

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&oy~a ~ ~ evim 2007 2006 Operating Activities Net margin $ 14,861 $ 26,286 Items not requiring cash Depreciation and fuel amortization 13,137 12,353 Amortization of capital asset retirement 25,710 26,919 Accretion of asset retirement obligation 4,867 4,680 Gain on debt refinancing (8,082)

Deferred income taxes ,(18,013)

IU Change in Ul Investments in associated organizations (412) (23,757)

Accounts receivable, members 6,256 (5,866)

Ul Other receivables (15)

(156) 20,134 (183)

Inventories (6,163)

IU Derivative investment Other current and non-current assets 2,210 (2,542) 269 Accounts payable and accrued expenses (2,781) 2,424 IU Accounts (receivable) payable, affiliated organizations (114) (114)

Other liabilities and deferred credits 27,054 6,103 IU Net cash provided by operating activities 70,062 55,003 UI Investing Activities lU Additions to electric utility plant and non-utility property, net (28,362) (14,826)

Payments received on notes receivable, members 22 19 Purchase of investments, net (20,619) 1,555 Purchase of other investments (5,711) (1,660)

Cash received on consolidation of variable interest entity 493 Net cash used in investing activities (54,670) (14,419)

Financing Activities UI Principal payments on long-term debt (32,357) (41,405)

UI Proceeds from issuance of long-term debt 23,721 Patronage capital retirement (3,938) (3,692) z Net cash used in financing activities (36,295) (21,376)

Net Increase (Decrease) in Cash and Cash Equivalents (20,903) 19,208 0

ttl KM I-Cash and Cash Equivalents, Beginning of Year 57,377 38,169 0

Cash and Cash Equivalents, End of Year $ 36,474 $ 57,377 0

z UI Supplemental Cash Flows Information Interest paid $ 10,481 11,079 U Income tax paid 1,882 272 See Notes to Financial Statements

Allegheny Electric Cooperative, Inc.

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 historically was provided'by the U.S. Department of Agriculture, Rural Utilities Service (RUS) and, therefore, the Cooperative was subject to certain rules and regulations promulgated for rural electric borrowers by RUS. The Cooperative refinanced all outstanding debt on March 31, 2006 with 100% financing now provided by the National Rural Utilities Cooperative Finance Corporation (CFC) and since that date, the Cooperative is no longer subject to rules and regulations of the RUS. U The Cooperative is a generation and transmission cooperative. The member cooperatives' primary service areas are rural areas throughout much of Pennsylvania and a portion of New Jersey. The Cooperative extends unsecured credit to its members. The Cooperative's primary operating asset is its 10% undivided interest in the Susquehanna Steam Electric Station (SSES), a 2,355-megawatt, two-unit nuclear power plant, co-owned by a subsidiary of PPL Corporation (PPL).

The Board of Directors of the Cooperative, appointed by its members, has full authority to establish electric rates. Rates are established on a cost of service basis. Beginning in 2007, the Cooperative's Board of Directors has established a deferred revenue account to offset future increases in power supply costs after 2008.

Principlesof Consolidation Effective May 13, 2006, the financial statements include the accounts of the Cooperative and a variable interest entity, Continental Electric Cooperative Services, Inc. (CCS), of which the U Cooperative has determined it is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

Basis of Accounting The Cooperative maintains its accounting records in accordance with the Federal Energy Regulatory Commission's (FERC) uniform system of accounts as modified and adopted by RUS.

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 of Regulation.

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[]lUectricEstilimPantes Eltfectri utlthe rplatiscrrted amuts oaset. aDepreiabtiesondislur of elcrcuoltlntispoingent assertshan

]estimabltied sefulteives offnnilreotadthe respciepsesonasragt-lin basins, oeexcept for nuclnear fuelng UL Dereguateonful Nl nis, ex t foruction Utility Plant Nucltric .l*

fom Nuclear utility Plant te i reh MainGenicantl anffeted the Coopertativeperations ab trecaove itscsde thrmou futur ratesan charo d mrebaers. to expendReplacements and renewals of items consined to

[] ~~be units of property are charged to 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. o A

Allegheny Electric Cooperative, Inc.

Property and Equipment Property and equipment are depreciated on a straight-line basis over the estimated useful life of each asset.

Nuclear Fuel Nuclear fuel is charged to fuel expense based on the quantity of heat produced for electri c generation. Under the 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.

Other Investments Debt and equity securities for which the Cooperative has no immediate plan to sell but may be sold in the future are classified as available for sale and carried at fair value. Unrealized gains and losses are recorded in members' equities.

Realized gains and losses, based on the specifically identified cost of the security, are included in net income.

Cash and Cash Equivalents H Cash and cash equivalents consist of bank deposits in federally insured accounts, temporary investments, money market funds, and certificates of deposit.

The Cooperative places its cash and temporary investments with high quality financial institutions.

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. At December 31, 2007, the Cooperative's cash accounts exceeded federally insured limits by approximately $35,619,000.

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, interest 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 Accounts receivable are stated at the amount billed to members. Accounts receivable are due inU accordance with approved policies. An allowance for doubtful accounts has not been recorded because all accounts receivable are considered fully collectible.U

Notes receivable are stated at their outstanding principal amount. An allowance for uncollectible U notes has not been recorded because all notes receivable are considered fully collectible.

Inventories The Cooperative accounts for certain power plant spare parts using a deferred inventory method.

Under this method, 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.

PatronageCapital and Other Margins and Equities (Deficiencies)

[] The Cooperative had established an unallocated equity account, Retained Earnings (Deficits), as a result of charges against margin. These charges against margin were recorded as deficits in an

[] unallocated equity account because the amount was not allocable to the Cooperative's members.

With the 2006 net margins, the unallocated margins have been eliminated and all future margins (excluding earnings from the Nuclear Decommissioning Trust), are assigned as patronage capital.

Income Taxes 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 not that a deferred tax asset will not be realized.

w Revenue Recognition L=

Revenue from the sale of electricity to members is recorded based on contracted power usage billed 4-

[] under the Cooperative's current rate schedule.

Z Impairment of Long-Lived Assets z K' The Cooperative reviews the carrying amount of anasset for possible impairment whenever events or changes in circumstances indicate that such amounts may not be recoverable. For the years ended 2007 and 2006, no such circumstances were noted.

z 4A UU I-0 U

Allegheny Electric Cooperative, Inc.

Note 2: Electric Utility Plant in Service U

2007 2006 (In thousands)

Nuclear Utility Plant Production $ 578,949 $ 572,221.

Transmission 41,232 41,232 General plant 3,102 2,951 U Nuclear fuel 168,784 155,115 792,067 771,519 Non-Nuclear Utility Plant 13,824 13,589 U

Total $ 805,891 $ 785,108 n

Note 3: Susquehanna Steam Electric Station n The Cooperative owns a 10% undivided interest in SSES. PPL owns the remaining 90%. Both participants provide their own financing. The Cooperative's po rtion of SSES's gross assets, which includes electric utility plant in service, construction and nuclear fuel in progress, totaled $614 million and $595 million as of December 31, 2007 and-2006, respectively. The Cooperative's share of anticipated costs for ongoing construction and nuclear fuel for SSES is estimated to be approximately $94.2 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 59% and 60% of the total kilowatt hours sold by the Cooperative during the years ended December 31, 2007 and 2006, respectively. The balance sheets and statements of income reflect the Cooperative's respective share of assets, liabilities and operations associated with SSES.

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Note 4: Investments Associated Organizations 20 07 2006 (In thousands)

U]

[] National Rural Utilities Cooperative Finance Corporation (CFC) Subordinated Term Certificate, bearing interest

[] at 5.52%, maturing February 1, 2008(1) $ 7,145 $ 7,145 National Rural Utilities Cooperative Finance Corporation

[] (CFC) Subordinated Term Certificates, bearing interest at 5.8%, maturing January 1, 2026(1) 16,576 16,576 National Rural Utilities Cooperative Finance Corporation (CFC) Subordinated Term Certificates, bearing interest from 0% to 5%, maturing January 1, 2014(1) 300 342

[] Other 812 358

[]

$ 24,833 $ 24,421

(')The Cooperative is required to maintain these investments pursuant to certain loan and guarantee agreements. Such investments are carried at cost.

Temporary Investments The Cooperative makes temporary investment of excess corporate funds in investment accounts managed by qualified registered investment advisors. The amortized cost, which includes any premiums or discounts at acquisition, and approximate fair values of these investments are as follows:

2007 2006 Debt securities UA Amortized cost $ 35,507. $ 14,664 Z Unrealized gains 85 -

Unrealized losses (197)

Fair value $ 35,395 $ 14,664

U U

Allegheny Electric Cooperative, Inc. U U

U U

U Maturities of debt investments at December 31, 2007: U Amortized Approximate U Cost Fair Value U

One year or less $ 28,909 $ 28,712 After one through five years 6,598 6,683 U

U

$ 35,507 $ 3,9 U

U Note 5: Notes Receivable from Members U Notes receivable from members arise from the lease of load management equipment to the member U cooperatives. Such notes bear interest at a variable rate (7.25% and 7.30% as of December 3 1, 2007 and 2006, respectively) and mature on March 31, 2009. Notes receivable from members U were $26,000 and $53,000 as of December 31, 2007 and 2006, respectively.

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Note 6: Nuclear Decommissioning Trust The Nuclear Decommissioning Trust consists of the following as of December 31, 2007 and 2006:

December 31, 2007 U Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value (in thousands)

Decommissioning Trust Fund A:

Cash 361 361 U.S. Government securities 6,939 108 7,047 U] Corporate bonds 3,606 52 (5) 3,653 Other obligations 884 10 894

[] Common stocks 9,907 1,937 (114) 11,730 21,697 2,107 (119) 23,685 NRC mandated Decommissioning Trust Fund B:

Cash 1,276 . 1,276 U.S. Government securities 10,666 170 (3) 10,833 Corporate bonds 5,793 72 (5) 5,860 Other obligations 950 14 (6) 958 Common stocks 14,269 4,205 (228) 18,246

-5 4

32,954 4,461 (242) 37,173 Li z

4 z

Total $ 54,651 $ 6,568 (361) $ 60,858 ml-a

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Allegheny Electric Cooperative, Inc. U U

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U December 31, 2006 Gross Gross U

Unrealized Unrealized Fair U Cost Gains Lo*sses Value (In thousands) U Decommissioning Trust Fund A:

Cash $ 331 $ 331 U

U.S. Government securities 10,092 15 (49)

Corporate bonds 5,899 34 (50) 10,058 5,883 U

917 Other obligations 948 (31) U Common stocks 3,011 1,738 (33) 4,716 U

20,281 1,787 (163) 21,905 U

NRC mandated Decommissioning Trust Fund B:

U Cash 478 478 U.S. Government securities 13,243 31 (47) 13,227 U

Corporate bonds 7,795 35 (50) 7,780 U Other obligations 842 1 (21) 822 3,868 Common stocks 6,524 (83) 10,309 U 28,882 3,935 (201) 32,616

$ 49,163 $ 5,722 Total $ (364) $ 54,521 U

U 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, 2007 U and 2006, was $11.1 million and $25.0 million, respectively. These declines primarily resulted from increases in market interest rates prior to the balance sheet date and the failure of certain U investments to meet projected earnings targets, which management believes is temporary. The gross unrealized losses at December 31, 2007 for a period of less than 12 months was $332,000 and U for a period greater than 12 months was $28,000. The gross unrealized losses at December 31, 2006 for a period of less than 12 months was $160,000 and for a period greater than 12 months was U

$203,000.

U U

U U

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U U Note 7: Financial Transmission Rights The Cooperative is issued Financial Transmission Rights (FTRs) by PJM Interconnection LLC, (PJM). These FTRs have been found to meet the FASB Statement No. 133, Accountingfor Derivative Instruments and Hedging Activities, 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 i "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 transmission congestion charges that arise when that specificipath is congested. The purpose of the FTR m~echanism is to act as a hedge against volatile congestion charges.

Market values of FTRs are only observable based on the clearing prices of the FTRs in annual,

~seasonal and monthly auctions. The expected value of FTRs fluctuates based on seasonal expectations of the supply and demand of energy for each specific path. Significant assumptions I and modeling projections are necessary to value FTRs. The expected FTR values 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. 7 1, A ccountingfor the Effects of Certain Types TeCoopertiv e of Regulation.

rcieaaesdsend The fair value of FTRs was $4,236,000 and netteentroeFTsnFT $6,446,000$od romasouce as of to61 a

~December UL 31, 2007 and 2006 for'the remainder of the current PJM planning periods that end May 31, 2008 and 2007.

Note 8: Deferred Charges R Deferred charges consist of the following regulatory assets as of December 31, 2007 and 2006.

Uad mnthy auti~s.

sesonl he xpeted alu ofFT~ flctuaes ase onseaona Ill2007 expetatons f oteenrgyfor spplyanddemndachspecficpat. 2006 Sinifcan assmptons U. D(In U anpojetios moelig ae ncesaryto alu FTs. he xpetedFTRvales thousands) re onsderd hv i Accrued decontamination and decommissioning of nuclear fuel ca236e Safe harbor lease closing costs 61 73anl Z

$ 10,961 $ 36,919 v IIL" A

N Allegheny Electric Cooperative-, Inc.

Based on agreements signed by the 14 member distribution cooperatives on March 29, 1999, with an effective date of January 1, 1999, and amended in 2004 and 2006, a portion of the SSES impairment writedown that took place in 1998 has been recognized as a regulatory asset and is 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 no later than December 31, 2009.

Note 9: Asset Retirement ObligationU Amounts collected from the Cooperative's members for decommissioning, less applicable taxes,U 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 $60.9 million and

$54.5 million for the years ended December 31, 2007 and 2006, respectively.

The changes in the carrying amounts of asset retirement obligations were as follows (in thousands):

2007 2006 (in thousands)U Beginning balance $ 121,686 $ 117,006 Accretion expense 4,867 4,680 Ending balance $ 126,553 $ 121,686 The amount of actual obligation could differ materially from the estimates reflected in these financ~ial statements.

U

U U

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U U Note 10: Long-Term Debt 2007 2006 (In thousands)

CCS Note payable - payable in monthly installments with interest rates ranging from 0% to .90%; final payment U January 2009, secured by transportation equipment $ 7 $ 14 Ut Note payable CFC, payable in varying quarterly installments beginning April 2008, plus interest at 6.8%, final payment U January 2014 21,700 21,700 Note payable CFC, payable in varying quarterly installments U1 beginning April 2014, plus interest at 6.9%, final payment January 2021 38,600 38,600 Note payable CFC, payable in varying quarterly installments beginning April 2021, plus interest at 7.0%, final payment April 2025 39,700 39,700 Note payable CFC, payable in varying quarterly installments beginning July 2006, plus interest at 6.8%, final payment January 2014 3,400 3,800 Note payable CFC, payable in varying quarterly installments beginning April 2014, plus interest at 6.9%, final payment January 2021 5,800 5,800 Note payable CFC, payable in varying quarterly installments I-U beginning April 2021, plus interest at 7.0%, final payment z April 2025 6,200 6,200 U Note payable CFC, payable in varying quarterly installments w

beginning July 2006, plus interest at 7.25%, final payment U October 2025 13,759 14,119 Note payable CFC, payable in varying quarterly installments En U beginning July 2006, plus interest at 7.25%, final payment M-October 2025 2,201 2,259 4-Note payable CFC, payable in varying quarterly installments beginning July 2006, plus interest at 6.8%, final payment Z I-January 2008 6,450 33,866 I' Note payable CFC, payable in varying quarterly installments a

U beginning July 2006, plus interest at 6.9%, final payment z

U January 2008 1,074 5,190 w 138,891 171,248 Less current installments U 10,705 32,357 z U $ 128,186 $ 138,891 .

A

• UI U

Allegheny Electric Cooperative, Inc.

On March 31, 2006, the Cooperative refinanced all outstanding debt to RUS. Concurrent with the March 31, 2006 refinancing, substantially all of the assets of the Cooperative were pledged to CFC through the terms of the existing mortgage.

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, n 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 had a final maturity date of January 1, 2008, with options for early termination.

During the.year ended December 31, 2006, the Cooperative retired all outstanding notes payable to RUS and all bonds as a part of debt refinancing. The debt was retired through a combination of cash payments and proceeds from issuance of long-term debt with CFC. The following table summarizes the activities related to the debt refinancing (in thousands).

Long-term debt at December 31, 2005 $ 196,996 n Cash payments prior to refinancing (9,309)

Accrued interest and fees 265 Total debt retired 187,952 Cash payment upon refinancing (13,870)

Proceeds from issuance of long-term debt with CFC (166,000)

Gain on debt refinancing $ 8,082 U

The debt refinancing resulted in the $189.7 million of proceeds from CFC being utilized to retire

$150.0 million in RUS debt, $16.0 million in Pollution Control Revenue Bonds and the purchase of

$23.7 million of CFC term certificates.

Pollution Control Revenue Bonds. (Bonds) were issued by an industrial development authority on the Cooperative's behalf. During 2006, the Cooperative paid off all outstanding bonds.

The Cooperative has an additional available borrowing balance with CFC totaling $62,859,500 at December 31, 2007.

The Cooperative has a $35,000,000 operating line of credit with CFC that expires March 31, 2011.

There were no outstanding borrowings against this line as of December 31, 2007 and 2006. The interest rate on the line of credit fluctuates as established by CFC, but shall not exceed the prime rate plus one percent (6.4% at December 31, 2007).

U U

N

Im Future maturities of all loing-term debt are as follows (in thousands):

• 2008 $ 10,705 2009 4,208

• 2010 4,469 2011 *4,858

• 2012* 5,074

• Thereafter UL 109,577

• The Cooperative is required by covenant to maintain an annual debt service coverage ratio. The

• Cooperative was in compliance with the applicable covenant as of December 31, 2007 and 2006, respectively.

III UZand 2006, the Cooperative incurred interest costs of $10,133,000 and $9,399,000, During 2007

~respectively.

Note 11: Income Taxes At December 31l, 2007 and 2006, the Cooperative had available nonmember, net operating loss

• carryforwards of approximately $55 and $52 million, respectively for tax reporting purposes ,,,

expiring in 2008 through 202 1, and alternative minimum tax credit carryforwards of approximately Ill $950,000 and $800,000 respectiveily, which carries forward indefinitely. ,

• Threafer 19,57 Elm There was no provision for federal income taxes at December 31, 2007 and 2006. The Cooperative Th opraiei reurdb oeatt anana nuldb evc oeaerto h

• not subject toa state is oprtv income taxes.ihteapiabecvnn so eebr3,20 ncmlac n 06 I 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. Z Deferred tax assets also include the effect 0f net operating loss carryforwards. The temporary

• differences and the carryforward items produce a deferred tax asset at December 31, 2007 and U.

2006, of approximately $23 and $27 million, respectively. Realization of the net deferred tax asset LU

~is contingent upon' the Cooperative's future earnings. A valuation allowance of approximately $5 "

and $27 million, respectively, has been established against this asset because it has been "

• determined that this portion of the deferred tax asset more likely than not will not be realized. The 4 UCooperative will include the utilization of the net deferred tax asset of $ 18 million at December 3 1, 0° 2007 in future rates charged to members. Therefore, a deferred credit has been recorded equas to

• ~the net deferred tax asset under FASB No. 7 1, Accountingfor the Effects of Certain Types ofo Regula0on. 50

U U

Allegheny Electric Cooperative, Inc. U U

U U

U Note 12: Pennsylvania Public Utility Realty Taxes U

The Commonwealth of Pennsylvania previously removed electric generation assets from the Pennsylvania Public Utility Realty Tax Act (PURTA) tax base and effectively returned those assets U to local real estate tax jurisdiction, with liability calculations based on assessed values. The courts of Pennsylvania subsequently determined that cooperatives are not subject to PURTA taxes. The U Cooperative's portion of local real estate taxes related to SSES are billed by and paid to PPL. The Cooperative is billed and pays directly to various local tax jurisdictions local real estate taxes on U other property that is exclusively owned by the Cooperative.

U U

Note 13: Variable Interest Entity U

As a result of the dissolution of the strategic alliance with Soyland Power Cooperative, Inc.,

effective May 13, 2006, Continental Electric Cooperative Services, Inc. (CCS) was considered to U

be a variable interest entity and the Cooperative was determined to be the primary beneficiary of CCS. As such, the assets, liabilities and results of operations have been consolidated into these U

financial statements from that date. The general creditors of CCS have no recourse against the U general credit of the Cooperative. The following table summarizes the assets and liabilities at the date of initial consolidation. U Cash 493,000 U Other receivables 11,000 Other current assets 868,000 U

Non-utility property, at cost (net of accumulated U depreciation) 433,000 U

Total assets $ 1,805,000 U

Accounts payable $ 1,054,000 U Accounts payable, member 136,000 Accounts payable, affiliated organizations 397,000 U Note payable 18,000 U

Unrestricted net assets 200,000 U

Total liabilities and net assets $ 1,805,000 U

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Note 14: Related Party Transaction

• Two affiliated organizations, the Pennsylvania Rural Electric Association (PREA) and CCS have provided the Cooperative with certain management, general, and administrative services on a cost

• reimbursement basis. The costs for services provided by PREA were $879,000 and $1,156,000 for the years ended December 3.1, 2007 and 2006, respectively. The costs for services providedby

• CCS prior to consolidation as a variable interest entity as discussed in footnote 15 were $2,221,000 in 2006.

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Note 15: Employee Benefit Plans U

All employment relationships are through CCS, the consolidated variable interest entity of the Cooperative. CCS's leave policies provide for payment of unused leave at a discounted rate after

• the end of each calendar year for 2007 and 2006. A provision has been recorded for this liability.

n The Cooperative through CCS, participates in a multi-employer defined-benefit pension plan and a 401(k) defined-contribution plan covering substantially all of its employees. The Cooperative U makes annual contributions to the Plans equal to the amount accrued for pension expense. Total pension expense for both plans amounted to $1,154,000 and $779,000 for the years ended December 31, 2007 and 2006, respectively.

K The Cooperative, through CCS, has an employment agreement, which contains a funded deferred

• compensation agreement, with its President & CEO.

n4 Note 16: Commitments and Contingencies I Power Supply and TransmissionAgreements La The Cooperative has entered into power supply and transmission agreements with various service providers. A significant number of these agreements are umbrella type agreements and do not bind

• the Cooperative to enter into any type of transaction.

K

• ll As of December 31, 2007, there were several significant capacity and energy transactions under 0 these agreements. However, energy deliveries under those contracts do not begin until January 1,

• W 2009.

Under one of the umbrella agreements, the Cooperative purchased capacity for the period June 1, 0 2007 through May 31, 2008 in a series of transactions. These transactions contain specific Z

[] ' quantities of capacity, all of which are needed to serve the Cooperative's load.

'A

E Allegheny Electric Cooperative, Inc. E A summary of the power supply agreements are as follows:

New York Power Authority This contract meets a portion of the Cooperative's base load and peaking requireme nts 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./ Bear Energy 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 Cooperative's owned and controlled generating resources and Williams in turn essentially supplies all of the Cooperative's load requirements. The agreement with Williams was assigned to Bear Energy (Bear) in late 2007 and will terminate on December 3 1, 2008.

The Williams/Bear a greement 'contains certain hourly and monthly energy caps. Energy provided above these thresholds is purchased at market prices. The Williams/Bear 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/Bear or other parties at market prices.

The Williams/Bear Agreement requires the Cooperative to provide credit support in the amount of

$9 million. The National Rural Utilities Cooperative Finance Corporation (CEC) issued an irrevocable standby letter of credit on behalf of the Cooperative in the amount of $9 million in favor of Williams/Bear. The letter of credit is valid until March 31, 2009.

In March 2008, the parent company of Bear Energy, Bear Steams, entered into a pending agr eement to be acquired by JP Morgan Chase. The Cooperative's management does not expect any impact from that acquisition on the existing agreement:

SSES Replacement Power Insurance Policy The Cooperative mitigated a portion of the economic risk of an outage at SSES 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 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 purchased a three year policy terminating December 31, 2007 from XL with an annual premium of

$926,000 for 2005 and $889,000 for each of 2006 and 2007, respectively. The Cooperative has purchased a new three year policy terminating December 31, 2010 from XL with the insured price of $75/MWh and an aggregate coverage limit of $25 million.

Transmission Services Ui Transmission services for the Cooperative's load is provided through a hybrid arrangement consisting of the PJM Open Access Transmission Tariff (OATT) and the pre-existing Wheeling and Supplemental Power Agreement with Pennsylvania Electric Company.

Insurance

• 1PPL, as the 90% owner and sole operator of SSES, and the Cooperative, as owner of a 10% 4A 1 undivided interest in SSES, are members of certain insurance programs which provide coverage for z property damage to the SSES nuclear generation plant. Under these programs, the plant, as a

• I 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 1 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, 2007, the maximum amount PPL and the Cooperative could jointly be z assessed under these programs ranged from $20 million to $40 million annually. z PPL and the Cooperative's public liability for claims resulting from a nuclear incident is currently l limited to $10.8 billion under provisions of the Price-Anderson Amendment Acts of 1988.

a

• 1 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. o 0

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Allegheny Electric Cooperative, Inc.

Safe HarborLease The Cooperative previously sold certain investment and energy tax credits and depreciation U] deductions pursuant to a safe harbor 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 $1.5 million and $1.9 million as of December 31, 2007 and

• ] 2006, respectively.

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, 2007 was approximately $5.2 million. Payment of this contingent liability has been guaranteed by CFC.

Litigation The Cooperative may be subject to claims and lawsuits that arise primarily in the ordinary course fl of business. At December 31, 2007, no such claims or lawsuits existed.

Note 17: Deferred Credits

[ Sale/LeasebackArrangement

• The Cooperative previously completed a sale arnd leaseback of its hydroelectric generation facility at the Raystown Dam (the Facility). Facilityinwas The million sold to a trustee bank representing Ford L"

[] Motor Credit Company (Ford) for $32.0 cash. During* 1996, Ford transferred its interest I--

in the Facility to a third party. Underterms of the arrangement, the Cooperative is leasing the 4

'U . Facility for an initial term of 30 years beginning June, 1988. 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 amount fixed by the transaction documents.

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. Paymentsa

[] during the fixed rate renewal 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

• I term of the lease. The gain of $1.9 million related to the sale is being recognized over the lease ,

term. The unrecognized gain is recorded in other deferred revenue and Was $870,000 and

- $950,000 as of December 31, 2007 and 2006, respectively.

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U Allegheny Electric Cooperative, Inc.

The payments by the Cooperative under this lease were determined in part on the assumption that Ford, or its 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 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.

The leaseback of the Facility is accounted for as an operating lease by the Cooperative. As of U December 31, 2007, 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):

2008 $ 1,932 2009 2,361 2010 2,361 2011 2,361 2012 2,361 Thereafter 14,165 U Total minimum lease payments $ 25,541 U

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 $1.5 and $1.4 million in years ended December 31, 2007 and 2006, respectively.

~U Deferred Revenue Plan U

On November 8, 2006, the Board approved a Deferred Revenue Plan, which seeks to stabilize members' rates for 2009 and as long as possible thereafter to mitigate the effects of expected increases in rates. The deferral of revenue for 2007 was determined at 50 percent of the 2007 margin, after excluding earnings from the Nuclear Decommissioning Trust. At December 31, 2007, deferred revenues associated with the Deferred Revenue Plan were $11,390,000.

Deferred Credit With the establishment of a deferred. tax asset to record the effect of the temporary differences

• related to net operating loss carryforwards, fixed asset basis, safe harbor lease treatment, gain on installment sale and financial statement accruals, the Cooperative established a deferred credit of

$18 million under FASB No. 71, Accountingfor the Effects of Certain Types of Regulation. The value of the deferred tax asset is considered in the -rate making process as required by FASB K No. 71.

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Note 18: 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 PPL's 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

'liability to be amortized was $236,000 as of December 31, 2006. The liability was fully amortized

• i during 2007.

Note 19: 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 =

Z

• Cash and cash equivalents - The carrying amounts of these items are a reasonable estimate of Z:

their fair value due to the short-term nature of the instruments, a NuclearDecommissioning Trust, Investments and Investments in Associated Organizations-The fair value of the Nuclear Decommissioning Trust and investments are estimated based on quoted market prices. Fair values of investments in associated organizations approximate Z their carrying amount. 0 Notes Receivable, 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.

Z

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Allegheny Electric Cooperative, Inc. U U

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U Liabilities Long-term debt- The fair value of the Cooperative's fixed rate long-term debt is estimated U

using discounted cash flows based on current rates offered to the Cooperative for similar debt U of the same remaining maturities.

The estimated fair values of the Cooperative's financial instruments at December 31, 2007 and U 2006, are as follows (in thousands):

U 2007 2006 Carrying Estimated Carrying Estimated U Amount Fair Value Amount Fair Value U

Cash and cash equivalents $ 36,474 $ 36,474 $ 57,377 $ 57,377 U

Investments 35,395 35,395 14,664 14,664 Other investments 60,858 60,858 Investment in associated organizations 24,833 24,833 54,521 24,421 54,521 24,421 U

Notes receivable from members Long-term debt 138,891 5 5 138,891 27 171,248 27 171,248 U

U Note 20: Future Change in Accounting Principle U

U FinancialAccounting Standards Board InterpretationNo. 48 U

During 2006, the Financial Accounting Standards Board issued FIN 48, Accounting for Uncertaintyin Income Taxes, an interpretationofFASB Statement No. 109. This Interpretation U clarifies the accounting for uncertainty in income tax positions and how the impact of the positions should be recognized in an enterprise's financial statements. It prescribes a measurement and U recognition threshold for a tax position taken or expected to be taken iii a tax return. U In November 2007, implementation of FIN 48 was given a one-year deferral period from its original effective date. FIN 48 will now be effective for fiscal years beginning after December 15, 2007. The Cooperative is evaluating the impact of applying this guidance and will implement the U Interpretation in fiscal year 2008.

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