UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549





Form
10-Q











[X]
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 for the quarterly period ended June 30,
      2008OR[
       ]
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 for the transition period from _________ to
    ___________





Commission
      File
              Number
            Registrant;
      State of Incorporation;
              Address and Telephone
      Number
            IRS
      Employer
              Identification
      No.1-11459
            PPL
      Corporation
              (Exact
      name of Registrant as specified in its charter)
              (Pennsylvania)
              Two
      North Ninth Street
              Allentown,
      PA  18101-1179
              (610)
      774-5151
            23-27581921-32944
            PPL
      Energy Supply, LLC
              (Exact
      name of Registrant as specified in its charter)
              (Delaware)
              Two
      North Ninth Street
              Allentown,
      PA  18101-1179
              (610)
      774-5151
            23-30749201-905
            PPL
      Electric Utilities Corporation
              (Exact
      name of Registrant as specified in its charter)
              (Pennsylvania)
              Two
      North Ninth Street
              Allentown,
      PA  18101-1179
              (610)
      774-5151
            23-0959590








Indicate
by check mark whether the Registrants (1) have filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrants were
required to file such reports), and (2) have been subject to such filing
requirements for the past 90 days.








PPL
      Corporation
            Yes
      X
            NoPPL
      Energy Supply, LLC
            Yes
      X
            NoPPL
      Electric Utilities Corporation
            Yes
      X
            No








Indicate
by check mark whether the Registrants are large accelerated filers, accelerated
filers, non-accelerated filers, or a smaller reporting company.  See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.





Large
      accelerated
              filer
            Accelerated
              filer
            Non-accelerated
              filer
            Smaller
      reporting
              companyPPL
      Corporation
            [ X
      ]
            [     ]
            [     ]
            [     ]PPL
      Energy Supply, LLC
            [     ]
            [     ]
            [ X
      ]
            [     ]PPL
      Electric Utilities Corporation
            [     ]
            [     ]
            [ X
      ]
            [     ]





Indicate
by check mark whether the Registrants are shell companies (as defined in Rule
12b-2 of the Exchange Act).





PPL
      Corporation
            Yes
            No
      XPPL
      Energy Supply, LLC
            Yes
            No
      XPPL
      Electric Utilities Corporation
            Yes
            No
      X





Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:





PPL
      Corporation
            Common
      stock, $.01 par value, 374,491,269 shares outstanding at July 25,
      2008.PPL
      Energy Supply, LLC
            PPL
      Corporation indirectly holds all of the membership interests in PPL Energy
      Supply, LLC.PPL
      Electric Utilities Corporation
            Common
      stock, no par value, 66,368,056 shares outstanding and all held by PPL
      Corporation at July 25, 2008.





This
document is available free of charge at the Investor Center on PPL's Web site at
www.pplweb.com.  However, information on this Web site does not
constitute a part of this Form 10-Q.





PPL
CORPORATION


PPL
ENERGY SUPPLY, LLC


PPL
ELECTRIC UTILITIES CORPORATION





FORM
10-Q


FOR THE
QUARTER ENDED June 30, 2008





Table of
Contents


PageGLOSSARY OF TERMS AND ABBREVIATIONS
            iFORWARD-LOOKING INFORMATION
            1PART
      I.  FINANCIAL INFORMATIONItem
      1.  Financial StatementsPPL
      Corporation and SubsidiariesCondensed Consolidated Statements of
      Income
            2Condensed Consolidated Statements of Cash
      Flows
            3Condensed Consolidated Balance
      Sheets
            4PPL
      Energy Supply, LLC and SubsidiariesCondensed Consolidated Statements of
      Income
            6Condensed Consolidated Statements of Cash
      Flows
            7Condensed Consolidated Balance
      Sheets
            8PPL
      Electric Utilities Corporation and SubsidiariesCondensed Consolidated Statements of
      Income
            10Condensed Consolidated Statements of Cash
      Flows
            11Condensed Consolidated Balance
      Sheets
            12Combined Notes to Condensed Consolidated Financial
      Statements
            14Item
      2.  Management's Discussion and Analysis of Financial Condition
      and Results of OperationsPPL Corporation and Subsidiaries
            51PPL Energy Supply, LLC and
Subsidiaries
            67PPL Electric Utilities Corporation and
      Subsidiaries
            80Item 3.  Quantitative and Qualitative
      Disclosures About Market Risk
            85Item 4.  Controls and
      Procedures
            85Item 4T.  Controls and
      Procedures
            85PART
      II.  OTHER INFORMATIONItem 1.  Legal Proceedings
            86Item 1A.  Risk Factors
            86Item 4.  Submission of Matters to a Vote of
      Security Holders
            86Item 6.  Exhibits
            87SIGNATURES
            88COMPUTATION
      OF RATIO OF EARNINGS TO FIXED CHARGESPPL Corporation and Subsidiaries
            89PPL Energy Supply, LLC and
      Subsidiaries
            90PPL Electric Utilities Corporation and
      Subsidiaries
            91CERTIFICATES
      OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL
OFFICER
              PURSUANT
      TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002PPL Corporation
            92PPL Energy Supply, LLC
            94PPL Electric Utilities Corporation
            96CERTIFICATES
      OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL
OFFICER
              PURSUANT
      TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002PPL Corporation
            98PPL Energy Supply, LLC
            100PPL Electric Utilities Corporation
            102





GLOSSARY OF TERMS AND ABBREVIATIONS





PPL Corporation and its
current and former subsidiaries





Emel
- Empresas Emel S.A., a Chilean electric distribution holding company in which
PPL Global had a majority ownership interest until its sale in November
2007.





Hyder
- Hyder Limited, a subsidiary of WPDL that was the previous owner of South Wales
Electricity plc.  In March 2001, South Wales Electricity plc was
acquired by WPDH Limited and renamed WPD (South Wales).





PPL-
PPL Corporation, the parent holding company of PPL Electric, PPL Energy Funding
and other subsidiaries.





PPL
Capital Funding - PPL Capital Funding, Inc., a wholly-owned financing
subsidiary of PPL.





PPL
Electric-
PPL Electric Utilities Corporation, a regulated utility subsidiary of PPL that
transmits and distributes electricity in its service territory and provides
electric supply to retail customers in this territory as a PLR.





PPL
Energy Funding - PPL Energy Funding Corporation, a subsidiary of PPL and
the parent company of PPL Energy Supply.





PPL
EnergyPlus - PPL EnergyPlus, LLC, a subsidiary of PPL Energy Supply that
markets and trades wholesale and retail electricity, and supplies energy and
energy services in deregulated markets.





PPL
Energy Supply - PPL Energy Supply, LLC, a subsidiary of PPL Energy
Funding and the parent company of PPL Generation, PPL EnergyPlus, PPL Global and
other subsidiaries.





PPL
Gas Utilities - PPL Gas Utilities Corporation, a regulated utility
subsidiary of PPL that specializes in natural gas distribution, transmission and
storage services, and the competitive sale of propane.  In March 2008,
PPL signed a definitive agreement to sell these businesses.





PPL
Generation - PPL Generation, LLC, a subsidiary of PPL Energy Supply that
owns and operates U.S. generating facilities through various
subsidiaries.





PPL
Global - PPL Global, LLC, a subsidiary of PPL Energy Supply that
primarily owns and operates a business in the U.K. that is focused on the
regulated distribution of electricity.





PPL
Holtwood - PPL Holtwood, LLC, a subsidiary of PPL Generation that owns
hydroelectric generating operations in Pennsylvania.





PPL
Martins Creek - PPL Martins Creek, LLC, a subsidiary of PPL Generation
that owns generating operations in Pennsylvania.





PPL
Montana - PPL Montana, LLC, an indirect subsidiary of PPL Generation that
generates electricity for wholesale sales in Montana and the Pacific
Northwest.





PPL
Services - PPL Services Corporation, a subsidiary of PPL that provides
shared services for PPL and its subsidiaries.





PPL
Susquehanna - PPL Susquehanna, LLC, the nuclear generating subsidiary of
PPL Generation.





PPL
Transition Bond Company - PPL Transition Bond Company, LLC, a subsidiary
of PPL Electric that was formed to issue transition bonds under the Customer
Choice Act.





SIUK
Capital Trust I- a business trust created to issue preferred securities,
the common equity of which was held by WPD LLP.  The preferred
securities were redeemed in February 2007.





WPD
- refers collectively to WPDH Limited and WPDL.





WPD
LLP - Western Power Distribution LLP, a wholly-owned subsidiary of WPDH
Limited, which owns WPD (South West) and WPD (South Wales).





WPD(South
Wales) - Western Power Distribution (South Wales) plc, a British regional
electric utility company.





WPD(South
West) - Western Power Distribution (South West) plc, a British regional
electric utility company.





WPDH
Limited - Western Power Distribution Holdings Limited, an indirect,
wholly-owned subsidiary of PPL Global.  WPDH Limited owns WPD
LLP.





WPDL
- WPD Investment Holdings Limited, an indirect wholly-owned subsidiary of PPL
Global.  WPDL owns 100% of the common shares of Hyder.





Other terms and
abbreviations





£ - British
pounds sterling.





2007
Form 10-K - Annual Report to the SEC on Form 10-K for the year ended
December 31, 2007.





APB- Accounting Principles Board.





ARB- Accounting Research Bulletin.





ARO
- asset retirement obligation.





Bcf
- billion cubic feet.





Clean
Air Act - federal legislation enacted to address certain environmental
issues related to air emissions, including acid rain, ozone and toxic air
emissions.





COLA
- combined construction and operating license application.





CTC
- competitive transition charge on customer bills to recover allowable
transition costs under the Customer Choice Act.





Customer
Choice Act-
the Pennsylvania Electricity Generation Customer Choice and Competition Act,
legislation enacted to restructure the state's electric utility industry to
create retail access to a competitive market for generation of
electricity.





DEP
- Department of Environmental Protection, a state government
agency.





DOE
- Department of Energy, a U.S. government agency.





EITF
- Emerging Issues Task Force, an organization that assists the FASB in improving
financial reporting through the identification, discussion and resolution of
financial accounting issues within the framework of existing authoritative
literature.





EMF
- electric and magnetic fields.





EPA
- Environmental Protection Agency, a U.S. government agency.





EPS
- earnings per share.





FASB- Financial Accounting
Standards Board, a rulemaking organization that establishes financial accounting
and reporting standards.





FERC
- Federal Energy Regulatory Commission, the federal agency that regulates, among
other things, interstate transmission and wholesale sales of electricity, hydro
power projects and related matters.





FIN- FASB Interpretation.





Fitch- Fitch, Inc.





FSP-FASB Staff
Position.





FTR-financial
transmission rights, which are financial instruments established to manage price
risk related to electricity transmission congestion.  They entitle the
holder to receive compensation or require the holder to remit payment for
certain congestion-related transmission charges that arise when the transmission
grid is congested.





GAAP-generally
accepted accounting principles in the U.S.





GWh
- gigawatt-hour, one million kilowatt-hours.





IRS-
Internal Revenue Service, a U.S. government agency.





ISO
- Independent System Operator.





ITC
- intangible transition charge on customer bills to recover intangible
transition costs associated with securitizing stranded costs under the Customer
Choice Act.





LIBOR-London Interbank Offered
Rate.





Montana
Power - The Montana Power Company, a Montana-based company that sold its
generating assets to PPL Montana in December 1999.  Through a series
of transactions consummated during the first quarter of 2002, Montana Power sold
its electricity delivery business to NorthWestern.





Moody's
- Moody's Investors Service, Inc.





MTM
- mark-to-market.





MW
- megawatt, one thousand kilowatts.





MWh
- megawatt-hour, one thousand kilowatt-hours.





NERC
- North American Electric Reliability Corporation.





NorthWestern- NorthWestern Energy Division, a Delaware corporation and a subsidiary
of NorthWestern Corporation and successor in interest to Montana Power's
electricity delivery business, including Montana Power's rights and obligations
under contracts with PPL Montana.





NRC
- Nuclear Regulatory Commission, the federal agency that regulates the operation
of nuclear power facilities.





NUGs(Non-Utility
Generators) - generating plants not owned by public utilities, whose electrical
output must be purchased by utilities under the PURPA if the plant meets certain
criteria.





NYMEX- New York
Mercantile Exchange.





PJM(PJM
Interconnection, L.L.C.) - operator of the electric transmission network and
electric energy market in all or parts of Delaware, Illinois, Indiana, Kentucky,
Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee,
Virginia, West Virginia and the District of Columbia.





PLR
(Provider of Last Resort) - the role of PPL Electric in providing default
electricity supply to retail customers within its delivery territory who have
not chosen to select an alternative electricity supplier under the Customer
Choice Act.





PP&E-
property, plant and equipment.





PUC-
Pennsylvania Public Utility Commission, the state agency that regulates certain
ratemaking, services, accounting and operations of Pennsylvania
utilities.





PUHCA
- Public Utility Holding Company Act of 1935, legislation passed by the U.S.
Congress.  Repealed effective February 2006 by the Energy Policy Act
of 2005.





PURPA-Public
Utility Regulatory Policies Act of 1978, legislation passed by the U.S. Congress
to encourage energy conservation, efficient use of resources and equitable
rates.





Regulation
S-X - SEC regulation governing the form and content of and requirements
for financial statements required to be filed pursuant to the federal securities
laws.





RFC-
ReliabilityFirst Corporation (the regional reliability entity that replaced the
Mid-Atlantic Area Coordination Council).





SCR
- selective catalytic reduction, a pollution control process.





Scrubber
- an air pollution control device that can remove particulates and/or gases
(such as sulfur dioxide) from exhaust gases.





SEC
- Securities and Exchange Commission, a U.S. government agency whose primary
mission is to protect investors and maintain the integrity of the securities
markets.





SFAS
- Statement of Financial Accounting Standards, the accounting and financial
reporting rules issued by the FASB.





S&P
- Standard & Poor's Ratings Services.





Smart
metering technology- technology that can measure, among other things,
time of consumption to permit offering rate incentives for usage during lower
cost or demand intervals.





Superfund
- federal environmental legislation that addresses remediation of contaminated
sites; states also have similar statutes.





Synfuel
projects - production facilities that manufacture synthetic fuel from
coal or coal byproducts.  Favorable federal tax credits, which expired
effective December 31, 2007, were available on qualified synthetic fuel
products.





Tolling
agreement-
agreement whereby the owner of an electric generating facility agrees to use
that facility to convert fuel provided by a third party into electric energy for
delivery back to the third party.





VaR
- value-at-risk.





Accounting
Pronouncements





APB
Opinion No. 23 - Accounting for Income Taxes-Special Areas.





EITF
87-24 - Allocation of Interest to Discontinued Operations.





EITF
Issue No. 02-3 - Issues Involved in Accounting for Derivative Contracts
Held for Trading Purposes and Contracts Involved in Energy Trading and Risk
Management Activities.





FIN
39 - Offsetting of Amounts Related to Certain Contracts, as amended and
interpreted.





FIN
45 - Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an Interpretation of
FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No.
34.





FSP
APB 14-1-Accounting for Convertible Debt Instruments That May Be Settled in Cash
upon Conversion (Including Partial Cash Settlement).





FSP
EITF 03-6-1-Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities.





FSP
FAS 157-1 -  Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement
13.





FSP
FAS 157-2 - Effective Date of FASB Statement No. 157.





SFAS
128- Earnings per Share.





SFAS
133 - Accounting for Derivative Instruments and Hedging Activities, as
amended and interpreted.





SFAS
141 - Business Combinations.





SFAS
141(R) - Business Combinations (revised 2007).





SFAS
144 - Accounting for the Impairment or Disposal of Long-Lived
Assets.





SFAS
146 - Accounting for Costs Associated with Exit or Disposal
Activities.





SFAS
157 - Fair Value Measurements.





SFAS
159 - The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement No. 115.





SFAS
160 - Noncontrolling Interests in Consolidated Financial Statements, an
amendment of ARB No. 51.





SFAS
161 - Disclosures about Derivative Instruments and Hedging Activities, an
amendment of FASB Statement No. 133.














(THIS
PAGE LEFT BLANK INTENTIONALLY.)











FORWARD-LOOKING INFORMATION





Statements
contained in this Form 10-Q concerning expectations, beliefs, plans, objectives,
goals, strategies, future events or performance and underlying assumptions and
other statements which are other than statements of historical facts are
"forward-looking statements" within the meaning of the federal securities
laws.  Although PPL, PPL Energy Supply and PPL Electric believe that
the expectations and assumptions reflected in these statements are reasonable,
there can be no assurance that these expectations will prove to be
correct.  Forward-looking statements involve a number of risks and
uncertainties, and actual results may differ materially from the results
discussed in forward-looking statements.  In addition to the specific
factors discussed in "Item 1A. Risk Factors" in the companies' 2007 Form 10-K
and in "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations" in this Form 10-Q report, the following are among the
important factors that could cause actual results to differ materially from the
forward-looking statements:





·
            market
      demand and prices for energy, capacity, emission allowances and
      fuel;·
            fuel
      supply availability;·
            weather
      conditions affecting generation production, customer energy use and
      operating costs;·
            competition
      in retail and wholesale power markets;·
            liquidity
      of wholesale power markets;·
            defaults
      by our counterparties under our energy, fuel or other power product
      contracts;·
            the
      effect of any business or industry restructuring;·
            the
      profitability and liquidity, including access to capital markets and
      credit facilities, of PPL and its subsidiaries;·
            new
      accounting requirements or new interpretations or applications of existing
      requirements;·
            operation,
      availability and operating costs of existing generation
      facilities;·
            transmission
      and distribution system conditions and operating costs;·
            current
      and future environmental conditions and requirements and the related costs
      of compliance, including environmental capital expenditures, emission
      allowance costs and other expenses;·
            significant
      delays in the ongoing installation of pollution control equipment at
      certain coal-fired generating units in Pennsylvania due to weather
      conditions, contractor performance or other reasons;·
            market
      prices of commodity inputs for ongoing capital
    expenditures;


·
            collective
      labor bargaining negotiations;·
            development
      of new projects, markets and technologies;·
            performance
      of new ventures;·
            asset
      acquisitions and dispositions;·
            political,
      regulatory or economic conditions in states, regions or countries where
      PPL or its subsidiaries conduct business;·
            any
      impact of hurricanes or other severe weather on PPL and its subsidiaries,
      including any impact on fuel prices;·
            receipt
      of necessary governmental permits, approvals and rate
    relief;·
            new
      state, federal or foreign legislation, including new tax
      legislation;·
            state,
      federal and foreign regulatory developments;·
            the
      impact of any state, federal or foreign investigations applicable to PPL
      and its subsidiaries and the energy industry;·
            capital
      market conditions, including changes in interest rates, and decisions
      regarding capital structure;·
            stock
      price performance of PPL;·
            the
      market prices of equity securities and the impact on pension costs and
      resultant cash funding requirements for defined benefit pension
      plans;·
            securities
      and credit ratings;·
            foreign
      currency exchange rates;·
            the
      outcome of litigation against PPL and its subsidiaries;·
            potential
      effects of threatened or actual terrorism or war or other hostilities;
      and·
            the
      commitments and liabilities of PPL and its
  subsidiaries.





Any such
forward-looking statements should be considered in light of such important
factors and in conjunction with other documents of PPL, PPL Energy Supply and
PPL Electric on file with the SEC.





New
factors that could cause actual results to differ materially from those
described in forward-looking statements emerge from time to time, and it is not
possible for PPL, PPL Energy Supply or PPL Electric to predict all of such
factors, or the extent to which any such factor or combination of factors may
cause actual results to differ from those contained in any forward-looking
statement.  Any forward-looking statement speaks only as of the date
on which such statement is made, and PPL, PPL Energy Supply and PPL Electric
undertake no obligation to update the information contained in such statement to
reflect subsequent developments or information.





PartI.FINANCIAL
      INFORMATIONItem 1. Financial
      StatementsCONDENSED
      CONSOLIDATED STATEMENTS OF INCOMEPPL
      Corporation and Subsidiaries(Unaudited)(Millions
      of Dollars, except per share data)Three
      Months Ended
              June
      30,
            
            Six
      Months Ended
              June
      30,2008
            
            2007
            
            2008
            
            2007Operating
      RevenuesUtility
            
            $
            981
            
            
            $
            977
            
            
            $
            2,101
            
            
            $
            2,058Unregulated
      retail electric and gas
            
            
            33
            
            
            
            23
            
            
            
            67
            
            
            
            45Wholesale
      energy marketingRealized
            
            
            443
            
            
            
            371
            
            
            
            881
            
            
            
            727Unrealized
      economic activity (Note 14)
            
            
            (616
            )
            
            
            8
            
            
            
            (796
            )
            
            
            (99
            )Net
      energy trading margins
            
            
            52
            
            
            
            9
            
            
            
            50
            
            
            
            18Energy-related
      businesses
            
            
            131
            
            
            
            185
            
            
            
            247
            
            
            
            370Total
            
            
            1,024
            
            
            
            1,573
            
            
            
            2,550
            
            
            
            3,119Operating
      ExpensesOperationFuel
            
            
            208
            
            
            
            202
            
            
            
            451
            
            
            
            435Energy
      purchasesRealized
            
            
            309
            
            
            
            207
            
            
            
            626
            
            
            
            449Unrealized
      economic activity (Note 14)
            
            
            (623
            )
            
            
            (14
            )
            
            
            (885
            )
            
            
            (134
            )Other
      operation and maintenance
            
            
            360
            
            
            
            347
            
            
            
            737
            
            
            
            672Amortization
      of recoverable transition costs
            
            
            68
            
            
            
            70
            
            
            
            144
            
            
            
            151Depreciation
            
            
            118
            
            
            
            110
            
            
            
            230
            
            
            
            226Taxes,
      other than income
            
            
            72
            
            
            
            72
            
            
            
            147
            
            
            
            150Energy-related
      businesses (Note 8)
            
            
            119
            
            
            
            201
            
            
            
            227
            
            
            
            403Total
            
            
            631
            
            
            
            1,195
            
            
            
            1,677
            
            
            
            2,352Operating
      Income
            
            
            393
            
            
            
            378
            
            
            
            873
            
            
            
            767Other
      Income - net
            
            
            8
            
            
            
            21
            
            
            
            16
            
            
            
            48Interest
      Expense
            
            
            110
            
            
            
            120
            
            
            
            218
            
            
            
            240Income
      from Continuing Operations Before Income Taxes, Minority Interest and
      Dividends on Preferred Securities of a Subsidiary
            
            
            291
            
            
            
            279
            
            
            
            671
            
            
            
            575Income
      Taxes
            
            
            97
            
            
            
            31
            
            
            
            226
            
            
            
            100Minority
      Interest
            
            
            1
            
            
            
            
            
            
            
            1
            
            
            
            1Dividends
      on Preferred Securities of a Subsidiary
            
            
            4
            
            
            
            4
            
            
            
            9
            
            
            
            9Income
      from Continuing Operations
            
            
            189
            
            
            
            244
            
            
            
            435
            
            
            
            465Income
      from Discontinued Operations (net of income taxes) (Note
      8)
            
            
            1
            
            
            
            101
            
            
            
            15
            
            
            
            83Net
      Income
            
            $
            190
            
            
            $
            345
            
            
            $
            450
            
            
            $
            548Earnings
      Per Share of Common Stock:Income
      from Continuing Operations:Basic
            
            $
            0.51
            
            
            $
            0.63
            
            
            $
            1.17
            
            
            $
            1.20Diluted
            
            
            0.50
            
            
            
            0.62
            
            
            
            1.15
            
            
            
            1.19Net
      income:Basic
            
            $
            0.51
            
            
            $
            0.89
            
            
            $
            1.21
            
            
            $
            1.42Diluted
            
            
            0.50
            
            
            
            0.88
            
            
            
            1.19
            
            
            
            1.41Dividends
      Declared Per Share of Common Stock
            
            $
            0.335
            
            
            $
            0.305
            
            
            $
            0.67
            
            
            $
            0.61





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





CONDENSED CONSOLIDATED STATEMENTS OF CASH
      FLOWSPPL
      Corporation and Subsidiaries(Unaudited)(Millions
      of Dollars)Six
      Months Ended
              June
      30,2008
            
            2007Cash
      Flows from Operating ActivitiesNet
      income
            
            $
            450
            
            
            $
            548Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
            
            
            230
            
            
            
            236Amortization
      - recoverable transition costs and other
            
            
            178
            
            
            
            209Pre-tax
      gain from the sale of a Latin American business
            
            
            
            
            
            
            (94
            )Deferred
      income taxes and investment tax credits
            
            
            (38
            )
            
            
            (38
            )Impairment
      of assets held for sale
            
            
            1
            
            
            
            70Unrealized
      gain on derivatives and other hedging activities
            
            
            (84
            )
            
            
            (35
            )Other
            
            
            38
            
            
            
            12Change
      in current assets and current liabilitiesAccounts
      receivable
            
            
            53
            
            
            
            (54
            )Accounts
      payable
            
            
            109
            
            
            
            (78
            )Fuel,
      materials and supplies
            
            
            (3
            )
            
            
            18Prepayments
            
            
            (68
            )
            
            
            (76
            )Unbilled
      revenue
            
            
            (174
            )Counterparty
      collateral deposits
            
            
            304
            
            
            
            14Other
            
            
            (57
            )
            
            
            (59
            )Other
      operating activitiesOther
      assets
            
            
            17
            
            
            
            (23
            )Other
      liabilities
            
            
            (23
            )
            
            
            (31
            )Net
      cash provided by operating activities
            
            
            933
            
            
            
            619Cash
      Flows from Investing ActivitiesExpenditures
      for property, plant and equipment
            
            
            (661
            )
            
            
            (687
            )Proceeds
      from the sale of a Latin American business
            
            
            
            
            
            
            180Expenditures
      for intangible assets
            
            
            (251
            )
            
            
            (25
            )Proceeds
      from the sale of intangible assets
            
            
            2
            
            
            
            51Purchases
      of nuclear plant decommissioning trust investments
            
            
            (55
            )
            
            
            (118
            )Proceeds
      from the sale of nuclear plant decommissioning trust
      investments
            
            
            42
            
            
            
            110Purchases
      of other investments
            
            
            (50
            )
            
            
            (504
            )Proceeds
      from the sale of other investments
            
            
            36
            
            
            
            513Net
      increase in restricted cash and cash equivalents
            
            
            (281
            )
            
            
            (72
            )Other
      investing activities
            
            
            2
            
            
            
            10Net
      cash used in investing activities
            
            
            (1,216
            )
            
            
            (542
            )Cash
      Flows from Financing ActivitiesIssuance
      of long-term debt
            
            
            399
            
            
            
            505Retirement
      of long-term debt
            
            
            (217
            )
            
            
            (568
            )Issuance
      of common stock
            
            
            17
            
            
            
            22Repurchase
      of common stock
            
            
            (38
            )
            
            
            (77
            )Payment
      of common stock dividends
            
            
            (239
            )
            
            
            (225
            )Net
      increase in short-term debt
            
            
            400
            
            
            
            61Other
      financing activities
            
            
            1
            
            
            
            (9
            )Net
      cash provided by (used in) financing activities
            
            
            323
            
            
            
            (291
            )Effect
      of Exchange Rates on Cash and Cash Equivalents
            
            
            (2
            )
            
            
            1Net
      Increase (Decrease) in Cash and Cash Equivalents
            
            
            38
            
            
            
            (213
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            430
            
            
            
            794Cash
      and Cash Equivalents included in Assets Held for Sale
            
            
            (2
            )
            
            
            (14
            )Cash
      and Cash Equivalents at End of Period
            
            $
            466
            
            
            $
            567The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.





CONDENSED CONSOLIDATED BALANCE
      SHEETSPPL
      Corporation and Subsidiaries(Unaudited)(Millions
      of Dollars)June
      30,
              2008
            
            December
      31,
              2007AssetsCurrent
      AssetsCash
      and cash equivalents
            
            $
            466
            
            
            $
            430Short-term
      investments
            
            
            89
            
            
            
            108Restricted
      cash and cash equivalents
            
            
            489
            
            
            
            203Accounts
      receivable (less reserve:  2008, $39; 2007, $39)Customer
            
            
            504
            
            
            
            574Other
            
            
            102
            
            
            
            87Unbilled
      revenues
            
            
            705
            
            
            
            531Fuel,
      materials and supplies
            
            
            325
            
            
            
            316Prepayments
            
            
            148
            
            
            
            160Deferred
      income taxes
            
            
            11
            
            
            
            25Price
      risk management assets
            
            
            2,431
            
            
            
            319Other
      intangibles
            
            
            79
            
            
            
            76Assets
      held for sale (Note 8)
            
            
            315
            
            
            
            318Other
            
            
            22
            
            
            
            21Total
      Current Assets
            
            
            5,686
            
            
            
            3,168InvestmentsInvestment
      in unconsolidated affiliates - at equity
            
            
            44
            
            
            
            44Nuclear
      plant decommissioning trust funds
            
            
            524
            
            
            
            555Other
            
            
            26
            
            
            
            9Total
      Investments
            
            
            594
            
            
            
            608Property,
      Plant and EquipmentElectric
      plant in serviceTransmission
      and distribution
            
            
            8,829
            
            
            
            8,787Generation
            
            
            9,529
            
            
            
            8,812General
            
            
            797
            
            
            
            83619,155
            
            
            
            18,435Construction
      work in progress
            
            
            878
            
            
            
            1,287Nuclear
      fuel
            
            
            358
            
            
            
            387Electric
      plant
            
            
            20,391
            
            
            
            20,109Gas
      and oil plant
            
            
            67
            
            
            
            66Other
      property
            
            
            193
            
            
            
            20220,651
            
            
            
            20,377Less:  accumulated
      depreciation
            
            
            7,812
            
            
            
            7,772Total
      Property, Plant and Equipment
            
            
            12,839
            
            
            
            12,605Regulatory
      and Other Noncurrent AssetsRecoverable
      transition costs
            
            
            430
            
            
            
            574Goodwill
            
            
            956
            
            
            
            991Other
      intangibles
            
            
            559
            
            
            
            335Price
      risk management assets
            
            
            1,697
            
            
            
            587Other
            
            
            1,140
            
            
            
            1,104Total
      Regulatory and Other Noncurrent Assets
            
            
            4,782
            
            
            
            3,591Total
      Assets
            
            $
            23,901
            
            
            $
            19,972The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.





CONDENSED
      CONSOLIDATED BALANCE SHEETSPPL
      Corporation and Subsidiaries(Unaudited)(Millions
      of Dollars)June
      30,
              2008
            
            December
      31,
              2007Liabilities
      and EquityCurrent
      LiabilitiesShort-term
      debt
            
            $
            491
            
            
            $
            92Long-term
      debt
            
            
            671
            
            
            
            678Accounts
      payable
            
            
            828
            
            
            
            723Above
      market NUG contracts
            
            
            33
            
            
            
            42Taxes
            
            
            60
            
            
            
            127Interest
            
            
            124
            
            
            
            131Dividends
            
            
            130
            
            
            
            118Price
      risk management liabilities
            
            
            2,312
            
            
            
            423Liabilities
      held for sale (Note 8)
            
            
            46
            
            
            
            68Counterparty
      collateral deposits
            
            
            325
            
            
            
            21Other
            
            
            442
            
            
            
            459Total
      Current Liabilities
            
            
            5,462
            
            
            
            2,882Long-term
      Debt
            
            
            7,019
            
            
            
            6,890Deferred
      Credits and Other Noncurrent LiabilitiesDeferred
      income taxes and investment tax credits
            
            
            1,735
            
            
            
            2,192Price
      risk management liabilities
            
            
            2,943
            
            
            
            916Accrued
      pension obligations
            
            
            57
            
            
            
            59Asset
      retirement obligations
            
            
            382
            
            
            
            376Above
      market NUG contracts
            
            
            17
            
            
            
            29Other
            
            
            783
            
            
            
            752Total
      Deferred Credits and Other Noncurrent Liabilities
            
            
            5,917
            
            
            
            4,324Commitments
      and Contingent Liabilities (Note 10)Minority
      Interest
            
            
            19
            
            
            
            19Preferred
      Securities of a Subsidiary
            
            
            301
            
            
            
            301Shareowners'
      Common EquityCommon
      stock - $0.01 par value (a)
            
            
            4
            
            
            
            4Capital
      in excess of par value
            
            
            2,180
            
            
            
            2,172Earnings
      reinvested
            
            
            3,647
            
            
            
            3,448Accumulated
      other comprehensive loss
            
            
            (648
            )
            
            
            (68
            )Total
      Shareowners' Common Equity
            
            
            5,183
            
            
            
            5,556Total
      Liabilities and Equity
            
            $
            23,901
            
            
            $
            19,972(a)
            
            780
      million shares authorized; 375 million shares issued and
      outstanding at June 30, 2008, and 373 million shares issued and
      outstanding at December 31, 2007.The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.





CONDENSED CONSOLIDATED STATEMENTS OF
      INCOMEPPL
      Energy Supply, LLC and Subsidiaries(Unaudited)(Millions
      of Dollars)Three
      Months Ended
              June
      30,
            
            Six
      Months Ended
              June
      30,2008
            
            2007
            
            2008
            
            2007Operating
      RevenuesWholesale
      energy marketingRealized
            
            $
            443
            
            
            $
            371
            
            
            $
            881
            
            
            $
            727Unrealized
      economic activity (Note 14)
            
            
            (616
            )
            
            
            8
            
            
            
            (796
            )
            
            
            (99
            )Wholesale
      energy marketing to affiliate
            
            
            428
            
            
            
            422
            
            
            
            917
            
            
            
            903Utility
            
            
            211
            
            
            
            218
            
            
            
            452
            
            
            
            434Unregulated
      retail electric and gas
            
            
            33
            
            
            
            23
            
            
            
            67
            
            
            
            45Net
      energy trading margins
            
            
            52
            
            
            
            9
            
            
            
            50
            
            
            
            18Energy-related
      businesses
            
            
            129
            
            
            
            183
            
            
            
            243
            
            
            
            366Total
            
            
            680
            
            
            
            1,234
            
            
            
            1,814
            
            
            
            2,394Operating
      ExpensesOperationFuel
            
            
            208
            
            
            
            202
            
            
            
            451
            
            
            
            435Energy
      purchasesRealized
            
            
            264
            
            
            
            158
            
            
            
            540
            
            
            
            349Unrealized
      economic activity (Note 14)
            
            
            (623
            )
            
            
            (14
            )
            
            
            (885
            )
            
            
            (134
            )Energy
      purchases from affiliate
            
            
            30
            
            
            
            37
            
            
            
            58
            
            
            
            74Other
      operation and maintenance
            
            
            267
            
            
            
            261
            
            
            
            550
            
            
            
            505Depreciation
            
            
            82
            
            
            
            74
            
            
            
            159
            
            
            
            155Taxes,
      other than income
            
            
            26
            
            
            
            26
            
            
            
            45
            
            
            
            50Energy-related
      businesses (Note 8)
            
            
            118
            
            
            
            200
            
            
            
            224
            
            
            
            401Total
            
            
            372
            
            
            
            944
            
            
            
            1,142
            
            
            
            1,835Operating
      Income
            
            
            308
            
            
            
            290
            
            
            
            672
            
            
            
            559Other
      Income - net
            
            
            7
            
            
            
            24
            
            
            
            18
            
            
            
            48Interest
      Expense
            
            
            76
            
            
            
            72
            
            
            
            147
            
            
            
            144Interest
      Expense with Affiliates
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4Income
      from Continuing Operations Before Income Taxes and Minority
      Interest
            
            
            239
            
            
            
            242
            
            
            
            543
            
            
            
            459Income
      Taxes
            
            
            81
            
            
            
            23
            
            
            
            186
            
            
            
            67Minority
      Interest
            
            
            1
            
            
            
            
            
            
            
            1
            
            
            
            1Income
      from Continuing Operations
            
            
            157
            
            
            
            219
            
            
            
            356
            
            
            
            391Income
      from Discontinued Operations (net of income taxes)
              (Note 8)
            
            
            
            
            
            
            101
            
            
            
            5
            
            
            
            76Net
      Income
            
            $
            157
            
            
            $
            320
            
            
            $
            361
            
            
            $
            467The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.





CONDENSED CONSOLIDATED STATEMENTS OF CASH
      FLOWSPPL
      Energy Supply, LLC and Subsidiaries(Unaudited)(Millions
      of Dollars)Six
      Months Ended
              June
      30,2008
            
            2007Cash
      Flows from Operating ActivitiesNet
      income
            
            $
            361
            
            
            $
            467Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
            
            
            159
            
            
            
            161Pre-tax
      gain from the sale of a Latin American business
            
            
            
            
            
            
            (94
            )Deferred
      income taxes and investment tax credits
            
            
            33
            
            
            
            26Impairment
      of assets held for sale
            
            
            
            
            
            
            70Unrealized
      gain on derivatives and other hedging activities
            
            
            (86
            )
            
            
            (38
            )Other
            
            
            37
            
            
            
            37Change
      in current assets and current liabilitiesAccounts
      receivable
            
            
            105
            
            
            
            (60
            )Accounts
      payable
            
            
            89
            
            
            
            (67
            )Fuel,
      materials and supplies
            
            
            (9
            )
            
            
            11Unbilled
      revenue
            
            
            (201
            )
            
            
            (7
            )Counterparty
      collateral deposits
            
            
            304
            
            
            
            14Other
            
            
            24
            
            
            
            31Other
      operating activitiesOther
      assets
            
            
            5
            
            
            
            (12
            )Other
      liabilities
            
            
            (22
            )
            
            
            (49
            )Net
      cash provided by operating activities
            
            
            799
            
            
            
            490Cash
      Flows from Investing ActivitiesExpenditures
      for property, plant and equipment
            
            
            (516
            )
            
            
            (536
            )Proceeds
      from the sale of a Latin American business
            
            
            
            
            
            
            180Expenditures
      for intangible assets
            
            
            (249
            )
            
            
            (23
            )Proceeds
      from the sale of intangible assets
            
            
            2
            
            
            
            51Purchases
      of nuclear plant decommissioning trust investments
            
            
            (55
            )
            
            
            (118
            )Proceeds
      from the sale of nuclear plant decommissioning trust
      investments
            
            
            42
            
            
            
            110Purchases
      of other investments
            
            
            (47
            )
            
            
            (465
            )Proceeds
      from the sale of other investments
            
            
            33
            
            
            
            448Net
      increase in restricted cash and cash equivalents
            
            
            (275
            )
            
            
            (74
            )Other
      investing activities
            
            
            
            
            
            
            5Net
      cash used in investing activities
            
            
            (1,065
            )
            
            
            (422
            )Cash
      Flows from Financing ActivitiesIssuance
      of long-term debt
            
            
            399
            
            
            
            6Retirement
      of long-term debt
            
            
            (57
            )
            
            
            (130
            )Distributions
      to Member
            
            
            (567
            )
            
            
            (463
            )Contributions
      from Member
            
            
            95
            
            
            
            500Net
      increase in short-term debt
            
            
            400
            
            
            
            7Other
      financing activities
            
            
            (2
            )
            
            
            (7
            )Net
      cash provided by (used in) financing activities
            
            
            268
            
            
            
            (87
            )Effect
      of Exchange Rates on Cash and Cash Equivalents
            
            
            (2
            )
            
            
            1Net
      Decrease in Cash and Cash Equivalents
            
            
            
            
            
            
            (18
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            355
            
            
            
            524Cash
      and Cash Equivalents included in Assets Held for Sale
            
            
            
            
            
            
            (14
            )Cash
      and Cash Equivalents at End of Period
            
            $
            355
            
            
            $
            492The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.





CONDENSED CONSOLIDATED BALANCE
    SHEETSPPL
      Energy Supply, LLC and Subsidiaries(Unaudited)(Millions
      of Dollars)June
      30,
              2008
            
            December
      31,
              2007AssetsCurrent
      AssetsCash
      and cash equivalents
            
            $
            355
            
            
            $
            355Short-term
      investments
            
            
            89
            
            
            
            102Restricted
      cash and cash equivalents
            
            
            426
            
            
            
            146Accounts
      receivable (less reserve:  2008, $20; 2007, $20)Customer
            
            
            281
            
            
            
            376Other
            
            
            71
            
            
            
            61Unbilled
      revenues
            
            
            537
            
            
            
            339Accounts
      receivable from affiliates
            
            
            145
            
            
            
            169Collateral
      on PLR energy supply to affiliate
            
            
            300
            
            
            
            300Fuel,
      materials and supplies
            
            
            291
            
            
            
            282Prepayments
            
            
            43
            
            
            
            120Deferred
      income taxes
            
            
            31
            
            
            
            49Price
      risk management assets
            
            
            2,429
            
            
            
            318Other
      intangibles
            
            
            79
            
            
            
            76Other
            
            
            10
            
            
            
            7Total
      Current Assets
            
            
            5,087
            
            
            
            2,700InvestmentsInvestment
      in unconsolidated affiliates - at equity
            
            
            44
            
            
            
            44Nuclear
      plant decommissioning trust funds
            
            
            524
            
            
            
            555Other
            
            
            19
            
            
            
            5Total
      Investments
            
            
            587
            
            
            
            604Property,
      Plant and EquipmentElectric
      plant in serviceTransmission
      and distribution
            
            
            4,412
            
            
            
            4,470Generation
            
            
            9,529
            
            
            
            8,812General
            
            
            268
            
            
            
            33414,209
            
            
            
            13,616Construction
      work in progress
            
            
            774
            
            
            
            1,165Nuclear
      fuel
            
            
            358
            
            
            
            387Electric
      plant
            
            
            15,341
            
            
            
            15,168Gas
      and oil plant
            
            
            67
            
            
            
            66Other
      property
            
            
            191
            
            
            
            20015,599
            
            
            
            15,434Less:  accumulated
      depreciation
            
            
            5,902
            
            
            
            5,904Total
      Property, Plant and Equipment
            
            
            9,697
            
            
            
            9,530Other
      Noncurrent AssetsGoodwill
            
            
            956
            
            
            
            991Other
      intangibles
            
            
            437
            
            
            
            214Price
      risk management assets
            
            
            1,682
            
            
            
            568Other
            
            
            706
            
            
            
            660Total
      Other Noncurrent Assets
            
            
            3,781
            
            
            
            2,433Total
      Assets
            
            $
            19,152
            
            
            $
            15,267The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.





CONDENSED
      CONSOLIDATED BALANCE SHEETSPPL
      Energy Supply, LLC and Subsidiaries(Unaudited)(Millions
      of Dollars)June
      30,
              2008
            
            December
      31,
              2007Liabilities
      and EquityCurrent
      LiabilitiesShort-term
      debt
            
            $
            450
            
            
            $
            51Long-term
      debt
            
            
            225
            
            
            
            283Accounts
      payable
            
            
            741
            
            
            
            626Accounts
      payable to affiliates
            
            
            45
            
            
            
            61Above
      market NUG contracts
            
            
            33
            
            
            
            42Taxes
            
            
            88
            
            
            
            102Interest
            
            
            87
            
            
            
            94Deferred
      revenue on PLR energy supply to affiliate
            
            
            12
            
            
            
            12Price
      risk management liabilities
            
            
            2,311
            
            
            
            421Counterparty
      collateral deposits
            
            
            325
            
            
            
            21Other
            
            
            321
            
            
            
            321Total
      Current Liabilities
            
            
            4,638
            
            
            
            2,034Long-term
      Debt
            
            
            5,123
            
            
            
            4,787Deferred
      Credits and Other Noncurrent LiabilitiesDeferred
      income taxes and investment tax credits
            
            
            1,029
            
            
            
            1,413Price
      risk management liabilities
            
            
            2,942
            
            
            
            904Accrued
      pension obligations
            
            
            19
            
            
            
            23Asset
      retirement obligations
            
            
            382
            
            
            
            376Above
      market NUG contracts
            
            
            17
            
            
            
            29Deferred
      revenue on PLR energy supply to affiliate
            
            
            6
            
            
            
            12Other
            
            
            463
            
            
            
            465Total
      Deferred Credits and Other Noncurrent Liabilities
            
            
            4,858
            
            
            
            3,222Commitments
      and Contingent Liabilities (Note 10)Minority
      Interest
            
            
            19
            
            
            
            19Member's
      Equity
            
            
            4,514
            
            
            
            5,205Total
      Liabilities and Equity
            
            $
            19,152
            
            
            $
            15,267The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.





CONDENSED CONSOLIDATED STATEMENTS OF
      INCOMEPPL
      Electric Utilities Corporation and Subsidiaries(Unaudited)(Millions
      of Dollars)Three
      Months Ended
              June
      30,
            
            Six
      Months Ended
              June
      30,2008
            
            2007
            
            2008
            
            2007Operating
      RevenuesRetail
      electric
            
            $
            770
            
            
            $
            761
            
            
            $
            1,650
            
            
            $
            1,626Wholesale
      electric to affiliate
            
            
            30
            
            
            
            37
            
            
            
            58
            
            
            
            74Total
            
            
            800
            
            
            
            798
            
            
            
            1,708
            
            
            
            1,700Operating
      ExpensesOperationEnergy
      purchases
            
            
            44
            
            
            
            50
            
            
            
            85
            
            
            
            101Energy
      purchases from affiliate
            
            
            428
            
            
            
            422
            
            
            
            917
            
            
            
            903Other
      operation and maintenance
            
            
            101
            
            
            
            99
            
            
            
            204
            
            
            
            191Amortization
      of recoverable transition costs
            
            
            68
            
            
            
            70
            
            
            
            144
            
            
            
            151Depreciation
            
            
            33
            
            
            
            33
            
            
            
            65
            
            
            
            65Taxes,
      other than income
            
            
            48
            
            
            
            46
            
            
            
            104
            
            
            
            100Total
            
            
            722
            
            
            
            720
            
            
            
            1,519
            
            
            
            1,511Operating
      Income
            
            
            78
            
            
            
            78
            
            
            
            189
            
            
            
            189Other
      Income - net
            
            
            3
            
            
            
            7
            
            
            
            8
            
            
            
            19Interest
      Expense
            
            
            24
            
            
            
            30
            
            
            
            50
            
            
            
            62Interest
      Expense with Affiliate
            
            
            2
            
            
            
            5
            
            
            
            5
            
            
            
            9Income
      Before Income Taxes
            
            
            55
            
            
            
            50
            
            
            
            142
            
            
            
            137Income
      Taxes
            
            
            19
            
            
            
            16
            
            
            
            50
            
            
            
            46Net
      Income
            
            
            36
            
            
            
            34
            
            
            
            92
            
            
            
            91Dividends
      on Preferred Securities
            
            
            4
            
            
            
            4
            
            
            
            9
            
            
            
            9Income
      Available to PPL
            
            $
            32
            
            
            $
            30
            
            
            $
            83
            
            
            $
            82The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.





CONDENSED CONSOLIDATED STATEMENTS OF CASH
      FLOWSPPL
      Electric Utilities Corporation and Subsidiaries(Unaudited)(Millions
      of Dollars)Six
      Months Ended
              June
      30,2008
            
            2007Cash
      Flows from Operating ActivitiesNet
      income
            
            $
            92
            
            
            $
            91Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
            
            
            65
            
            
            
            65Amortization
      - recoverable transition costs and other
            
            
            154
            
            
            
            161Other
            
            
            (9
            )
            
            
            4Change
      in current assets and current liabilitiesAccounts
      receivable
            
            
            (30
            )
            
            
            (14
            )Accounts
      payable
            
            
            (43
            )
            
            
            (11
            )Prepayments
            
            
            (83
            )
            
            
            (109
            )Other
            
            
            17
            
            
            
            (42
            )Other
      operating activitiesOther
      assets
            
            
            3
            
            
            
            8Other
      liabilities
            
            
            21
            
            
            
            6Net
      cash provided by operating activities
            
            
            187
            
            
            
            159Cash
      Flows from Investing ActivitiesExpenditures
      for property, plant and equipment
            
            
            (131
            )
            
            
            (138
            )Purchases
      of investments
            
            
            
            
            
            
            (32
            )Proceeds
      from the sale of investments
            
            
            
            
            
            
            57Net
      decrease in note receivable from affiliate
            
            
            202Net
      (increase) decrease in restricted cash and cash
equivalents
            
            
            (11
            )
            
            
            2Other
      investing activities
            
            
            2
            
            
            
            5Net
      cash provided by (used in) investing activities
            
            
            62
            
            
            
            (106
            )Cash
      Flows from Financing ActivitiesRetirement
      of long-term debt
            
            
            (160
            )
            
            
            (157
            )Payment
      of common stock dividends to PPL
            
            
            (48
            )
            
            
            (74
            )Net
      increase in short-term debt
            
            
            
            
            
            
            54Other
      financing activities
            
            
            (9
            )
            
            
            (9
            )Net
      cash used in financing activities
            
            
            (217
            )
            
            
            (186
            )Net
      Increase (Decrease) in Cash and Cash Equivalents
            
            
            32
            
            
            
            (133
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            33
            
            
            
            150Cash
      and Cash Equivalents at End of Period
            
            $
            65
            
            
            $
            17The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.





CONDENSED CONSOLIDATED BALANCE
    SHEETSPPL
      Electric Utilities Corporation and Subsidiaries(Unaudited)(Millions
      of Dollars)June
      30,
              2008
            
            December
      31,
              2007AssetsCurrent
      AssetsCash
      and cash equivalents
            
            $
            65
            
            
            $
            33Restricted
      cash and cash equivalents
            
            
            52
            
            
            
            42Accounts
      receivable (less reserve:  2008, $18; 2007, $18)Customer
            
            
            223
            
            
            
            197Other
            
            
            23
            
            
            
            17Unbilled
      revenues
            
            
            168
            
            
            
            192Accounts
      receivable from affiliates
            
            
            14
            
            
            
            16Note
      receivable from affiliate
            
            
            75
            
            
            
            277Prepayments
            
            
            99
            
            
            
            16Prepayment
      on PLR energy supply from affiliate
            
            
            12
            
            
            
            12Other
            
            
            49
            
            
            
            53Total
      Current Assets
            
            
            780
            
            
            
            855Property,
      Plant and EquipmentElectric
      plant in serviceTransmission
      and distribution
            
            
            4,416
            
            
            
            4,316General
            
            
            462
            
            
            
            4434,878
            
            
            
            4,759Construction
      work in progress
            
            
            94
            
            
            
            114Electric
      plant
            
            
            4,972
            
            
            
            4,873Other
      property
            
            
            2
            
            
            
            24,974
            
            
            
            4,875Less:  accumulated
      depreciation
            
            
            1,891
            
            
            
            1,854Total
      Property, Plant and Equipment
            
            
            3,083
            
            
            
            3,021Regulatory
      and Other Noncurrent AssetsRecoverable
      transition costs
            
            
            430
            
            
            
            574Intangibles
            
            
            122
            
            
            
            121Prepayment
      on PLR energy supply from affiliate
            
            
            6
            
            
            
            12Taxes
      recoverable through future rates
            
            
            244
            
            
            
            245Other
            
            
            152
            
            
            
            158Total
      Regulatory and Other Noncurrent Assets
            
            
            954
            
            
            
            1,110Total
      Assets
            
            $
            4,817
            
            
            $
            4,986The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.





CONDENSED
      CONSOLIDATED BALANCE SHEETSPPL
      Electric Utilities Corporation and Subsidiaries(Unaudited)(Millions
      of Dollars)June
      30,
              2008
            
            December
      31,
              2007Liabilities
      and EquityCurrent
      LiabilitiesShort-term
      debt
            
            $
            41
            
            
            $
            41Long-term
      debt
            
            
            235
            
            
            
            395Accounts
      payable
            
            
            60
            
            
            
            59Accounts
      payable to affiliates
            
            
            153
            
            
            
            192Taxes
            
            
            29
            
            
            
            44Collateral
      on PLR energy supply from affiliate
            
            
            300
            
            
            
            300Other
            
            
            111
            
            
            
            107Total
      Current Liabilities
            
            
            929
            
            
            
            1,138Long-term
      Debt
            
            
            1,279
            
            
            
            1,279Deferred
      Credits and Other Noncurrent LiabilitiesDeferred
      income taxes and investment tax credits
            
            
            747
            
            
            
            763Other
            
            
            241
            
            
            
            220Total
      Deferred Credits and Other Noncurrent Liabilities
            
            
            988
            
            
            
            983Commitments
      and Contingent Liabilities (Note 10)Shareowners'
      EquityPreferred
      securities
            
            
            301
            
            
            
            301Common
      stock - no par value (a)
            
            
            364
            
            
            
            364Additional
      paid-in capital
            
            
            424
            
            
            
            424Earnings
      reinvested
            
            
            532
            
            
            
            497Total
      Shareowners' Equity
            
            
            1,621
            
            
            
            1,586Total
      Liabilities and Equity
            
            $
            4,817
            
            
            $
            4,986





(a)
            
            170
      million shares authorized; 66 million shares issued and outstanding at
      June 30, 2008 and December 31, 2007.The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.





Combined
Notes to Condensed Consolidated Financial Statements
(Unaudited)





Terms and
abbreviations appearing in Combined Notes to Condensed Consolidated Financial
Statements are explained in the glossary.  Dollars are in millions,
except per share data, unless otherwise noted.





1.
            Interim
      Financial Statements





(PPL,
PPL Energy Supply and PPL Electric)





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the U.S.
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X and, therefore, do not include all of the
information and footnotes required by accounting principles generally accepted
in the U.S. for complete financial statements.  In the opinion of
management, all adjustments considered necessary for a fair presentation in
accordance with accounting principles generally accepted in the U.S. are
reflected in the condensed consolidated financial statements.  All
adjustments are of a normal recurring nature, except as otherwise
disclosed.  The Balance Sheets at December 31, 2007, are derived
from each Registrant's 2007 audited Balance Sheet.  The financial
statements and notes thereto should be read in conjunction with the financial
statements and notes contained in each Registrant's 2007 Form
10-K.  The results of operations for the six months ended
June 30, 2008, are not necessarily indicative of the results to be expected
for the full year ending December 31, 2008, or other future periods, because
results for interim periods can be disproportionately influenced by various
factors and developments and seasonal variations.





The
classification of certain prior period amounts has been changed to conform to
the presentation in the June 30, 2008 financial statements.





(PPL)


PPL is in
the process of selling its natural gas distribution and propane
businesses.  On the Statements of Income, the operating results of the
natural gas distribution and propane businesses for the three and six months
ended June 30, 2008 and 2007, are classified as Discontinued
Operations.  At June 30, 2008 and December 31, 2007, the assets
and liabilities related to the natural gas distribution and propane businesses
are reflected in the Balance Sheets as held for sale, except for $10 million of
debt that was classified as "Current Liabilities - Long-term debt" at June 30,
2008.  See Note 8 for additional information.  The
Statements of Cash Flows do not separately report the cash flows of the
Discontinued Operations.





(PPL
and PPL Energy Supply)





Discontinued
Operations for the six months ended June 30, 2008, and the three and six months
ended June 30, 2007, include the results of Latin American businesses that
were sold during 2007.  See Note 8 for additional
information.  The Statements of Cash Flows do not separately report
the cash flows of the Discontinued Operations.





2.
            Summary
      of Significant Accounting Policies





(PPL,
PPL Energy Supply and PPL Electric)





The
following accounting policy disclosures represent updates to the "Summary of
Significant Accounting Policies" Note in each Registrant's 2007 Form 10-K and
should be read in conjunction with that discussion.





Price
Risk Management





Master Netting
Arrangements





As
permitted by FIN 39, PPL and its subsidiaries have elected not to offset net
derivative positions in the financial statements.  Accordingly, PPL
and its subsidiaries do not offset such derivative positions against the fair
value of amounts (or amounts that approximate fair value) recognized for the
right to reclaim cash collateral (a receivable) or the obligation to return cash
collateral (a payable) under master netting arrangements.





PPL's and
PPL Energy Supply's obligation to return counterparty cash collateral under
master netting arrangements was $325 million at June 30, 2008 and $21
million at December 31, 2007.





PPL
Electric's obligation to return cash collateral to PPL Energy Supply under
master netting arrangements was $300 million at June 30, 2008 and December
31, 2007.  See Note 11 for additional information.





PPL and
PPL Electric have not posted any cash collateral under master netting
arrangements.





New
Accounting Standards Adopted





SFAS 157, as
amended





In
September 2006, the FASB issued SFAS 157, which provides a definition of fair
value as well as a framework for measuring fair value.  In addition,
SFAS 157 expands the fair value disclosure requirements of other accounting
pronouncements to require, among other things, disclosure of the methods and
assumptions used to measure fair value as well as the earnings impact of certain
fair value measurement techniques.  SFAS 157 excludes from its scope
fair value measurements related to stock-based compensation.  See Note
13 for additional information and related disclosures.





In
February 2008, the FASB amended SFAS 157 through the issuance of FSP FAS 157-1
and FSP FAS 157-2.  FSP FAS 157-1 was effective upon the initial
adoption of SFAS 157 and amends SFAS 157 to exclude from its scope certain
accounting pronouncements that address fair value measurements associated with
leases.  FSP FAS 157-2 was effective upon issuance and delays the
effective date of SFAS 157 to fiscal years beginning after November 15, 2008,
for nonfinancial assets and nonfinancial liabilities that are not recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually).





PPL and
its subsidiaries adopted SFAS 157, as amended, prospectively, effective January
1, 2008.  Limited retrospective application for financial instruments
that were previously measured at fair value in accordance with footnote 3 of
EITF Issue No. 02-3 was not required.  The January 1, 2008 adoption
did not have a significant impact on PPL and its subsidiaries.  As
permitted by this guidance, PPL and its subsidiaries will apply SFAS 157, as
amended, prospectively effective January 1, 2009, to nonfinancial assets and
nonfinancial liabilities that are not recognized or disclosed at fair value in
the financial statements on a recurring basis.  PPL and its
subsidiaries are in the process of evaluating the impact of applying SFAS 157,
as amended, to these items.  The potential impact of this application
is not yet determinable, but it could be material.





Since PPL
and PPL Energy Supply elected to defer the effective date of SFAS 157, as
amended, for eligible assets and liabilities, the provisions of this standard
were not applied to intangible assets acquired and asset retirement obligations
recognized during 2008.  PPL Electric's election to defer the
effective date of this standard for eligible assets and liabilities had no
impact on its 2008 financial statements.





SFAS 159





In
February 2007, the FASB issued SFAS 159, which provides entities with an option
to measure, upon adoption of this standard and at specified election dates,
certain financial assets and liabilities at fair value, including
available-for-sale and held-to-maturity securities, as well as other eligible
items.  The fair value option (i) may be applied on an
instrument-by-instrument basis, with a few exceptions, (ii) is irrevocable
(unless a new election date occurs), and (iii) is applied to an entire
instrument and not to only specified risks, cash flows, or portions of that
instrument.  An entity shall report unrealized gains and losses on
items for which the fair value option has been elected in earnings at each
subsequent reporting date.





SFAS 159
also establishes presentation and disclosure requirements designed to facilitate
comparisons between similar assets and liabilities measured using different
attributes.  Upon adoption of SFAS 159, an entity may elect the fair
value option for eligible items that exist at that date and must report the
effect of the first remeasurement to fair value as a cumulative-effect
adjustment to the opening balance of retained earnings.





PPL and
its subsidiaries adopted SFAS 159 effective January 1, 2008.  PPL
and its subsidiaries did not elect the fair value option for eligible
items.  Therefore, the January 1, 2008 adoption did not have an impact
on PPL and its subsidiaries.





New
Accounting Standards Pending Adoption





See Note
19 for a discussion of new accounting standards pending adoption.





3.
            Segment
      and Related Information





(PPL
and PPL Energy Supply)





See the
"Segment and Related Information" Note in each Registrant's 2007 Form 10-K for a
discussion of reportable segments.





Financial
data for the segments are:





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,PPL
            
            2008
            
            2007
            
            2008
            
            2007Income
      Statement DataRevenues
      from external customersSupply
      (a)
            
            $
            34
            
            
            $
            586
            
            
            $
            431
            
            
            $
            1,041International
      Delivery
            
            
            220
            
            
            
            227
            
            
            
            470
            
            
            
            453Pennsylvania
      Delivery
            
            
            770
            
            
            
            760
            
            
            
            1,649
            
            
            
            1,6251,024
            
            
            
            1,573
            
            
            
            2,550
            
            
            
            3,119Intersegment
      revenuesSupply
            
            
            428
            
            
            
            422
            
            
            
            917
            
            
            
            903Pennsylvania
      Delivery
            
            
            30
            
            
            
            38
            
            
            
            59
            
            
            
            75Net
      IncomeSupply
            
            
            97
            
            
            
            132
            
            
            
            199
            
            
            
            249International
      Delivery (b)
            
            
            62
            
            
            
            183
            
            
            
            160
            
            
            
            211Pennsylvania
      Delivery (c)
            
            
            31
            
            
            
            30
            
            
            
            91
            
            
            
            88$
            190
            
            
            $
            345
            
            
            $
            450
            
            
            $
            548





June
      30,2008
            
            December
      31,2007Balance
      Sheet DataTotal
      assetsSupply
            
            $
            13,445
            
            
            $
            9,231International
      Delivery
            
            
            5,498
            
            
            
            5,639Pennsylvania
      Delivery
            
            
            4,958
            
            
            
            5,102$
            23,901
            
            
            $
            19,972





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,PPL Energy
      Supply
            
            2008
            
            2007
            
            2008
            
            2007Income
      Statement DataRevenues
      from external customersSupply
      (a)
            
            $
            460
            
            
            $
            1,007
            
            
            $
            1,344
            
            
            $
            1,941International
      Delivery
            
            
            220
            
            
            
            227
            
            
            
            470
            
            
            
            453680
            
            
            
            1,234
            
            
            
            1,814
            
            
            
            2,394Net
      IncomeSupply
            
            
            95
            
            
            
            137
            
            
            
            201
            
            
            
            256International
      Delivery (b)
            
            
            62
            
            
            
            183
            
            
            
            160
            
            
            
            211$
            157
            
            
            $
            320
            
            
            $
            361
            
            
            $
            467





June
      30,2008
            
            December
      31,2007Balance
      Sheet DataTotal
      assetsSupply
            
            $
            13,654
            
            
            $
            9,628International
      Delivery
            
            
            5,498
            
            
            
            5,639$
            19,152
            
            
            $
            15,267





(a)
            
            Includes
      unrealized gains and losses from economic hedge activity.  See
      Note 14 for additional information.(b)
            
            The
      six-month period in 2008 and both periods in 2007 include the results of
      Discontinued Operations.  See Note 8 for additional
      information.(c)
            
            2008
      and 2007 include the results of Discontinued Operations.  See
      Note 8 for additional information.





4.
            Earnings
      Per Share





(PPL)





Basic EPS
is calculated using the weighted-average number of common shares outstanding
during the period.  Diluted EPS is calculated using the
weighted-average number of common shares outstanding during the period,
increased for additional shares that would be outstanding if potentially
dilutive securities were converted to common shares.  Potentially
dilutive securities consist of:





·
            stock
      options, restricted stock and restricted stock units granted under the
      incentive compensation plans;·
            stock
      units representing common stock granted under the directors compensation
      programs; and·
            convertible
      senior notes.





The basic
and diluted EPS calculations, and the reconciliation of the shares (in
thousands) used in the calculations, are:





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Income
      (Numerator)Income
      from continuing operations
            
            $
            189
            
            
            $
            244
            
            
            $
            435
            
            
            $
            465Income
      from discontinued operations (net of income taxes)
            
            
            1
            
            
            
            101
            
            
            
            15
            
            
            
            83Net
      Income
            
            $
            190
            
            
            $
            345
            
            
            $
            450
            
            
            $
            548Shares
      (Denominator)Shares
      for Basic EPS
            
            
            373,158
            
            
            
            385,300
            
            
            
            373,009
            
            
            
            385,053Add
      incremental shares:Convertible
      Senior Notes
            
            
            671
            
            
            
            1,796
            
            
            
            877
            
            
            
            1,575Restricted
      stock, stock options and other share-based awards
            
            
            2,678
            
            
            
            3,013
            
            
            
            2,707
            
            
            
            3,017Shares
      for Diluted EPS
            
            
            376,507
            
            
            
            390,109
            
            
            
            376,593
            
            
            
            389,645


Basic
      EPSIncome
      from continuing operations
            
            $
            0.51
            
            
            $
            0.63
            
            
            $
            1.17
            
            
            $
            1.20Income
      from discontinued operations (net of income taxes)
            
            
            
            
            
            
            0.26
            
            
            
            0.04
            
            
            
            0.22Net
      Income
            
            $
            0.51
            
            
            $
            0.89
            
            
            $
            1.21
            
            
            $
            1.42


Diluted
      EPSIncome
      from continuing operations
            
            $
            0.50
            
            
            $
            0.62
            
            
            $
            1.15
            
            
            $
            1.19Income
      from discontinued operations (net of income taxes)
            
            
            
            
            
            
            0.26
            
            
            
            0.04
            
            
            
            0.22Net
      Income
            
            $
            0.50
            
            
            $
            0.88
            
            
            $
            1.19
            
            
            $
            1.41





PPL
Energy Supply's 2-5/8% Convertible Senior Notes due 2023 (Convertible Senior
Notes) required cash settlement of the principal amount and permitted settlement
of any conversion premium in cash or PPL common stock.  Based upon the
conversion rate of 40.2212 shares per $1,000 principal amount of notes (or
$24.8625 per share), the Convertible Senior Notes had a dilutive impact when the
average market price of PPL common stock equaled or exceeded
$24.87.





During
the six months ended June 30, 2008, all Convertible Senior Notes were either
converted at the election of the holders or redeemed at par as a result of PPL
Energy Supply calling the Convertible Senior Notes for redemption on
May 20, 2008.  No Convertible Senior Notes were outstanding at
June 30, 2008.  See Note 7 for additional information.





During
the six months ended June 30, 2008, PPL issued 933,956 shares of common
stock related to the exercise of stock options, vesting of restricted stock and
restricted stock units and conversion of stock units granted to directors under
its stock-based compensation plans.





No stock
options to purchase PPL common shares were excluded in the respective periods'
computations of diluted EPS because the effect would have been
antidilutive.





5.
            Income
      Taxes





(PPL,
PPL Energy Supply and PPL Electric)





Reconciliations
of effective income tax rates are:





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,PPL
            
            2008
            
            2007
            
            2008
            
            2007Reconciliation
      of Income Tax ExpenseFederal
      income tax on Income from Continuing Operations Before Income Taxes,
      Minority Interest and Dividends on Preferred Securities of a
      Subsidiary at statutory tax rate - 35%
            
            $
            102
            
            
            $
            97
            
            
            $
            235
            
            
            $
            201Increase
      (decrease) due to:State
      income taxes
            
            
            8
            
            
            
            6
            
            
            
            17
            
            
            
            11Amortization
      of investment tax credit
            
            
            (2
            )
            
            
            (2
            )
            
            
            (5
            )
            
            
            (5
            )Domestic
      manufacturing deduction
            
            
            (3
            )
            
            
            (1
            )
            
            
            (7
            )
            
            
            (2
            )Difference
      related to income recognition of foreign affiliates (net of foreign income
      taxes)
            
            
            (9
            )
            
            
            (8
            )
            
            
            (17
            )
            
            
            (17
            )Stranded
      cost securitization (a)
            
            
            (2
            )
            
            
            (2
            )
            
            
            (3
            )
            
            
            (3
            )Federal
      income tax credits (b)
            
            
            
            
            
            
            (26
            )
            
            
            13
            
            
            
            (52
            )Change
      in foreign tax reserves (a)
            
            
            17
            
            
            
            
            
            
            
            5Foreign
      income tax return adjustments
            
            
            (17
            )
            
            
            
            
            
            
            (17
            )Change
      in federal tax reserves (a)
            
            
            3
            
            
            
            (32
            )
            
            
            6
            
            
            
            (30
            )Other
            
            
            
            
            
            
            (1
            )
            
            
            (1
            )
            
            
            (3
            )(5
            )
            
            
            (66
            )
            
            
            (9
            )
            
            
            (101
            )Total
      income tax expense
            
            $
            97
            
            
            $
            31
            
            
            $
            226
            
            
            $
            100Effective
      income tax rate
            
            
            33.3%
            
            
            
            11.1%
            
            
            
            33.7%
            
            
            
            17.4%





(a)
            
            For
      the three months ended June 30, 2008, PPL recorded an $18 million tax
      expense related to income tax reserve changes, which consisted of a $17
      million expense reflected in "Change in foreign tax reserves" and a $3
      million expense reflected in "Change in federal tax reserves," offset by a
      $2 million benefit reflected in "Stranded cost
      securitization."
              
              For
      the three months ended June 30, 2007, PPL recorded a $34 million benefit
      related to income tax reserve changes, which consisted of a $32 million
      benefit reflected in "Change in federal tax reserves" and a $2 million
      benefit reflected in "Stranded cost securitization."
              
              For
      the six months ended June 30, 2008, PPL recorded an $8 million
      expense related to income tax reserve changes, which consisted of a $5
      million expense reflected in "Change in foreign tax reserves" and a $6
      million expense reflected in "Change in federal tax reserves," offset by a
      $3 million benefit reflected in "Stranded cost
      securitization."
              
              For
      the six months ended June 30, 2007, PPL recorded a $33 million benefit
      related to income tax reserve changes, which consisted of a $30 million
      benefit reflected in "Change in federal tax reserves" and a $3 million
      benefit reflected in "Stranded cost securitization."(b)
            
            In
      March 2008, PPL recorded income tax expense of $13 million to adjust the
      amount of synthetic fuel tax credits recorded during 2007.  See
      Note 10 for additional information.











Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,PPL Energy
      Supply
            
            2008
            
            2007
            
            2008
            
            2007Reconciliation
      of Income Tax ExpenseFederal
      income tax on Income from Continuing Operations Before Income Taxes and
      Minority Interest at statutory tax rate - 35%
            
            $
            84
            
            
            $
            85
            
            
            $
            190
            
            
            $
            161Increase
      (decrease) due to:State
      income taxes (a)
            
            
            8
            
            
            
            7
            
            
            
            15
            
            
            
            11Amortization
      of investment tax credit
            
            
            (2
            )
            
            
            (2
            )
            
            
            (4
            )
            
            
            (4
            )Domestic
      manufacturing deduction
            
            
            (3
            )
            
            
            (1
            )
            
            
            (7
            )
            
            
            (2
            )Difference
      related to income recognition of foreign affiliates (net of foreign income
      taxes)
            
            
            (9
            )
            
            
            (8
            )
            
            
            (17
            )
            
            
            (17
            )Federal
      income tax credits (b)
            
            
            
            
            
            
            (25
            )
            
            
            13
            
            
            
            (51
            )Change
      in foreign tax reserves (a)
            
            
            17
            
            
            
            
            
            
            
            5Foreign
      income tax return adjustments
            
            
            (17
            )
            
            
            
            
            
            
            (17
            )Change
      in federal tax reserves (a)
            
            
            2
            
            
            
            (31
            )
            
            
            6
            
            
            
            (29
            )Other
            
            
            1
            
            
            
            (2
            )
            
            
            2
            
            
            
            (2
            )(3
            )
            
            
            (62
            )
            
            
            (4
            )
            
            
            (94
            )Total
      income tax expense
            
            $
            81
            
            
            $
            23
            
            
            $
            186
            
            
            $
            67Effective
      income tax rate
            
            
            33.9%
            
            
            
            9.5%
            
            
            
            34.3%
            
            
            
            14.6%





(a)
            
            For
      the three months ended June 30, 2008, PPL Energy Supply recorded a
      $20 million expense related to income tax reserve changes, which consisted
      of a $17 million expense reflected in "Change in foreign tax reserves," a
      $2 million expense reflected in "Change in federal tax reserves" and a $1
      million expense reflected in "State income taxes."
              
              For
      the three months ended June 30, 2007, PPL Energy Supply recorded a $31
      million benefit related to income tax reserve changes, which is reflected
      in "Change in federal tax reserves."
              
              For
      the six months ended June 30, 2008, PPL Energy Supply recorded an $11
      million expense related to income tax reserve changes, which consisted of
      a $5 million expense reflected in "Change in foreign tax reserves" and a
      $6 million expense reflected in "Change in federal tax
      reserves."
              
              For
      the six months ended June 30, 2007, PPL Energy Supply recorded a $29
      million benefit related to income tax reserve changes, which is reflected
      in "Change in federal tax reserves."(b)
            
            In
      March 2008, PPL Energy Supply recorded income tax expense of $13 million
      to adjust the amount of synthetic fuel tax credits recorded during
      2007.  See Note 10 for additional
  information.











Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,PPL
      Electric
            
            2008
            
            2007
            
            2008
            
            2007Reconciliation
      of Income Tax ExpenseFederal
      income tax on Income Before Income Taxes at statutory tax rate -
      35%
            
            $
            20
            
            
            $
            18
            
            
            $
            50
            
            
            $
            48Increase
      (decrease) due to:State
      income taxes
            
            
            2
            
            
            
            1
            
            
            
            6
            
            
            
            4Amortization
      of investment tax credit
            
            
            
            
            
            
            
            
            
            
            (1
            )
            
            
            (1
            )Stranded
      cost securitization (a)
            
            
            (2
            )
            
            
            (2
            )
            
            
            (3
            )
            
            
            (3
            )Other
      (a)
            
            
            (1
            )
            
            
            (1
            )
            
            
            (2
            )
            
            
            (2
            )(1
            )
            
            
            (2
            )
            
            
            
            
            
            
            (2
            )Total
      income tax expense
            
            $
            19
            
            
            $
            16
            
            
            $
            50
            
            
            $
            46Effective
      income tax rate
            
            
            34.5%
            
            
            
            32.0%
            
            
            
            35.2%
            
            
            
            33.6%





(a)
            
            For
      the three months ended June 30, 2008, PPL Electric recorded a $2 million
      benefit related to income tax reserve changes, which is reflected in
      "Stranded cost securitization."
              
              For
      the three months ended June 30, 2007, PPL Electric recorded a $3 million
      benefit related to income tax reserve changes, which consisted of a $2
      million benefit reflected in "Stranded cost securitization" and a $1
      million benefit reflected in "Other."
              
              For
      the six months ended June 30, 2008, PPL Electric recorded a $3 million
      benefit related to income tax reserve changes, which is reflected in
      "Stranded cost securitization."
              
              For
      the six months ended June 30, 2007, PPL Electric recorded a $4 million
      benefit related to income tax reserve changes, which consisted of a $3
      million benefit reflected in "Stranded cost securitization" and a $1
      million benefit reflected in
"Other."





Unrecognized
Tax Benefits





Changes
to unrecognized tax benefits were as follows:





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007PPLBeginning
      of period (a)
            
            $
            200
            
            
            $
            220
            
            
            $
            204
            
            
            $
            226Additions
      based on tax positions of prior years
            
            
            17
            
            
            
            
            
            
            
            34Reduction
      based on tax positions of prior years
            
            
            
            
            
            
            
            
            
            
            (10
            )
            
            
            (4
            )Additions
      based on tax positions related to the current year
            
            
            2
            
            
            
            
            
            
            
            7Settlements
            
            
            
            
            
            
            
            
            
            
            (12
            )Lapse
      of applicable statutes of limitations
            
            
            (2
            )
            
            
            (28
            )
            
            
            (4
            )
            
            
            (30
            )Effects
      of foreign currency translation
            
            
            
            
            
            
            
            
            
            
            (2
            )End
      of period
            
            $
            217
            
            
            $
            192
            
            
            $
            217
            
            
            $
            192


PPL Energy
      SupplyBeginning
      of period (a)
            
            $
            111
            
            
            $
            140
            
            
            $
            130
            
            
            $
            143Additions
      based on tax positions of prior years
            
            
            17
            
            
            
            
            
            
            
            17Reduction
      based on tax positions of prior years
            
            
            
            
            
            
            
            
            
            
            (7
            )
            
            
            (3
            )Additions
      based on tax positions related to the current year
            
            
            2
            
            
            
            
            
            
            
            4Settlements
            
            
            
            
            
            
            
            
            
            
            (12
            )Lapse
      of applicable statutes of limitations
            
            
            
            
            
            
            (26
            )
            
            
            
            
            
            
            (26
            )Effects
      of foreign currency translation
            
            
            
            
            
            
            
            
            
            
            (2
            )End
      of period
            
            $
            130
            
            
            $
            114
            
            
            $
            130
            
            
            $
            114PPLElectricBeginning
      of period
            
            $
            83
            
            
            $
            75
            
            
            $
            68
            
            
            $
            78Additions
      based on tax positions of prior years
            
            
            
            
            
            
            
            
            
            
            17Reduction
      based on tax positions of prior years
            
            
            
            
            
            
            
            
            
            
            (3
            )
            
            
            (1
            )Additions
      based on tax positions related to the current year
            
            
            
            
            
            
            
            
            
            
            3Lapse
      of applicable statutes of limitations
            
            
            (2
            )
            
            
            (2
            )
            
            
            (4
            )
            
            
            (4
            )End
      of period
            
            $
            81
            
            
            $
            73
            
            
            $
            81
            
            
            $
            73





(a)
            
            The
      beginning of period balance for the six months ended June 30, 2008,
      includes a $15 million adjustment to exclude recognized uncertain tax
      positions from unrecognized tax
benefits.





At June
30, 2008, the total unrecognized tax benefits and related indirect effects that
if recognized would decrease the effective tax rate were:





PPL
            
            PPL
      Energy Supply
            
            PPL
      ElectricTotal
      unrecognized tax benefits
            
            $
            217
            
            
            $
            130
            
            
            $
            81Unrecognized
      tax benefits associated with taxable or deductible temporary
      differences
            
            
            (26
            )
            
            
            2
            
            
            
            (28
            )Unrecognized
      tax benefits associated with business combinations (a)
            
            
            (18
            )
            
            
            (18
            )Total
      indirect effect of unrecognized tax benefits on other tax
      jurisdictions
            
            
            (41
            )
            
            
            (12
            )
            
            
            (27
            )Total
      unrecognized tax benefits and related indirect effects that if recognized
      would decrease the effective tax rate
            
            $
            132
            
            
            $
            102
            
            
            $
            26





(a)
            
            Upon
      adoption, effective January 1, 2009, SFAS 141(R) will require changes in
      unrecognized tax benefits associated with business combinations to be
      recognized in tax expense rather than in goodwill.  These
      amounts do not consider the impact of SFAS
  141(R).





At June
30, 2008, it was reasonably possible that during the next 12 months the total
amount of unrecognized tax benefits could increase by as much as $1 million or
decrease by up to $91 million for PPL, decrease between $5 million to $76
million for PPL Energy Supply and decrease by up to $9 million for PPL Electric.
 These increases and decreases could result from subsequent recognition,
derecognition and/or changes in measurement of uncertain tax positions related
to the creditability of foreign taxes, the timing and utilization of foreign tax
credits and the related impact on alternative minimum tax and other credits, the
timing and/or valuation of certain deductions, intercompany transactions and
unitary filing groups.  The events that could cause these changes are
direct settlements with taxing authorities, litigation, legal or administrative
guidance by relevant taxing authorities and the lapse of an applicable statute
of limitation.





At June
30, 2008, PPL, PPL Energy Supply and PPL Electric had accrued interest related
to tax positions of $32 million, $26 million and $6 million.  At
December 31, 2007, PPL, PPL Energy Supply and PPL Electric had accrued interest
and penalties of $31 million, $26 million and $4 million.





PPL and
its subsidiaries recognize interest and penalties in "Income Taxes" on their
Statements of Income.  The following expenses (benefits) were
recognized.





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007PPL
            
            $
            2
            
            
            $
            (8
            )
            
            $
            1
            
            
            $
            (5
            )PPL
      Energy Supply
            
            
            3
            
            
            
            (8
            )
            
            
            
            
            
            
            (5
            )PPL
      Electric
            
            
            (1
            )
            
            
            
            
            
            
            1





The
recognition of these amounts, for PPL and PPL Energy Supply, was primarily
the result of additional interest accrued or reversed related to tax positions
of prior years and the lapse of applicable statutes of limitations, with respect
to certain issues.





6.
            Comprehensive
      (Loss) Income





(PPL
and PPL Energy Supply)





The
after-tax components of comprehensive (loss) income were as
follows:





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,PPL
            
            2008
            
            2007
            
            2008
            
            2007Net
      Income
            
            $
            190
            
            
            $
            345
            
            
            $
            450
            
            
            $
            548Other
      comprehensive loss:Foreign
      currency translation adjustments (a)
            
            
            (13
            )
            
            
            14
            
            
            
            (72
            )
            
            
            14Defined
      benefit plans amortization:Prior
      service cost (b)
            
            
            3
            
            
            
            3
            
            
            
            7
            
            
            
            7Net
      actuarial gain (c)
            
            
            4
            
            
            
            9
            
            
            
            6
            
            
            
            19Transition
      asset
            
            
            1
            
            
            
            
            
            
            
            1Net
      unrealized (loss) gain on available-for-sale securities
(d)
            
            
            (8
            )
            
            
            7
            
            
            
            (21
            )
            
            
            8Net
      unrealized loss on qualifying derivatives (e)
            
            
            (474
            )
            
            
            (118
            )
            
            
            (500
            )
            
            
            (86
            )Equity
      investee comprehensive loss:Defined
      benefit plans
            
            
            (1
            )
            
            
            
            
            
            
            (1
            )Total
      other comprehensive loss
            
            
            (488
            )
            
            
            (85
            )
            
            
            (580
            )
            
            
            (38
            )Comprehensive
      (Loss) Income
            
            $
            (298
            )
            
            $
            260
            
            
            $
            (130
            )
            
            $
            510




(a)
              
              Net
      of a tax benefit of $2 million for both the three and six months
      ended June 30, 2007.  Such amounts were insignificant for both the
      three and six months ended June 30, 2008.(b)
              
              Net
      of tax expense of $2 million for both the three months ended June 30, 2008
      and 2007 and $4 million for both the six months ended June 30, 2008 and
      2007.(c)
              
              Net
      of tax expense of $1 million and $3 million for the three months ended
      June 30, 2008 and 2007 and $2 million and $8 million for the six months
      ended June 30, 2008 and 2007.(d)
              
              Net
      of a tax benefit (expense) of $7 million and $(3) million for the three
      months ended June 30, 2008 and 2007 and $21 million and $(6) million
      for the six months ended June 30, 2008 and 2007.(e)
              
              Net
      of a tax benefit of $328 million and $83 million for the three months
      ended June 30, 2008 and 2007 and $347 million and $62 million for the six
      months ended June 30, 2008 and
2007.
  Three
      Months Ended June 30,
                
                Six
      Months Ended June 30,PPLEnergy
      Supply
                
                2008
                
                2007
                
                2008
                
                2007Net
      Income
                
                $
                157
                
                
                $
                320
                
                
                $
                361
                
                
                $
                467Other
      comprehensive loss:Foreign
      currency translation adjustments (a)
                
                
                (13
                )
                
                
                14
                
                
                
                (72
                )
                
                
                14Defined
      benefit plans amortization:Prior
      service cost (b)
                
                
                3
                
                
                
                3
                
                
                
                6
                
                
                
                6Net
      actuarial gain (c)
                
                
                3
                
                
                
                10
                
                
                
                6
                
                
                
                20Transition
      asset
                
                
                1
                
                
                
                
                
                
                
                1Net
      unrealized (loss) gain on available-for-sale securities
(d)
                
                
                (7
                )
                
                
                7
                
                
                
                (20
                )
                
                
                8Net
      unrealized loss on qualifying derivatives (e)
                
                
                (479
                )
                
                
                (124
                )
                
                
                (500
                )
                
                
                (91
                )Equity
      investee comprehensive loss:Defined
      benefit plans
                
                
                (1
                )
                
                
                
                
                
                
                (1
                )Total
      other comprehensive loss
                
                
                (493
                )
                
                
                (90
                )
                
                
                (580
                )
                
                
                (43
                )Comprehensive
      (Loss) Income
                
                $
                (336
                )
                
                $
                230
                
                
                $
                (219
                )
                
                $
                424


(a)
              
              Net
      of a tax benefit of $2 million for both the three and six months
      ended June 30, 2007.  Such amounts were insignificant for both the
      three and six months ended June 30, 2008.(b)
              
              Net
      of tax expense of $1 million and $2 million for the three months ended
      June 30, 2008 and 2007 and $3 million for both the six months ended June
      30, 2008 and 2007.(c)
              
              Net
      of tax expense of $1 million and $4 million for the three months ended
      June 30, 2008 and 2007 and $2 million and $8 million for the six months
      ended June 30, 2008 and 2007.(d)
              
              Net
      of a tax benefit (expense) of $7 million and $(3) million for the three
      months ended June 30, 2008 and 2007 and $21 million and $(6) million
      for the six months ended June 30, 2008 and 2007.(e)
              
              Net
      of a tax benefit of $332 million and $87 million for the three months
      ended June 30, 2008 and 2007 and $347 million and $65 million for the six
      months ended June 30, 2008 and
2007.


(PPL
Electric)





PPL
Electric's comprehensive income approximates net income.





7.
            Credit
      Arrangements and Financing
Activities





Credit
Arrangements





(PPL
and PPL Energy Supply)





PPL
Energy Supply maintains credit facilities in order to enhance liquidity and
provide credit support, and as a backstop to its commercial paper
program.





In March
2008, PPL Energy Supply increased the capacity of its 364-day reimbursement
agreement from $200 million to $300 million and extended the expiration date of
the agreement to March 2009.  Under the agreement, PPL Energy Supply
can cause the bank to issue up to $300 million of letters of credit but cannot
make cash borrowings.  At June 30, 2008, there were $257 million
of letters of credit outstanding under this agreement.





PPL
Energy Supply maintains a $3.4 billion five-year credit facility that expires in
June 2012.  PPL Energy Supply has the ability to cause the lenders
under this facility to issue letters of credit.  At June 30,
2008, there were $100 million of cash borrowings, at an interest rate of 2.94%,
and $1.3 billion of letters of credit outstanding under this
facility.





PPL
Energy Supply also maintains a $300 million five-year letter of credit and
revolving credit facility expiring in March 2011.  At June 30,
2008, there were no cash borrowings and $253 million of letters of credit
outstanding under this facility.  PPL Energy Supply's obligations
under this facility are supported by a $300 million letter of credit issued on
PPL Energy Supply's behalf under a separate $300 million five-year letter of
credit and reimbursement agreement, also expiring in March 2011.





PPL
Energy Supply maintains a commercial paper program for up to $500 million to
provide an additional financing source to fund its short-term liquidity needs,
if and when necessary.  Commercial paper issuances are supported by
PPL Energy Supply's $3.4 billion five-year credit facility.  PPL
Energy Supply had $350 million of commercial paper outstanding at June 30,
2008, with a weighted average interest rate of 3.00%.





In
January 2008, WPDH Limited extended the expiration date of its £150 million
(approximately $296 million) five-year committed credit facility to January
2013, and it has the option to extend the expiration date by another year in
January 2009.  WPD (South West) maintains a £150 million
(approximately $296 million) five-year committed credit facility that expires in
October 2009 and uncommitted credit facilities of £65 million (approximately
$128 million).  There were no cash borrowings outstanding under any of
WPD's credit facilities at June 30, 2008.





(PPL
and PPL Electric)





PPL
Electric maintains credit facilities in order to enhance liquidity and provide
credit support, and as a backstop to its commercial paper program.





PPL
Electric maintains a $200 million five-year credit facility that expires in May
2012.  PPL Electric has the ability to cause the lenders under this
facility to issue letters of credit.  PPL Electric had no cash
borrowings and an insignificant amount of letters of credit outstanding under
this facility at June 30, 2008.





PPL
Electric maintains a commercial paper program for up to $200 million to provide
an additional financing source to fund its short-term liquidity needs, if and
when necessary.  Commercial paper issuances are supported by PPL
Electric's $200 million five-year credit facility.  PPL Electric had
no commercial paper outstanding at June 30, 2008.





At
June 30, 2008, $170 million of accounts receivable and $151 million of
unbilled revenue were pledged by a PPL Electric subsidiary under the credit
agreement related to PPL Electric's and the subsidiary's participation in an
asset-backed commercial paper program.  Also at this date, there was
$41 million of short-term debt outstanding under the credit agreement at an
interest rate of 2.71%, all of which was being used to cash collateralize
letters of credit issued on PPL Electric's behalf.  The funds used to
cash collateralize the letters of credit are reported in "Restricted cash and
cash equivalents" on the Balance Sheet.  At June 30, 2008, based
on the accounts receivable and unbilled revenue pledged, an additional $109
million was available for borrowing.  PPL Electric's sale to its
subsidiary of the accounts receivable and unbilled revenue is an absolute sale
of the assets, and PPL Electric does not retain an interest in these
assets.  However, for financial reporting purposes, the subsidiary's
financial results are consolidated in PPL Electric's financial
statements.  The credit agreement governing the asset-backed
commercial paper program expired in July 2008.





(PPL,
PPL Energy Supply and PPL Electric)





The
subsidiaries of PPL are separate legal entities.  PPL's subsidiaries
are not liable for the debts of PPL.  Accordingly, creditors of PPL
may not satisfy their debts from the assets of the subsidiaries absent a
specific contractual undertaking by a subsidiary to pay PPL's creditors or as
required by applicable law or regulation.  Similarly, absent a
specific contractual undertaking or as required by applicable law or regulation,
PPL is not liable for the debts of its subsidiaries.  Accordingly,
creditors of PPL's subsidiaries may not satisfy their debts from the assets of
PPL absent a specific contractual undertaking by PPL to pay the creditors of its
subsidiaries or as required by applicable law or regulation.





Similarly,
the subsidiaries of PPL Energy Supply and PPL Electric are separate legal
entities.  These subsidiaries are not liable for the debts of PPL
Energy Supply and PPL Electric.  Accordingly, creditors of PPL Energy
Supply and PPL Electric may not satisfy their debts from the assets of their
subsidiaries absent a specific contractual undertaking by a subsidiary to pay
the creditors or as required by applicable law or regulation.  In
addition, absent a specific contractual undertaking or as required by applicable
law or regulation, PPL Energy Supply and PPL Electric are not liable for the
debts of their subsidiaries.  Accordingly, creditors of these
subsidiaries may not satisfy their debts from the assets of PPL Energy Supply or
PPL Electric absent a specific contractual undertaking by that parent to pay the
creditors of its subsidiaries or as required by applicable law or
regulation.





Financing
Activities





(PPL)





In March
2007, PPL and PPL Capital Funding entered into a Replacement Capital Covenant in
connection with the issuance of PPL Capital Funding's 2007 Series A Junior
Subordinated Notes due 2067.  In March 2008, there was a redesignation
of the series of covered debt benefiting from such Replacement Capital
Covenant.  Effective March 1, 2008, PPL Capital Funding's 4.33% Notes
Exchange Series A due March 2009 ceased being the covered debt and PPL Capital
Funding's 6.85% Senior Notes due 2047 became the covered debt benefiting from
the Replacement Capital Covenant.





In July
2008, PPL notified the holders of PPL Gas Utilities' 8.70% Senior Notes due
December 2022 of PPL Gas Utilities' intent to prepay the entire $10 million
aggregate principal amount of the notes in August 2008.  PPL Gas
Utilities expects to pay a premium of approximately $3 million in connection
with the prepayment.





(PPL
and PPL Energy Supply)





In March
2008, PPL Energy Supply issued $400 million of 6.50% Senior Notes due 2018
(6.50% Notes).  The 6.50% Notes may be redeemed any time prior to
maturity at PPL Energy Supply's option at make-whole redemption
prices.  PPL Energy Supply received proceeds of $396 million, net of a
discount and underwriting fees, from the issuance of the 6.50%
Notes.  The proceeds have been used for general corporate purposes,
including capital expenditures relating to the installation of pollution control
equipment by PPL Energy Supply subsidiaries.





In April
2008, PPL Energy Supply elected to change the interest rate mode on the Exempt
Facilities Revenue Bonds, Series 2007 due 2037 (Bonds) that were issued by the
Pennsylvania Economic Development Financing Authority on behalf of PPL Energy
Supply in December 2007.  The interest rate mode was converted from a
rate that was reset daily through daily remarketing of the Bonds to a term rate
of 1.80% for one year.  In connection with this change, the letter of
credit supporting the Bonds was modified accordingly.





The terms
of PPL Energy Supply's 2-5/8% Convertible Senior Notes due 2023 (Convertible
Senior Notes) included a market price trigger that permitted holders to convert
the notes during any fiscal quarter if the closing sale price of PPL's common
stock exceeded $29.83 for at least 20 trading days in the 30 consecutive trading
days ending on the last trading day of the preceding fiscal
quarter.  The holders of the Convertible Senior Notes also had the
right to require PPL Energy Supply to purchase all or any part (equal to $1,000
principal amount or an integral multiple thereof) of the Convertible Senior
Notes on May 15, 2008 at 100% of the principal amount, plus accrued and unpaid
interest thereon as of such date.  In April 2008, the holders were
notified that, in accordance with the terms of the Convertible Senior Notes, PPL
Energy Supply was calling for redemption on May 20, 2008 all outstanding
Convertible Senior Notes at 100% of the principal amount, plus accrued and
unpaid interest thereon as of such date.





The
Convertible Senior Notes were subject to conversion at the election of the
holders any time prior to May 20, 2008 as a result of the market price trigger
being met and the notes being called for redemption.  Upon conversion
of the Convertible Senior Notes, PPL Energy Supply was required to settle the
principal amount in cash and any conversion premium in cash or PPL common
stock.  During the six months ended June 30, 2008, Convertible Senior
Notes in an aggregate principal amount of $57 million were presented for
conversion.  The total conversion premium related to these conversions
was $56 million, which was settled with 1,128,341 shares of PPL common stock,
together with an insignificant amount of cash in lieu of fractional
shares.  On May 20, 2008, PPL Energy Supply redeemed an insignificant
amount of Convertible Senior Notes.  As of June 30, 2008, no
Convertible Senior Notes remain outstanding.





In July
2008, PPL Energy Supply issued $300 million of 6.30% Senior Notes due 2013
(6.30% Notes).  The 6.30% Notes may be redeemed any time prior to
maturity at PPL Energy Supply's option at make-whole redemption
prices.  PPL Energy Supply received proceeds of $298 million, net of a
discount and underwriting fees, from the issuance of the 6.30%
Notes.  The proceeds have been used to repay short-term
debt.





(PPL
and PPL Electric)





During
the six months ended June 30, 2008, PPL Transition Bond Company made
principal payments on transition bonds of $160 million.





Common Stock Repurchase Program(PPL)





In June
2007, PPL's Board of Directors authorized the repurchase by PPL of up to $750
million of its common stock.  Through June 30, 2008, a total of
15,732,708 shares were repurchased for $750 million, excluding related fees,
under the plan.  This includes the purchases of 802,816 shares of its
common stock for $38 million in 2008.  These purchases were primarily
recorded as a reduction to "Capital in excess of par value" on the Balance
Sheet.





Distributions,
Capital Contributions and Related Restrictions





(PPL)





In
February 2008, PPL announced an increase to its quarterly common stock dividend,
effective April 1, 2008, to 33.5 cents per share (equivalent to $1.34 per
annum).  Future dividends, declared at the discretion of the Board of
Directors, will be dependent upon future earnings, cash flows, financial
requirements and other factors.





(PPL
Energy Supply)





During
the six months ended June 30, 2008, PPL Energy Supply distributed $567
million to its parent company, PPL Energy Funding, and received cash capital
contributions of $95 million.





(PPL
Electric)





During
the six months ended June 30, 2008, PPL Electric paid common stock
dividends of $48 million to PPL.





(PPL
and PPL Electric)





PPL
Electric is subject to Section 305(a) of the Federal Power Act, which makes it
unlawful for a public utility to make or pay a dividend from any funds "properly
included in capital account."  The meaning of this limitation has
never been clarified under the Federal Power Act.  PPL Electric
believes, however, that this statutory restriction, as applied to its
circumstances, would not be construed or applied by the FERC to prohibit the
payment from retained earnings of dividends that are not excessive and are for
lawful and legitimate business purposes.





8.
            Acquisitions,
      Development and Divestitures





(PPL,
PPL Energy Supply and PPL Electric)





PPL
continuously evaluates strategic options for its business segments and, from
time to time, PPL and its subsidiaries are involved in negotiations with third
parties regarding acquisitions and dispositions of businesses and assets, joint
ventures and development projects, which may or may not result in definitive
agreements.  Any such transactions may impact future financial
results.





Domestic





Development





(PPL
and PPL Energy Supply)





In
January 2008, PPL Susquehanna received NRC approval for its request to increase
the amount of electricity the Susquehanna nuclear plant can
generate.  The total expected capacity increase is 159 MW, of
which PPL Susquehanna's share would be 143 MW.  The first uprate
for Unit 1 was completed in May 2008.  The remaining total expected
capacity increase is 109 MW, of which PPL Susquehanna's share would be
98 MW.  PPL Susquehanna's share of the expected capital cost for
the remainder of this project is $235 million.  PPL expects to achieve
the full capacity increase of 159 MW after the refueling outage in 2010 for Unit
1.





In
December 2007, PPL announced that a subsidiary will submit a COLA to the NRC for
a nuclear generating unit adjacent to the Susquehanna plant.  NRC
acceptance of the COLA by December 2008 would meet the first requirement to
qualify for federal production tax credits and loan guarantees, as provided
under the Energy Policy Act of 2005.  PPL has contracted with UniStar
Nuclear Services, LLC, an affiliate of UniStar Nuclear Energy, LLC, a joint
venture between Constellation Energy Nuclear Group, LLC and EDF Development,
Inc., to prepare the application.  The facility for which the
application will be submitted will be based on the U.S. Evolutionary Power
Reactor design developed by AREVA NP, Inc. and its affiliates.  PPL is
currently authorized by its Board of Directors to spend up to $90 million on the
COLA, an estimated $60 million of which is expected to be incurred by the end of
2008.  PPL also intends to submit an application in 2008 for a federal
loan guarantee, in response to the June 2008 DOE solicitation for proposals for
advanced nuclear power projects.  PPL has made no decision to proceed
with development and construction of another nuclear unit and expects that such
decision could take as long as four years given an anticipated lengthy approval
process.  Additionally, PPL has announced that it would likely proceed
to construction only in a joint arrangement with other interested parties and
with a federal loan guarantee or other acceptable financing
structures.  Through June 30, 2008, $28 million of costs
associated with the licensing effort were capitalized, as PPL deems it probable
that these costs are ultimately recoverable.





(PPL
and PPL Electric)





In June
2007, PJM approved the construction of a new 130-mile, 500-kilovolt transmission
line between the Susquehanna substation in Pennsylvania and the Roseland
substation in New Jersey that has been identified as essential to long-term
reliability of the mid-Atlantic electricity grid.  PJM determined that
the line is needed to prevent potential overloads that could occur in the next
decade on several existing transmission lines in the interconnected PJM
system.  PJM has directed PPL Electric to construct the portion of the
Susquehanna-Roseland line in Pennsylvania and has directed Public Service
Electric & Gas Company (PSE&G) to construct the portion of the line in
New Jersey by June 1, 2012.  PPL Electric's estimated share of the
project costs at June 30, 2008, was $509 million.  This project is
pending certain regulatory approvals.





In
December 2007, PPL Electric and PSE&G filed a joint petition for a
declaratory order with the FERC requesting approval of transmission rate
incentives for the Susquehanna-Roseland transmission line.  The
companies requested:  (1) an additional 1.5% allowed rate of return on
equity; (2) recognition of construction work in progress in rate base; (3)
recovery of all costs if the project is cancelled; and (4) an additional 0.5%
allowed rate of return on equity for membership in PJM.  In April
2008, the FERC approved the filing and granted all of the requested incentives
except that the allowed rate of return on equity was approved at
1.25%.





PPL
Electric has identified three potential routes for the Pennsylvania portion of
the line and has conducted a series of nine meetings to obtain public input on
each of those routes.  PPL Electric expects to select a proposed route
in the third quarter of 2008 and to file an application with the PUC for
approval to site and construct the line in the fourth quarter of
2008.





(PPL
and PPL Energy Supply)





Sale of Telecommunication
Operations





In the
first quarter of 2007, PPL completed a review of strategic options for the
transport operations of its domestic telecommunications subsidiary, which
offered fiber optic capacity to other telecommunications companies and
enterprise customers.  The operating results of this subsidiary were
included in the Supply segment.  Due to a combination of significant
capital requirements for the telecommunication operations and competing capital
needs in PPL's core electricity supply and delivery businesses, PPL decided to
actively market these telecommunication operations.  As a result, PPL
and PPL Energy Supply recorded an initial impairment of $31 million ($18 million
after tax) of the telecommunication assets based on their estimated fair
value.  The impairment is included in "Energy-related businesses"
expenses on the Statement of Income.  The transport operations did not meet
the criteria for discontinued operations presentation on the Statement of Income
because there were not separate and distinguishable cash flows, among other
factors.





In May
2007, PPL reached a definitive agreement to sell its telecommunication
operations.  In the second quarter of 2007, PPL and PPL Energy Supply
recorded an additional impairment of $3 million ($2 million after
tax).  In August 2007, PPL completed the sale of its telecommunication
operations and recorded an additional impairment of $5 million ($3 million after
tax).  PPL realized net proceeds of $47 million from the
sale.





Acquisition of a Long-term
Tolling Agreement





In June
2008, PPL EnergyPlus executed an agreement to acquire the rights to an existing
long-term tolling agreement associated with the capacity and energy of a 664 MW
natural gas-fired power plant in Lebanon, Pennsylvania.  The tolling
agreement extends through 2021 and contains a lease that will be accounted for
as an operating lease.  As a result of this agreement, PPL EnergyPlus
recognized an intangible asset for an upfront payment.  See Notes 15
and 18 for additional information.





Other





In 2004,
PPL Maine entered into an agreement with a coalition of government agencies and
private groups to sell three of its nine hydroelectric dams in
Maine.  Under the agreement, a non-profit organization designated by
the coalition would have a five-year option to purchase the dams for $25
million, and PPL Maine would receive rights to increase energy output at its
other hydroelectric dams in Maine.  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 the Penobscot
River.  In June 2008, the coalition notified PPL Maine of its intent
to exercise the purchase option.  The agreement requires updates to
the representations and warranties in the purchase and sale agreement, and
several approvals by the FERC.  Certain of these regulatory approvals
have been obtained, but PPL cannot predict whether or when all of them will be
obtained.





International





Sales





In 2005,
WPD effectively sold an equity investment by transferring substantially all
risks and rewards of ownership of the two subsidiaries that held the
investment.  The gain was deferred until WPD's continuing involvement
in the subsidiaries ceased.  In the first quarter of 2007, PPL Global
recognized a pre- and after-tax gain of $5 million as WPD's involvement
ceased.  This gain is included in "Other Income - net" on the
Statements of Income.





Other





In 2000,
WPD acquired Hyder.  Subsequently, WPD sold the majority of Hyder's
non-electricity delivery businesses and placed the remaining companies in
liquidation.  WPD has periodically received distributions related to
these ongoing liquidations.  These distributions are included in
"Other Income - net" on the Statements of Income (as detailed in
Note 12).  The Hyder non-electricity delivery businesses are
substantially liquidated at June 30, 2008.  WPD continues to
operate the former Hyder electricity delivery business, now WPD (South
Wales).





Discontinued
Operations





Sale of Latin American
Businesses





In March
2007, PPL completed a review of strategic options for its Latin American
businesses and announced its intention to sell its regulated electricity
delivery businesses in Chile, El Salvador and Bolivia, which were included in
the International Delivery segment.





In April
2007, PPL agreed to sell its Bolivian businesses and recorded an impairment in
the first quarter of 2007 of $34 million, or $17 million after tax, to reflect
the estimated fair value of the businesses at the date the agreement was
reached.  In the second and third quarters of 2007, additional pre-
and after-tax impairments of $2 million and $1 million were recorded primarily
to offset each period's earnings.  This sale was completed in July
2007.





In May
2007, PPL completed the sale of its El Salvadoran business for $180 million in
cash.  PPL recorded a gain of $94 million, or $89 million after tax,
as a result of the sale.





In
November 2007, PPL completed the sale of its Chilean business for $660 million
in cash.  PPL recorded a gain of $306 million, or $197 million after
tax, as a result of the sale.





In the
first quarter of 2008, PPL Global recognized income tax adjustments and other
expenses in Discontinued Operations as the dissolution of the remaining Latin
American holding companies commenced.  PPL Global may recognize
additional adjustments and/or expenses in Discontinued Operations until this
process is complete.





In
accordance with SFAS 144, the following results of operations for the six months
ended June 30, 2008, and the three and six months ended June 30, 2007, have been
classified as Discontinued Operations on the Statements of Income.





Three
      Months Ended June 30,
            
            Six
      Months Ended June 30,2008
            
            2007
            
            2008
            
            2007Operating
      revenues
            
            
            
            
            
            $
            158
            
            
            
            
            
            
            $
            313Operating
      expenses (a)
            
            
            
            
            
            
            125
            
            
            $
            2
            
            
            
            294Operating
      income (loss)
            
            
            
            
            
            
            33
            
            
            
            (2
            )
            
            
            19Other
      income – net
            
            
            
            
            
            
            
            
            
            
            (1
            )
            
            
            3Interest
      expense (b)
            
            
            
            
            
            
            6
            
            
            
            
            
            
            
            11Income
      (Loss) before income taxes and minority interest
            
            
            
            
            
            
            27
            
            
            
            (3
            )
            
            
            11Income
      tax expense (benefit) (c) (d)
            
            
            
            
            
            
            13
            
            
            
            (8
            )
            
            
            20Minority
      interest
            
            
            
            
            
            
            2
            
            
            
            
            
            
            
            4Gain
      on sale of El Salvadoran business (net of tax expense of $5
      million)
            
            
            
            
            
            
            89
            
            
            
            
            
            
            
            89Income
      from Discontinued Operations
            
            
            
            
            
            $
            101
            
            
            $
            5
            
            
            $
            76





(a)
            
            The
      three and six months ended June 30, 2007, include $2 million and $36
      million of impairment charges related to the Bolivian
      businesses.(b)
            
            The
      three and six months ended June 30, 2007, include $2 million and $4
      million of interest expense allocated pursuant to EITF
      87-24.  The allocation was based on the discontinued operation's
      share of the net assets of PPL Energy Supply.(c)
            
            The
      three and six months ended June 30, 2007, include U.S. deferred tax
      charges of $4 million and $22 million.  As a result of PPL's
      decision to sell its Latin American businesses, it no longer qualifies for
      the permanently reinvested exception to recording deferred taxes pursuant
      to APB Opinion No. 23.(d)
            
            The
      six months ended June 30, 2008, includes $6 million from the recognition
      of a previously unrecognized tax benefit associated with a prior year tax
      position.





(PPL)





Anticipated Sale of Gas and
Propane Businesses





In July
2007, PPL completed a review of strategic options for its natural gas
distribution and propane businesses and announced its intention to sell these
businesses, which are included in the Pennsylvania Delivery
segment.  In March 2008, PPL signed a definitive agreement to sell
these businesses for $268 million in cash plus working capital, pursuant to a
stock purchase agreement and following the receipt of necessary regulatory
approvals.  In June 2008, PPL recorded a pre- and after-tax impairment
of $1 million primarily to offset increased capital expenditures.  PPL
expects the sale to close before the end of 2008.  Proceeds of the
sale are expected to be used to invest in growth opportunities in PPL's core
electricity supply and delivery businesses and/or for the repurchase of
securities.





In
accordance with SFAS 144, the results of operations for the three and six months
ended June 30, 2008 and 2007, have been classified as Discontinued
Operations on the Statements of Income.  The assets and liabilities at
June 30, 2008 and December 31, 2007, are classified on the Balance
Sheets as held for sale.





Following
are the components of Discontinued Operations on the Statements of
Income.





Three
      Months Ended June 30,
            
            Six
      Months Ended June 30,2008
            
            2007
            
            2008
            
            2007Operating
      revenues
            
            $
            42
            
            
            $
            44
            
            
            $
            136
            
            
            $
            138Operating
      expenses
            
            
            40
            
            
            
            41
            
            
            
            116
            
            
            
            122Operating
      income
            
            
            2
            
            
            
            3
            
            
            
            20
            
            
            
            16Interest
      expense
            
            
            1
            
            
            
            1
            
            
            
            3
            
            
            
            2Income
      before income taxes
            
            
            1
            
            
            
            2
            
            
            
            17
            
            
            
            14Income
      tax expense
            
            
            
            
            
            
            2
            
            
            
            7
            
            
            
            7Income
      from Discontinued Operations
            
            $
            1
            
            
            $
            
            
            
            $
            10
            
            
            $
            7





The major
classes of "Assets held for sale" and "Liabilities held for sale" on the Balance
Sheets were as follows at:





June 30,
      2008
            
            December
      31, 2007Current
      AssetsCash
      and cash equivalents
            
            $
            2Accounts
      receivable
            
            
            17
            
            
            $
            18Fuel,
      materials and supplies
            
            
            12
            
            
            
            18Other
            
            
            5
            
            
            
            7Total
      Current Assets
            
            
            36
            
            
            
            43PP&E
            
            
            218
            
            
            
            213Goodwill
      and other noncurrent assets
            
            
            61
            
            
            
            62Total
      assets held for sale
            
            $
            315
            
            
            $
            318Current
      LiabilitiesAccounts
      payable
            
            $
            16
            
            
            $
            18Other
            
            
            3
            
            
            
            14Total
      Current Liabilities
            
            
            19
            
            
            
            32Long-term
      Debt (a)
            
            
            
            
            
            
            10Deferred
      Credits and Other Noncurrent Liabilities
            
            
            27
            
            
            
            26Total
      liabilities held for sale
            
            $
            46
            
            
            $
            68





(a)
            
            Under
      the terms of the definitive sales agreement, the purchaser is not assuming
      this debt.  Therefore, it has been reclassified from
      "Liabilities held for sale" to "Current Liabilities - Long-term debt" on
      the Balance Sheet at June 30, 2008.  See Note 7 for information on
      the planned redemption of this
debt.





9.
            Defined
      Benefits





(PPL
and PPL Energy Supply)





Net
periodic defined benefit costs (credits) were:


Pension
      BenefitsThree
      Months Ended June 30,
            
            Six
      Months Ended June 30,Domestic
            
            International
            
            Domestic
            
            International2008
            
            2007
            
            2008
            
            2007
            
            2008
            
            2007
            
            2008
            
            2007PPLService
      cost
            
            $
            15
            
            
            $
            16
            
            
            $
            4
            
            
            $
            6
            
            
            $
            30
            
            
            $
            32
            
            
            $
            8
            
            
            $
            12Interest
      cost
            
            
            34
            
            
            
            33
            
            
            
            49
            
            
            
            42
            
            
            
            69
            
            
            
            66
            
            
            
            98
            
            
            
            84Expected
      return on plan assets
            
            
            (44
            )
            
            
            (44
            )
            
            
            (60
            )
            
            
            (56
            )
            
            
            (89
            )
            
            
            (88
            )
            
            
            (120
            )
            
            
            (112
            )Amortization
      of:Transition
      asset
            
            
            (1
            )
            
            
            (1
            )
            
            
            
            
            
            
            
            
            
            
            (2
            )
            
            
            (2
            )Prior
      service cost
            
            
            5
            
            
            
            4
            
            
            
            1
            
            
            
            1
            
            
            
            10
            
            
            
            9
            
            
            
            2
            
            
            
            2Actuarial
      (gain) loss
            
            
            (2
            )
            
            
            1
            
            
            
            5
            
            
            
            14
            
            
            
            (4
            )
            
            
            1
            
            
            
            10
            
            
            
            27Net
      periodic pension costs (credits) prior to settlement
charge
            
            
            7
            
            
            
            9
            
            
            
            (1
            )
            
            
            7
            
            
            
            14
            
            
            
            18
            
            
            
            (2
            )
            
            
            13Settlement
      charge
            
            
            
            
            
            
            3
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3Net
      periodic defined benefit costs (credits)
            
            $
            7
            
            
            $
            12
            
            
            $
            (1
            )
            
            $
            7
            
            
            $
            14
            
            
            $
            21
            
            
            $
            (2
            )
            
            $
            13PPL Energy
      SupplyService
      cost
            
            $
            1
            
            
            $
            1
            
            
            $
            4
            
            
            $
            6
            
            
            $
            2
            
            
            $
            2
            
            
            $
            8
            
            
            $
            12Interest
      cost
            
            
            1
            
            
            
            2
            
            
            
            49
            
            
            
            42
            
            
            
            3
            
            
            
            3
            
            
            
            98
            
            
            
            84Expected
      return on plan assets
            
            
            (2
            )
            
            
            (2
            )
            
            
            (60
            )
            
            
            (56
            )
            
            
            (4
            )
            
            
            (4
            )
            
            
            (120
            )
            
            
            (112
            )Amortization
      of:Prior
      service cost
            
            
            
            
            
            
            
            
            
            
            1
            
            
            
            1
            
            
            
            
            
            
            
            
            
            
            
            2
            
            
            
            2Actuarial
      loss
            
            
            
            
            
            
            
            
            
            
            5
            
            
            
            14
            
            
            
            
            
            
            
            
            
            
            
            10
            
            
            
            27Net
      periodic defined benefit costs (credits)
            
            $
            
            
            
            $
            1
            
            
            $
            (1
            )
            
            $
            7
            
            
            $
            1
            
            
            $
            1
            
            
            $
            (2
            )
            
            $
            13








Other
      Postretirement BenefitsThree
      Months Ended June 30,
            
            Six
      Months Ended June 30,2008
            
            2007
            
            2008
            
            2007PPLService
      cost
            
            $
            2
            
            
            $
            2
            
            
            $
            4
            
            
            $
            4Interest
      cost
            
            
            8
            
            
            
            7
            
            
            
            16
            
            
            
            15Expected
      return on plan assets
            
            
            (5
            )
            
            
            (5
            )
            
            
            (10
            )
            
            
            (10
            )Amortization
      of:Transition
      obligation
            
            
            2
            
            
            
            2
            
            
            
            4
            
            
            
            4Prior
      service cost
            
            
            2
            
            
            
            3
            
            
            
            5
            
            
            
            5Actuarial
      loss
            
            
            1
            
            
            
            1
            
            
            
            2
            
            
            
            3Net
      periodic defined benefit costs
            
            $
            10
            
            
            $
            10
            
            
            $
            21
            
            
            $
            21





10.
            Commitments
      and Contingencies





Energy
Purchases, Energy Sales and Other Commitments





Energy Purchase
Commitments





(PPL
and PPL Energy Supply)





PPL and
PPL Energy Supply enter into long-term purchase contracts to supply the fuel
requirements for generation facilities.  These contracts include
commitments to purchase coal, emission allowances, limestone, natural gas, oil
and nuclear fuel and extend for terms through 2019.  PPL and PPL
Energy Supply also enter into long-term contracts for the storage and
transportation of natural gas.  The long-term natural gas storage
contracts extend for terms through 2013 for PPL and 2010 for PPL Energy
Supply.  The long-term natural gas transportation contracts extend for
terms through 2032 for PPL and PPL Energy Supply.  Additionally, PPL
and PPL Energy Supply have entered into long-term contracts to purchase power
that extend for terms through 2017, excluding long-term power purchase
agreements for full output of two wind farms.  These wind farm
contracts extend for terms through 2027.





In June
2008, PPL EnergyPlus executed an agreement to acquire the rights to an existing
long-term tolling agreement associated with the capacity and energy of a 664 MW
natural gas-fired power plant in Lebanon, Pennsylvania.  Under the
agreement, PPL EnergyPlus has control over the plant's dispatch into the
electricity grid and will supply the natural gas necessary to operate the
plant.  The tolling agreement extends through 2021.  See
Notes 15 and 18 for additional information.





(PPL
and PPL Electric)





Beginning
in 2007, PPL Electric began to conduct competitive solicitations to purchase
electricity generation supply in 2010, after its existing PLR contract expires,
for customers who do not choose a competitive supplier.  A total of
six auctions are planned, with two occurring in each of the years 2007, 2008 and
2009.  Each solicitation is for 850 MW of expected generation
supply.  Average generation supply prices (per MWh), including
Pennsylvania gross receipts tax and an adjustment for line losses, for the first
three solicitations were as follows:





Residential
            
            Small
      Commercial and Small IndustrialJuly
      2007
            
            $
            101.77
            
            
            $
            105.11October
      2007
            
            
            105.08
            
            
            
            105.75March
      2008
            
            
            108.80
            
            
            
            108.76





The
fourth competitive solicitation is scheduled to be held in September
2008.





See Note
11 for additional information on PPL Electric's existing PLR contracts with PPL
EnergyPlus and the bids awarded to PPL EnergyPlus under PPL Electric's Supply
Master Agreement for 2010.





Energy Sales
Commitments





(PPL
and PPL Energy Supply)





In
connection with its marketing activities or associated with certain of its power
plants, PPL Energy Supply has entered into long-term power sales contracts that
extend for terms through 2016.  All long-term contracts were executed
at prices that approximated market prices at the time of execution.





PPL
Energy Supply has entered into load-following and retail contracts with various
counterparties.  These contracts extend through 2014.  Under
these contracts, if PPL Energy Supply's credit rating falls below investment
grade or PPL Energy Supply's contract exposure exceeds the established credit
limit for the contract, then the counterparty has the right to request
collateral from PPL Energy Supply.





(PPL
Energy Supply)





See Note
11 for information on the power supply agreements between PPL EnergyPlus and PPL
Electric.





PPL Montana Hydroelectric
License Commitments(PPL
and PPL Energy Supply)





PPL
Montana has 11 hydroelectric facilities and one storage reservoir licensed by
the FERC pursuant to the Federal Power Act under long-term
licenses.  Pursuant to Section 8(e) of the Federal Power Act, the FERC
approved the transfer from Montana Power to PPL Montana of all pertinent
licenses and any amendments in connection with the Montana Asset Purchase
Agreement.





The Kerr
Dam Project license was jointly issued by the FERC to Montana Power and the
Confederated Salish and Kootenai Tribes of the Flathead Reservation in 1985, and
required Montana Power to hold and operate the project for 30
years.  The license required Montana Power, and subsequently PPL
Montana as a result of the purchase of the Kerr Dam from Montana Power, to
continue to implement a plan to mitigate the impact of the Kerr Dam on fish,
wildlife and the habitat.  Under this arrangement, PPL Montana has a
remaining commitment to spend $14 million between 2008 and 2015, in addition to
the annual rental it pays to the tribes.  Between 2015 and 2025, the
tribes have the option to purchase, hold and operate the project for the
remainder of the license term, which expires in 2035.





PPL
Montana entered into two Memoranda of Understanding (MOUs) with state, federal
and private entities related to the issuance in 2000 of the FERC renewal license
for the nine dams for the Missouri-Madison project.  The MOUs require
PPL Montana to implement plans to mitigate the impact of its projects on fish,
wildlife and the habitat, and to increase recreational
opportunities.  The MOUs were created to maximize collaboration
between the parties and enhance the possibility for matching funds from relevant
federal agencies.  Under this arrangement, PPL Montana has a remaining
commitment to spend $39 million between 2008 and 2040.





Legal
Matters





(PPL,
PPL Energy Supply and PPL Electric)





PPL and
its subsidiaries are involved in legal proceedings, claims and litigation in the
ordinary course of business.  PPL and its subsidiaries cannot predict
the outcome of such matters, or whether such matters may result in material
liabilities.





Montana Power Shareholders'
Litigation(PPL
and PPL Energy Supply)





In August
2001, a purported class-action lawsuit was filed by a group of shareholders of
Montana Power against Montana Power, the directors of Montana Power, certain
advisors and consultants of Montana Power, and PPL Montana.  The
plaintiffs allege, among other things, that Montana Power was required to, and
did not, obtain shareholder approval of the sale of Montana Power's generation
assets to PPL Montana in 1999, and that the sale "was null and void ab
initio."  Among the remedies that the plaintiffs are seeking is the
establishment of a "resulting and/or constructive trust" on both the generation
assets and all profits earned by PPL Montana from the generation assets, plus
interest on the amounts subject to the trust.  This lawsuit is pending
in the U.S. District Court of Montana, Butte Division, and the judge placed this
proceeding on hold pending the outcome of certain motions currently before the
U.S. Bankruptcy Court for the District of Delaware, the resolution of which may
impact this proceeding.  The judge in this case has not established a
schedule to resume the proceeding.  In September 2007, certain
plaintiffs proposed a settlement of certain claims not involving PPL and
proposed a status conference to discuss their proposal.  The judge
held the status conference in January 2008 and rejected the proposed
settlement.  PPL and PPL Energy Supply cannot predict the outcome of
this matter.





Montana Hydroelectric
Litigation(PPL
and PPL Energy Supply)





In
November 2004, PPL Montana, Avista Corporation (Avista) and PacifiCorp commenced
an action for declaratory judgment in Montana First Judicial District Court
seeking a determination that no lease payments or other compensation for their
hydropower facilities' use and occupancy of streambeds in Montana can be
collected by the State of Montana.  This request was brought following
the dismissal of the State of Montana's federal lawsuit seeking such payments or
compensation in the U.S. District Court of Montana, Missoula Division, on
jurisdictional grounds.  The State's federal lawsuit was founded on
allegations that the beds of Montana's navigable rivers became state-owned trust
property upon Montana's admission to statehood, and that the use of them for
placement of dam structures, affiliated structures and reservoirs should, under
a 1931 regulatory scheme enacted after all but one of the dams in question were
constructed, trigger lease payments for use of land beneath.  In July
2006, the Montana state court approved a stipulation by the State of Montana
that it is not seeking lease payments or other compensation from PPL Montana for
the period prior to PPL Montana's acquisition of the hydroelectric facilities in
December 1999.





In June
and October 2007, Pacificorp and Avista, respectively, entered into settlement
agreements with the State of Montana providing, in pertinent part, that each
company would make prospective lease payments of $50,000 and $4 million per year
for use of the State's navigable streambed (adjusted annually for inflation and
subject to other future adjustments).  Under these settlement
agreements, the future annual payments resolved the State's claims for both past
and future compensation.





In the
October 2007 trial of this matter, the State of Montana asserted that PPL
Montana should make a prospective lease payment for use of the State's
streambeds of $6 million per year (adjusted annually for inflation) and a
retroactive payment of compensation for the 2000-2006 period (including
interest) of $41 million.  PPL Montana vigorously contested both such
assertions.





In June
2008, the District Court issued a decision awarding compensation of
approximately $34 million for prior years and approximately $6 million for 2007
compensation.  The Court also deferred the determination of
compensation for 2008 and future years to the Montana State Land
Board.





PPL
Montana believes that the District Court's decision and a number of its pretrial
rulings are erroneous and intends to appeal the decision to the Montana Supreme
Court and to seek a stay of judgment, including a stay of the Land Board's
authority to assess compensation against PPL Montana for 2008 and future
periods.





PPL
Montana believes that it is reasonably possible that a liability for prior use
and occupancy of certain Montana streambeds may ultimately be incurred for the
periods 2000 through 2006, and the amount awarded by the District Court
represents the maximum exposure.  PPL Montana has not recorded a loss
accrual for this portion of the State's claim.





For 2007
and subsequent years, PPL Montana believes it is probable that its hydroelectric
projects will be subject to annual estimated compensation ranging from $300,000
to $6 million.  Given
that there was no single amount within that range more likely than any other,
PPL Montana recorded a loss accrual equal to the low end of this
range.





PPL
Montana will continue to assess the loss exposure for the Montana hydro
litigation in future periods.





Holtwood Hydroelectric
Project(PPL
and PPL Energy Supply)


In
December 2007, PPL Holtwood submitted to the FERC an application to amend PPL
Holtwood's license for the Holtwood Project (Project), which is located on the
Susquehanna River, in Lancaster and York Counties,
Pennsylvania.  PPL's proposed amendment (Proposal) would, among other
things, extend the existing license to 2030 and authorize construction to
increase the generating capacity at the Project by 125 MW.  In
connection with the Proposal, Exelon Generation (Exelon) raised certain
questions concerning the Proposal's potential impact on Exelon's downstream
hydroelectric facilities.  Subsequently, PPL Holtwood and Exelon
entered into a settlement agreement which provides, among other things, that PPL
Holtwood will maintain certain minimum flows of water through its Project and
will forego approximately $400,000 annually in payments that Exelon otherwise
would pay to PPL Holtwood through 2030 pursuant to a pre-existing agreement
relating to the effects of Exelon's downstream generation facilities on PPL
Holtwood.





Regulatory
Issues





California ISO and Western
Markets(PPL
and PPL Energy Supply)





Through
its subsidiaries, PPL made $18 million of sales to the California ISO during the
period from October 2000 through June 2001, of which $17 million has not been
paid to PPL subsidiaries.  Given the myriad of electricity supply
problems faced by the California electric utilities and the California ISO, PPL
cannot predict whether or when it will receive payment.  At June 30,
2008, PPL continues to be fully reserved for underrecoveries of payments for
these sales.





Regulatory
proceedings arising out of the California electricity supply situation have been
filed at the FERC.  The FERC has determined that all sellers of energy
into markets operated by the California ISO and the California Power Exchange,
including PPL Montana, should be subject to refund liability for the period
beginning October 2, 2000 through June 20, 2001, but the FERC has not yet ruled
on the exact amounts that the sellers, including PPL Montana, would be required
to refund.  In decisions in September 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 refunds for periods prior to October 2, 2000, and
ordered the FERC to determine whether or not it would be appropriate to grant
such additional refunds.  In February 2008, the FERC initiated
proceedings to determine whether it would be appropriate to grant additional
refunds.  The FERC also instituted settlement proceedings to explore
whether a settlement is possible.





In June
2003, the FERC took several actions as a result of a number of related
investigations.  The FERC terminated proceedings to consider whether
to order refunds for spot market bilateral sales made in the Pacific Northwest,
including sales made by PPL Montana, during the period December 2000 through
June 2001.  In August 2007, the U.S. Court of Appeals for the Ninth
Circuit reversed the FERC's decision and ordered the FERC to consider additional
evidence.  The FERC also commenced additional investigations relating
to "gaming" and bidding practices during 2000 and 2001, but neither PPL
EnergyPlus nor PPL Montana believes it is a subject of these
investigations.





Litigation
arising out of the California electricity supply situation has been filed in
California courts against sellers of energy to the California
ISO.  The plaintiffs and intervenors in these legal proceedings
allege, among other things, abuse of market power, manipulation of market
prices, unfair trade practices and violations of state antitrust laws, and seek
other relief, including treble damages and attorneys' fees.  While
PPL's subsidiaries have not been named by the plaintiffs in these legal
proceedings, one defendant in a consolidated court proceeding named PPL Montana
in its cross-complaint; this defendant denied any unlawful conduct but asserted
that, if it is found liable, the other generators and power marketers, including
PPL Montana, caused, contributed to and/or participated in the plaintiffs'
alleged losses.  In July 2006, the Court dismissed this case as the
result of a settlement under which PPL Montana was not required to make any
payments or provide any compensation.





In
February 2004, the Montana Public Service Commission (PSC) initiated a limited
investigation of the Montana retail electricity market for the years 2000 and
2001, focusing on how that market was affected by transactions involving the
possible manipulation of the electricity grid in the western U.S.  The
investigation includes all public utilities and licensed electricity suppliers
in Montana, including PPL Montana, as well as other entities that may possess
relevant information.  In June 2004, the Montana Attorney General
served PPL Montana and more than 20 other companies with subpoenas requesting
documents, and PPL Montana has provided responsive documents to the Montana
Attorney General.





While PPL
and its subsidiaries believe that they have not engaged in any improper trading
or marketing practices affecting the California and western markets, PPL cannot
predict the outcome of the above-described investigations, lawsuits and
proceedings or whether any PPL subsidiaries will be the target of any additional
governmental investigations or named in other lawsuits or refund
proceedings.





PJM
Capacity Litigation(PPL, PPL Energy Supply and PPL
Electric)





In
December 2002, PPL was served with a complaint against PPL, PPL EnergyPlus and
PPL Electric filed in the U.S. District Court for the Eastern District of
Pennsylvania by 14 Pennsylvania boroughs that apparently alleged, among other
things, violations of the federal antitrust laws in connection with the pricing
of installed capacity in the PJM daily market during the first quarter of 2001
and certain breach of contract claims.  These boroughs were wholesale
customers of PPL Electric.  In April 2006, the Court dismissed all of
the federal antitrust claims and all but one of the breach of contract
claims.  In May 2007, the Court withdrew its April 2006 decision as to
one of the federal antitrust claims, but directed additional briefing on
alternative grounds for dismissal of that claim.  In September 2007,
the Court dismissed the one remaining federal antitrust claim.  Such
dismissals were subject to the plaintiffs' right to appeal.  In April
2008, the parties agreed to dismiss all claims in the proceeding and forgo
appeals.  The matter is now concluded.





Each of
the U.S. Department of Justice - Antitrust Division, the FERC and the
Pennsylvania Attorney General conducted investigations regarding PPL's PJM
capacity market transactions in early 2001 and did not take action against
PPL.





PJM
RPM Litigation (PPL,
PPL Energy Supply and PPL Electric)





In May
2008, a group of state public utility commissions, state consumer advocates,
municipal entities and electric cooperatives, industrial end-use customers and a
single electric distribution company (collectively, the RPM Buyers) filed a
complaint before the FERC objecting to the prices for capacity under the PJM
Reliability Pricing Model (RPM) that were set in the 2008-09, 2009-10 and
2010-11 RPM base residual auctions.  The RPM Buyers request that the
FERC re-set the rates paid to generators for capacity in those periods to a
significantly lower level.  Thus, the complaint requests that
generators be paid less for those periods through refunds and/or prospective
changes in rates.  The relief requested in the complaint, if granted,
could have a material effect on PPL, PPL Energy Supply and PPL
Electric.  PJM, PPL and numerous other parties have responded to the
complaint, strongly opposing the relief sought by the RPM Buyers.  PPL
cannot predict the outcome of this proceeding.





FERC Market-Based Rate
Authority(PPL
and PPL Energy Supply)





In
December 1998, the FERC issued an order authorizing PPL EnergyPlus to make
wholesale sales of electric power and related products at market-based
rates.  In that order, the FERC directed PPL EnergyPlus to file an
updated market analysis within three years of the date of the order, and every
three years thereafter.  Market-based rate filings with the FERC were
made in November 2004 by PPL EnergyPlus, PPL Electric, PPL Montana and most of
PPL Generation's subsidiaries.  These filings consisted of a Western
market-based rate filing for PPL Montana and an Eastern market-based rate filing
for most of the other PPL subsidiaries in the PJM region.





In
September 2005, the FERC issued an order conditionally approving the Eastern
market-based rate filing, subject to PPL subsidiaries making a compliance filing
providing further support that they cannot erect other non-transmission barriers
to entry into the generation market.  The PPL subsidiaries made this
compliance filing in October 2005, which the FERC accepted.





In May
2006, the FERC issued an order rejecting the claims of the various parties in
the proceeding regarding PPL's Western market-based rate filing and granting PPL
Montana market-based rate authority in NorthWestern's control
area.  In July 2007, the FERC denied two outstanding requests for
rehearing of its 2006 order.  Subsequently, various parties in this
proceeding filed appeals of the order with the U.S. Court of Appeals for the
Ninth Circuit.  In September 2007, a party also filed a complaint with
the FERC seeking additional refunds in the event that the U.S. Court of Appeals
overturns or reverses the FERC order.  While PPL Montana continues to
believe that it does not have market power in NorthWestern's control area and
that it has no obligations to make additional sales of power to NorthWestern
regardless of the outcome of this proceeding, it cannot predict the outcome of
these proceedings.





In
January 2008, pursuant to the schedule established by FERC orders, PPL's
subsidiaries made another market-based rate renewal filing for all Eastern
subsidiaries in the PJM, New England and New York regions, including PPL
Electric, PPL EnergyPlus and most of PPL Generation's subsidiaries.





Currently,
if a seller is granted market-based rate authority by the FERC, it may enter
into power contracts during the time period for which such authority has been
granted.  If the FERC determines that the market is not workably
competitive or that the seller possesses market power or is not charging "just
and reasonable" rates, the FERC institutes prospective action.  Any
contracts entered into pursuant to the FERC's market-based rate authority remain
in effect and are generally subject to a high standard of review before the FERC
can order any changes.  Recent court decisions by the U.S. Court of
Appeals for the Ninth Circuit have raised issues that may make it more difficult
for the FERC to continue its program of promoting wholesale electricity
competition through market-based rate authority.  These court
decisions permit retroactive refunds and a lower standard of review by the FERC
for changing power contracts, and could have the effect of requiring the FERC to
review in advance most, if not all, power contracts.  In June 2008,
the U.S. Supreme Court reversed one of the decisions of the U.S. Court of
Appeals for the Ninth Circuit, thus upholding the higher standard of review for
modifying contracts.  The FERC has not yet taken action in response to
these recent court decisions.  At this time, PPL cannot predict the
impact of these court decisions on the FERC's future market-based rate authority
program or on PPL's business.





Maine Transmission Line
Rates(PPL
and PPL Energy Supply)





PPL
currently holds 100 MW of firm point-to-point transmission service rights
associated with an existing transmission line owned by Maine Electric Power
Company, Inc. (MEPCO).  MEPCO is owned by Central Maine Power Company,
Bangor Hydro Electric Company and Maine Public Service Company.  These
transmission rights enable PPL to sell energy and capacity from Canada into ISO
New England.





In August
2007, MEPCO, ISO New England and other New England transmission owners (the
Filing Parties) submitted a filing to the FERC seeking to roll the revenue
requirement of the MEPCO transmission facilities into the regional transmission
rates in New England and to change certain rules concerning the use of the
transmission line for energy and capacity (MEPCO roll-in).  PPL
protested this proposal because it fails to preserve and protect pre-existing
firm transmission rights currently held on the MEPCO transmission facilities by
PPL EnergyPlus.  If the proposal were accepted by the FERC as filed,
the value of PPL's pre-existing rights on the MEPCO line would be adversely
affected.





In 2007,
PPL recorded a $23 million ($13 million after tax) impairment of the
transmission rights based on their estimated fair value as determined by an
internal model and other analysis.  These transmission rights are
included in the Supply segment.





In
October 2007, the FERC issued an order accepting the Filing Parties' proposal,
subject to modification of certain matters presented in the
filing.  Based on the October 2007 Order, PPL EnergyPlus opted to
terminate its contractual rights on the MEPCO line in the event the MEPCO
roll-in proposal was implemented.  Due to complications implementing
the proposal as modified by the FERC, in November 2007, ISO New England and
MEPCO filed with the FERC a motion to delay the effectiveness and hold a
technical conference or, in the alternative, cancel the MEPCO
roll-in.





In
February 2008, the FERC issued a further order in response to the ISO New
England and MEPCO request that authorized appointment of a settlement judge and
deferred the effective date of the MEPCO roll-in proposal to a future date to be
determined.  In April 2008, the FERC terminated the settlement
proceeding without the parties having reached any settlement.





IRS Synthetic Fuels Tax
Credits(PPL
and PPL Energy Supply)





PPL,
through its subsidiaries, has interests in two synthetic fuel production
facilities: the Somerset facility located in Pennsylvania and the Tyrone
facility located in Kentucky.  PPL has received tax credits pursuant
to Section 29/45K of the Internal Revenue Code based on the sale of synthetic
fuel from these facilities.  The Section 29/45K tax credit program
expired at the end of 2007, and production of synthetic fuel at these facilities
and all other synthetic fuel operations ceased as of December 31,
2007.  The facilities are being dismantled and PPL is in the process
of disposing of its interests.





In
addition, Section 29/45K provided for the synthetic fuel tax credit to begin to
phase out when the relevant annual reference price for crude oil, which is the
domestic first purchase price (DFPP), fell within a designated range and to be
eliminated when the DFPP exceeds the range.  The phase-out range was
adjusted annually for inflation.





PPL
estimated the phase-out range for 2007 to begin at about $57 per barrel (DFPP)
and the tax credits to be totally eliminated at about $71 per barrel
(DFPP).  At December 31, 2007, PPL projected a phase-out of
approximately 56% of the gross tax credits produced in 2007, based on its
estimate of the DFPP reference price and the inflation-adjusted phase-out range
applicable for 2007.  The DFPP was published by the IRS in April 2008
for the prior year indicating that the DFPP reference price increased above the
previously estimated price levels for 2007 and the inflation-adjusted phase-out
range decreased, resulting in a higher phase-out percentage of approximately
67%.  Therefore, PPL recorded an expense of $13 million ($0.04 per
share, basic and diluted, for PPL) during the six months ended June 30, 2008, to
"Income Taxes" on the Statement of Income to account for this
difference.





After
considering the above adjustment, the synthetic fuel produced at the Somerset
and Tyrone facilities resulted in an aggregate estimated recognition of tax
credits of $314 million for Somerset and $112 million for Tyrone through
June 30, 2008.





In 2007,
PPL also purchased synthetic fuel from unaffiliated third parties, at prices
below the market price of coal, for use at its coal-fired power
plants.  The resulting fuel cost savings for the six months ended June
30, 2007 were $11 million.





Energy
Policy Act of 2005 (PPL, PPL Energy Supply and PPL
Electric)





In August
2005, President Bush signed into law the Energy Policy Act of 2005 (the 2005
Energy Act).  The 2005 Energy Act is comprehensive legislation that
substantially affects the regulation of energy companies.  The Act
amends federal energy laws and provides the FERC with new oversight
responsibilities.  Among the important changes that have been or will
be implemented as a result of this legislation are:





·
            The
      Public Utility Holding Company Act of 1935 was repealed.  PUHCA
      significantly restricted mergers and acquisitions in the electric utility
      sector.·
            The
      FERC has appointed the NERC as the organization to establish and enforce
      mandatory reliability standards (Reliability Standards) regarding the bulk
      power system, and the FERC will oversee this process and independently
      enforce the Reliability Standards, as further described
    below.·
            The
      FERC will establish incentives for transmission companies, such as
      performance-based rates, recovery of the costs to comply with reliability
      rules and accelerated depreciation for investments in transmission
      infrastructure.·
            The
      Price-Anderson Amendments Act of 1988, which provides the framework for
      nuclear liability protection, was extended to 2025.·
            Federal
      support will be available for certain clean coal power initiatives,
      nuclear power projects and renewable energy
  technologies.





The
implementation of the 2005 Energy Act requires proceedings at the state level
and the development of regulations, some of which have not been finalized, by
the FERC, the DOE and other federal agencies.  PPL cannot predict when
all of these proceedings and regulations will be finalized.





The
implemented Reliability Standards have the force and effect of law, and apply to
certain users of the bulk power electricity system, including electric utility
companies, generators and marketers.  The FERC has indicated that it
intends to enforce vigorously the Reliability Standards using, among other
means, civil penalty authority.  Under the Federal Power Act, the FERC
may assess civil penalties of up to $1 million per day, per violation, for
certain violations.  The first group of Reliability Standards approved
by the FERC became effective in June 2007.





In
September 2007, PPL Electric self-reported to the RFC, a regional reliability
entity designated to enforce the Reliability Standards, that it had identified a
potential violation of certain reliability requirements and submitted an
accompanying mitigation plan.  In February 2008, the RFC notified PPL
Electric that it had completed its investigation, accepted PPL Electric's
mitigation plan and issued a Notice of Alleged Violation.  Once
finalized, following opportunity for PPL Electric to comment, the RFC's
determination is subject to review and approval by the NERC and the
FERC.  At this time, PPL Electric cannot predict the outcome of these
reviews.





PPL and
its subsidiaries cannot predict the impact the Reliability Standards will have
on PPL and its subsidiaries, including on its capital and operating
expenditures; however, compliance costs could be significant.





PPL also
cannot predict with certainty the impact of the other provisions of the 2005
Energy Act and any related regulations on PPL and its subsidiaries.





Environmental
Matters - Domestic





(PPL,
PPL Energy Supply and PPL Electric)





Due to
the environmental issues discussed below or other environmental matters, PPL
subsidiaries may be required to modify, curtail, replace or cease operating
certain facilities to comply with statutes, regulations and actions by
regulatory bodies or courts.  In this regard, PPL subsidiaries also
may incur capital expenditures or operating expenses in amounts which are not
now determinable, but could be significant.





Air(PPL and PPL Energy
Supply)





The Clean
Air Act deals, in part, with emissions causing acid deposition, attainment of
federal ambient air quality standards and toxic air emissions and visibility in
the U.S.  Amendments to the Clean Air Act requiring additional
emission reductions are likely to continue to be proposed in the U.S.
Congress.  The Clean Air Act allows states to develop more stringent
regulations and in some instances, as discussed below, Pennsylvania and Montana
have chosen to do so.





Clean Air Interstate
Rule





Citing
its authority under the Clean Air Act, in 1997, the EPA developed new standards
for ambient levels of ozone and fine particulates in the U.S.  These
standards have been upheld following court challenges.  To facilitate
attainment of these standards, the EPA promulgated the Clean Air Interstate Rule
(CAIR) for 28 midwestern and eastern states, including Pennsylvania, to reduce
sulfur dioxide emissions by about 50% by 2010 and to extend the current seasonal
program for reduction in nitrogen oxides emissions to a year-round program
starting in 2009.  The CAIR required further reductions in the CAIR
region, starting in 2015, in sulfur dioxide of 30% from 2010 levels, and
nitrogen oxides during the ozone season of 17% from 2009 levels.  The
CAIR allowed these reductions to be achieved through cap-and-trade
programs.





On July
11, 2008, the United States Court of Appeals for the D.C. Circuit invalidated
CAIR.  The Court did not overturn the existing cap-and-trade program
for sulfur dioxide reductions under the acid rain program.  In
addition, despite the Court's ruling that a regional cap-and-trade program
cannot be used for attainment of the ozone standard, the existing ozone season
cap-and-trade program was not invalidated.





As a
result of this decision, PPL now anticipates that all of the annual nitrogen
oxide allowances PPL EnergyPlus had purchased are no longer
required.  In addition, the market price of sulfur dioxide allowances
has fallen dramatically since the Court's decision was issued.  PPL
currently is evaluating the Court's decision to determine its financial and
other impacts.  The combined book value for these sulfur dioxide and
nitrogen oxide emission allowances was approximately $100 million at June 30,
2008, excluding the seasonal nitrogen oxide allowances unaffected by the Court's
ruling.  While PPL is still evaluating the impact of the Court's
decision, PPL may impair these allowances in the third quarter of
2008.  The amount of the impairment charge, if any, will be based on,
among other factors, an assessment of the emission allowances PPL expects to
consume in future periods and prevailing market prices.  As a result
of the Court's decision, PPL also
is reviewing aspects of its previously announced program to install certain
pollution control equipment to meet the CAIR requirements.  In
addition, as a part of the analysis of the potential financial impacts of this
decision, PPL is reviewing the relevant contracts for the purchase of these
allowances.




At this
time, PPL cannot predict the outcome of the legal proceedings related to the
Court's decision, what action the EPA will take in response to this decision and
the timing of such action, or the ultimate impact on PPL of these proceedings
and resulting regulatory and other actions.





The EPA
has recently tightened the ambient air quality standard for
ozone.  The more stringent standard could result in requirements to
reduce emissions of nitrogen oxides beyond those previously required under the
CAIR.  If additional reductions were to be required, the costs are not
now determinable, but could be significant.





To
continue meeting the sulfur dioxide reduction requirements under the acid rain
provisions of the Clean Air Act, and the reductions previously required by CAIR,
PPL has installed scrubbers at its Montour plant that are now in
service.  In addition, PPL is continuing with installation of
scrubbers at its Brunner Island plant.  However, PPL is re-evaluating
the operating strategy for the Brunner Island scrubbers on Units 1 and 3 in
light of the CAIR decision.  In addition, with respect to compliance
with ozone season attainment requirements, PPL's plan has been to operate the
SCRs at Montour Units 1 and 2 during the ozone season, to optimize emission
reductions from the existing combustion controls and purchase any needed
emission allowances on the open market.  PPL's current installation
plan for the scrubbers and other pollution control equipment (primarily aimed at
sulfur dioxide, particulate and nitrogen oxides with co-benefits for mercury
emissions reduction) through 2012 is included in the capital
budget.  PPL expects a 30 MW reduction in net generation capability at
each of the Brunner Island and Montour plants due to the estimated increases in
station service usage during the scrubber operation.





Mercury





Also
citing its authority under the Clean Air Act, the EPA issued the Clean Air
Mercury Regulations (CAMR) that affect coal-fired plants.  These
regulations established a cap-and-trade program to take effect in two phases,
with a first phase to begin in January 2010, and a second phase with more
stringent requirements to begin in January 2018.  However, in February
2008, the U.S. Court of Appeals for the D.C. Circuit overturned the EPA's
rule.  Under this decision, the EPA must either properly remove
mercury from regulation under the hazardous air pollutant provisions of the
Clean Air Act or develop standards requiring maximum achievable control
technology (MACT) for electric generating units.  The EPA has stated
that it will likely proceed with developing MACT standards for all hazardous air
emissions from electric generating units.  The costs of complying with
such standards are not now determinable, but could be significant.





Pennsylvania
has adopted its own, more stringent mercury rules.  Pennsylvania's
rules establish mercury emission limits for each coal-fired generating facility
beginning in 2010, and require that mercury emission allowances under the EPA's
cap-and-trade program under CAMR be met at each unit without the benefit of an
emissions trading program, and that tighter emission limits based on the second
phase of the CAMR requirements be accelerated to begin in 2015.  With
the invalidation of both CAIR and CAMR, PPL expects Pennsylvania's rule to be
challenged in court.  The cost effectiveness of Pennsylvania's mercury
rule and the timing of the required reductions were based on the expected
scrubbers and SCRs to be installed for compliance with CAIR.  In
addition the caps in Pennsylvania's rule were based entirely on the caps in
CAMR.





If
Pennsylvania's mercury rule remains unchanged, PPL may need to have all of the
Brunner Island scrubbers in service by 2010 along with chemical injection
systems so that it can achieve the Phase 1 mercury reduction
requirements.  PPL estimates that the capital cost of such chemical
injection systems at Brunner Island will be approximately $40
million.  For Montour, PPL expects that it will have to operate the
SCRs (already in place) year round along with the scrubbers to achieve
compliance with Phase 1.  However, additional injection systems could
be required to meet the stringent cap. PPL estimates the cost of these systems
to be $32 million.





If
Pennsylvania's mercury rule remains unchanged, to meet Pennsylvania's 2015
mercury reduction requirements, adsorption/absorption technology with fabric
filters may be required at most PPL Pennsylvania coal-fired generating units if
required reductions cannot be achieved by the chemical injection
systems.  Based on current analysis and industry estimates, PPL
estimates that if this technology were required at every one of its Pennsylvania
units, the aggregate capital cost of compliance would be approximately $530
million.





Montana
also has finalized its own more stringent rules that require, by 2010, every
coal-fired generating plant in that state to achieve reduction levels more
stringent than the CAMR's 2018 requirements.  PPL presently plans to
install chemical injection systems to meet these requirements.  PPL
estimates its share of the capital cost for these systems in Montana would be
approximately $8 million.  Because enhanced chemical injection
technologies may not be sufficiently developed to meet this level of reductions
by 2010, there is a risk that adsorption/absorption technology with fabric
filters at both Colstrip and Corette would be required.  Based on
current analysis and industry estimates, PPL estimates that if this technology
were required, its share of the capital cost to achieve compliance at its
Montana units would be approximately $140 million.  PPL expects that
the Montana mercury rule may also be challenged in court.





Regional Haze and
Visibility





In
addition to the above rules, the Clean Air Visibility Rule was issued by the EPA
on June 15, 2005, to address regional haze or regionally-impaired visibility
caused by multiple sources over a wide area.  The rule defines Best
Available Retrofit Technology (BART) requirements for electric generating units,
including presumptive limits for sulfur dioxide and nitrogen oxides controls for
large units.  Under the BART rule, PPL has submitted to the
Pennsylvania DEP its analyses of the visibility impacts of particulate matter
emissions from Martins Creek Units 3 and 4, Brunner Island Units 2 and 3 and
Montour Units 1 and 2.  The EPA had determined that meeting the
requirements for CAIR met the BART requirements for sulfur dioxide and nitrogen
dioxide.  However, with the invalidation of CAIR, BART for sulfur
dioxide and nitrogen dioxide emissions will now need to be evaluated for the
Pennsylvania plants.  Also under the BART rule, PPL has submitted to
the EPA (Region 8), which administers the BART program for Montana, its analyses
of the visibility impacts of sulfur dioxide, nitrogen oxides and particulate
matter emissions for Colstrip Units 1 and 2 and Corette.  PPL's
analyses have shown that further reductions are not needed.  The EPA
has responded to PPL's reports for Colstrip and Corette and requested further
information and analysis.  PPL has completed further analysis and
submitted addendums to the initial reports for Colstrip and
Corette.  PPL cannot predict whether any additional reductions will be
required in Pennsylvania or Montana.  If additional reductions are
required, the costs are not now determinable, but could be
significant.





New Source
Review





In 1999,
the EPA initiated enforcement actions against several electric generators,
asserting that older, coal-fired power plants operated by those generators have,
over the years, been modified in ways that subjected them to more stringent "New
Source" requirements under the Clean Air Act.  The EPA subsequently
issued notices of violation and commenced enforcement activities against other
generators.





However,
in recent years, the EPA has shifted its position on New Source
Review.  In 2003, the EPA issued changes to its regulations that
clarified what projects are exempt from "New Source" requirements as routine
maintenance and repair.  However, these regulations were stayed and
subsequently struck down by the U.S. Court of Appeals for the D.C.
Circuit.  Furthermore, in April 2007, the U.S. Supreme Court upheld
the annual emissions test under which the EPA had found emissions increases at
the plants included in its enforcement initiative.  PPL is therefore
continuing to operate under the "New Source" regulations as they existed prior
to the EPA's 2003 clarifications.





In
October 2005, the EPA proposed changing its rules on how to determine whether a
project results in an emissions increase and is therefore subject to review
under the "New Source" regulations.  The EPA's proposed tests are
consistent with the position of energy companies and industry groups and, if
adopted, would substantially reduce the uncertainties under the current
regulations.  PPL cannot predict whether these proposed new tests will
be adopted.  In the interim, the EPA has not brought substantial new
enforcement actions.  Accordingly, PPL believes it is unlikely the EPA
will pursue the information requests issued to PPL Montana's Corette and
Colstrip plants by EPA Region 8 in 2000 and 2003, and to PPL Generation's
Martins Creek plant by EPA Region 3 in 2002.  However, states and
environmental groups also have brought enforcement actions alleging violations
of "New Source" requirements by coal-fired plants, and PPL is unable to predict
whether such state or citizens enforcement actions will be brought with respect
to any of PPL affiliates' plants.





If new
source review requirements are imposed, then PPL must install best available
control technology for any pollutant found to have significantly increased due
to a major modification.  The costs to install such technology are not
now determinable, but could be significant.





Finally,
if the EPA regulates carbon dioxide emissions pursuant to the recent U.S.
Supreme Court decision on global climate change, then carbon dioxide emissions
could become subject to the PSD/NSR provisions of the Clean Air
Act.  The implications are uncertain, as currently no permitting
authorities have implemented the PSD/NSR program for carbon dioxide
emissions.





Opacity





The New
Jersey DEP and some New Jersey residents have raised environmental concerns with
respect to the visible opacity of emissions from the oil-fired units at the
Martins Creek plant.  Similar issues also are being raised by the
Pennsylvania DEP.  PPL is continuing to study and negotiate the matter
with the Pennsylvania DEP.  If it is determined that actions must be
taken to address the visible opacity of these emissions, such actions could
result in costs that are not now determinable, but could be
significant.  In September 2007, in accordance with a 2003 agreement
with the New Jersey DEP and the Pennsylvania DEP, PPL shut down Martins Creek's
two 150 MW coal-fired generating units.  In July 2008, demolition
work began to decommission these two units.  PPL may replace the units
at any time so long as it complies with all applicable state and federal
requirements.





Global Climate
Change





There is
a growing concern nationally and internationally about global climate change and
the contribution of greenhouse gas emissions including, most significantly,
carbon dioxide from the combustion of fossil fuels.  This concern has
led to increased federal legislative proposals, actions at state and local
levels, as well as litigation relating to greenhouse gas emissions, including an
April 2007 U.S. Supreme Court decision holding that the EPA has the authority to
regulate greenhouse gas emissions from new motor vehicles under the Clean Air
Act.  As a result of this decision, the EPA is reviewing the Clean Air
Act provisions for New Source Performance Standards (NSPS) applicable to
stationary sources to determine if it will include stationary source greenhouse
gas emissions under these rules.  In addition, if the EPA concludes
greenhouse gases from motor vehicles pose an endangerment to public health or
welfare, this could lead to regulation of stationary source carbon dioxide
emissions under other provisions of the Clean Air Act.  Also,
increased pressure for carbon dioxide emissions reduction is being initiated by
investor and environmental organizations and the international
community.





PPL
believes future legislation and regulations that cap or tax carbon dioxide
emissions from power plants are likely, although technology to efficiently
capture, remove and sequester carbon dioxide emissions is not presently
available.  At the federal level, such regulation has received support
from the majority leadership in both the U.S. Senate and U.S. House of
Representatives.  PPL supports a national program and has publicly
supported the key concepts of the "Low Carbon Economy Act of 2007" introduced in
the Senate in July 2007, including an economy-wide approach, a gradual phase-in
of greenhouse gas emission reduction targets and timetables and cost containment
measures to limit the cost to the economy.





At the
regional level, ten northeastern states signed a Memorandum of Understanding
(MOU) agreeing to establish a greenhouse gas emission cap-and-trade program,
called the Regional Greenhouse Gas Initiative (RGGI).  The program
commences in January 2009 and calls for stabilization of carbon dioxide
emissions, at base levels established in 2005, from electric power plants larger
than 25 MW in capacity.  The MOU also provides for a 10% reduction in
carbon dioxide emissions from base levels by 2019.  A similar effort
is under way in the western U.S. (the Western Regional Climate Action Initiative
or WCI), and Midwestern states have recently agreed to form another regional
climate change program.





Pennsylvania
and Montana have not, at this time, established mandatory programs to regulate
carbon dioxide and other greenhouse gases.  Pennsylvania has not
stated an intention to join RGGI, but has declared support for state action on
climate change.  Montana has joined the WCI and will participate in
any greenhouse gas emission control regulations that are adopted by the
WCI.  The WCI currently is developing greenhouse gas emission
allocation, offsets, and reporting recommendations.





PPL has
conducted an inventory of its carbon dioxide emissions and is continuing to
evaluate options for reducing, avoiding, off-setting or sequestering its carbon
dioxide emissions.  In 2007, PPL's power plants emitted approximately
31 million tons of carbon dioxide (based on PPL's equity share of these
assets).





PPL
believes that the regulation of greenhouse gas emissions may have a material
impact on its capital expenditures and operations, but the costs are not now
determinable.  PPL also cannot predict the impact that any pending or
future federal or state climate change legislation regarding more stringent
environmental standards could have on PPL or its subsidiaries.





Water/Waste(PPL and PPL Energy
Supply)





Martins Creek Fly Ash
Release





In August
2005, there was a release of approximately 100 million gallons of water
containing fly ash from a disposal basin at the Martins Creek plant used in
connection with the operation of the two 150 MW coal-fired generating units
at the plant.  This resulted in ash being deposited onto adjacent
roadways and fields, and into a nearby creek and the Delaware
River.  The leak was stopped, and PPL has determined that the problem
was caused by a failure in the disposal basin's discharge
structure.  PPL has conducted extensive clean-up and completed
studies, in conjunction with a group of natural resource trustees and the
Delaware River Basin Commission, evaluating the effects of the release on the
river's sediment, water quality and ecosystem.  These studies do not
show any environmental damage attributable to the release.





The
Pennsylvania DEP filed a complaint in Commonwealth Court against PPL Martins
Creek and PPL Generation, alleging violations of various state laws and
regulations and seeking penalties and injunctive relief.  The Delaware
Riverside Conservancy and several citizens have been granted the right, without
objection from PPL, to intervene in the Pennsylvania DEP's
action.  PPL and the Pennsylvania DEP have settled this
matter.  The settlement required a payment of $1.5 million in
penalties and reimbursement of the DEP's costs.  PPL made this payment
in the second quarter of 2008.  The settlement also requires PPL to
submit a report on the completed studies of possible natural resource
damages.  PPL submitted the assessment report to the agencies in June
2007.  However, the agencies may require additional
studies.  In addition, PPL expects the trustees and the Delaware River
Basin Commission to seek to recover their costs and/or any damages they
determine were caused by the release.





At
June 30, 2008, management's best estimate of the probable loss associated
with the Martins Creek ash basin leak was $35 million, of which $29 million
relates to off-site costs, and the balance to on-site costs.  These
estimates reflect a reduction of $2 million recorded in the second quarter of
2008.  At June 30, 2008, the remaining recorded contingency for
this remediation was $5 million.  PPL and PPL Energy Supply cannot be
certain of the outcome of the natural resource damage assessment, the outcome of
any lawsuit brought by the citizens and businesses and the exact nature of any
other regulatory or other legal actions that may be initiated against PPL, PPL
Energy Supply or their subsidiaries as a result of the disposal basin
leak.





In July
2008, work began to close this ash basin as part of the decommissioning of the
Martins Creek coal-fired power plant.





Basin Seepage -
Pennsylvania





Seepages
have been detected at active and retired wastewater basins at various PPL
plants, including the Montour, Brunner Island and Martins Creek generating
facilities.  PPL has completed an assessment of some of the seepages
at the Montour and Brunner Island facilities and is working with the
Pennsylvania DEP to implement abatement measures for those
seepages.  PPL is continuing to conduct assessments of other seepages
at the Montour and Brunner Island facilities as well as seepages at the Martins
Creek facility to determine the appropriate abatement actions.  PPL's
capital budget includes $50 million to upgrade and/or replace certain wastewater
facilities in response to the seepage and for other facility
changes.  The potential additional cost to address the identified
seepages or other seepages at all of PPL's Pennsylvania plants is not now
determinable, but could be significant.





Basin Seepage -
Montana





In May
2003, approximately 50 plaintiffs brought an action now pending at the Montana
Sixteenth Judicial District Court, Rosebud County, against PPL Montana and the
other owners of the Colstrip plant alleging property damage from seepage from
the freshwater and wastewater ponds at Colstrip.  In February 2007,
six plaintiffs filed a separate lawsuit in the same court against the Colstrip
plant owners asserting similar claims.  The lawsuit filed in 2007 is
in its initial stages of discovery and investigation, and PPL Montana is unable
to predict the outcome of these proceedings.  PPL Montana has
undertaken certain groundwater investigation and remediation measures at the
Colstrip plant to address groundwater contamination alleged by the plaintiffs as
well as other groundwater contamination at the plant.  These measures
include proceeding with extending city water to certain residents who live near
the plant, some of whom are plaintiffs in the original 2003
lawsuit.  At a September 2007 mandatory mediation session with the
original 2003 plaintiffs, PPL Montana and the other current owner defendants
proposed a settlement.  At that time, PPL Montana recorded a reserve
of $1 million for its share of the proposed settlement cost.  In April
2008, the current owner defendants and the original 2003 plaintiffs reached an
agreement in principle to settle their claims based on a revised settlement
offer.  Accordingly, in the first quarter of 2008, PPL Montana
recorded an additional reserve of $7 million ($0.01 per share, basic and
diluted, for PPL) to "Operation and maintenance" on the Statement of
Income.  In July 2008, the parties executed a settlement agreement and
PPL Montana and the other current owner defendants funded the
settlement.  PPL Montana's share of the settlement was approximately
$8 million.  In June 2008, PPL Montana recorded an insignificant
additional reserve for its share of potential settlements with three property
owners living near the original 2003 plaintiffs.  These property
owners may have claims similar to the original 2003 plaintiffs, but were not
parties to either lawsuit.  Neither the settlement of the original
2003 lawsuit nor the potential settlements with the three property owners affect
the status of the lawsuit filed in February 2007.  PPL Montana may
incur further costs based on the outcome of the lawsuits and its additional
groundwater investigations and any related remedial measures, which costs are
not now determinable, but could be significant.





Other
Issues





The EPA
significantly increased the water quality standard for arsenic in January 2006,
but limited the standard to drinking water.  In Pennsylvania, the
comment period for the Triennial Review, in which the arsenic standard has been
proposed as an in-stream water quality standard, has ended but final regulations
have not been published and are expected before the end of 2008.  The
revised standard may result in action by individual states that could require
several PPL subsidiaries to further treat wastewater or take abatement action at
their power plants, or both.  The cost of complying with any such
requirements is not now determinable, but could be significant.





The EPA
finalized requirements in 2004 for new or modified cooling water intake
structures.  These requirements affect where generating facilities are
built, establish intake design standards, and could lead to requirements for
cooling towers at new and modified power plants.  Another rule
finalized in 2004 that addressed existing structures has been withdrawn
following a January 2007 decision by the U.S. Court of Appeals for the Second
Circuit.  In April 2008, the U.S. Supreme Court granted the petitions
for writs of certiorari filed by Utility Water Act Group, Public Service
Enterprise Group, Inc. and Entergy Corporation, limited to one
question:  Whether Section 316(b) of the Clean Water Act authorizes
the EPA to compare costs with benefits in determining the "best technology
available for minimizing adverse environmental impact" at cooling water intake
structures.  Depending on the outcome of the U.S. Supreme Court review
and what changes the EPA makes to the rule in accordance with this decision and
the other issues raised by the Second Circuit Court (that will not be reviewed
by the U.S. Supreme Court), in addition to what actions the states may take on
their own, the impacts of the actions could result in stricter standards for
existing structures that could impose significant costs on PPL
subsidiaries.





The EPA
plans to finalize its 2008 Effluent Guidelines Plan by August 2008, in which the
EPA will make a decision about whether to revise the steam electric effluent
guidelines.  The EPA is presently conducting a sampling study of
industry discharges to obtain information needed to make that
decision.





PPL has
signed a consent order with the Pennsylvania DEP under which it will take
further actions to minimize the possibility of fish kills at the Brunner Island
plant.  Fish are attracted to power plant discharge channels,
especially during cold weather, because of the warm water. In the past,
some fish kills have occurred at Brunner Island when debris at the intake pumps
has resulted in a unit trip or reduction in load, causing a sudden change in the
water temperature in the discharge channel where fish are present.





PPL will
pay the DEP a nominal penalty for fish kills that occurred in October 2007 and
March 2008. In addition, PPL has committed to construct a barrier to prevent
debris from entering the intake area and to investigate alternatives to address
how to completely exclude fish from the discharge area.  PPL will need
to implement one of these alternatives if a fish kill occurs after construction
of the cooling towers at Brunner Island is completed in 2010.  The
cost of the debris barrier will not be significant.  However, the cost
of excluding fish from the discharge channel is not now determinable but could
be significant.





Superfund
and Other Remediation





(PPL,
PPL Energy Supply and PPL Electric)





PPL
Electric is a potentially responsible party at several sites listed by the EPA
under the federal Superfund program, including the Columbia Gas Plant
Site.  Clean-up actions have been or are being undertaken at all of
these sites, the costs of which have not been significant.  However,
should the EPA require significantly different or additional measures in the
future, the costs of such measures are not determinable, but could be
significant.





PPL
Electric and PPL Gas Utilities have been remediating several sites that were not
being addressed under another regulatory program such as Superfund, but for
which PPL Electric or PPL Gas Utilities may be liable for
remediation.  These include a number of coal gas manufacturing
facilities formerly owned or operated by PPL Electric; coal gas manufacturing
facilities and potential mercury contamination from gas meters and regulators at
PPL Gas Utilities' sites and plugging of abandoned wells by PPL Gas
Utilities.





Depending
on the outcome of investigations at sites where investigations have not begun or
have not been completed, the costs of remediation and other liabilities could be
substantial.  PPL and its subsidiaries also could incur other
non-remediation costs at sites included in the consent orders or other
contaminated sites, the costs of which are not now determinable, but could be
significant.





The EPA
is evaluating the risks associated with naphthalene, a chemical by-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 cleanup.  This could require several PPL subsidiaries to take
more extensive assessment and remedial actions at former coal gas manufacturing
facilities.  The costs to PPL of complying with any such requirements
are not now determinable, but could be significant.





(PPL
and PPL Energy Supply)





Under the
Pennsylvania Clean Streams Law, subsidiaries of PPL Generation are obligated to
remediate acid mine drainage at former mine sites and may be required to take
additional measures to prevent potential acid mine drainage at previously capped
refuse piles.  One PPL Generation subsidiary is pumping mine water at
two mine sites, and treating water at one of these sites.  Another PPL
Generation subsidiary has installed a passive wetlands treatment system at a
third site.  At June 30, 2008, PPL Energy Supply had accrued a
discounted liability 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 treatment at the third site.  PPL Energy Supply
discounted this liability at a rate of 5.74%.  Expected undiscounted
payments are estimated at $1 million for each of the years from 2008 through
2012, and the expected payments for the work after 2012 are $135
million.





(PPL,
PPL Energy Supply and PPL Electric)





Future
cleanup or remediation work at sites currently under review, or at sites not
currently identified, may result in material additional operating costs for PPL
subsidiaries that cannot be estimated at this time.





Gas Seepage (PPL)





PPL Gas
Utilities owns and operates the Meeker gas storage field and has a partial
ownership interest in the Tioga gas storage field, both located in north-central
Pennsylvania.  There continues to be an issue with natural gas
observed in several drinking water wells that the Pennsylvania DEP has been
working to address.  The Pennsylvania DEP has raised concerns that
potential leakage of natural gas from the Tioga gas storage field could be
contributing to this issue.  To help determine the cause of the
natural gas in the potable water wells, the Pennsylvania DEP enlisted the
services of the U.S. Geological Survey Department.  The results of the
U.S. Geological Survey study were published in mid-2007 and indicate that gas in
the groundwater in the area, including in certain residential wells, may be due
in part to gas stored in the storage fields.  Pending completion of a
more detailed study of the issue, PPL Gas Utilities and the co-owner of the
Tioga storage field have offered to sample potable water wells and install water
treatment systems on any wells in which natural gas exceeds 20 parts per million
within an agreed-upon program area.  The cost of the actions in the
program area offered by PPL Gas Utilities and the co-owner are not expected to
be significant.  The costs of any required mitigation actions,
following completion of the broader study, are not now determinable, but could
be significant.





Electric
and Magnetic Fields (PPL, PPL Energy Supply and PPL
Electric)





Concerns
have been expressed by some members of the public regarding potential health
effects of power frequency EMFs, which are emitted by all devices carrying
electricity, including electric transmission and distribution lines and
substation equipment.  Government officials in the U.S. and the U.K.
have reviewed this issue.  The U.S. National Institute of
Environmental Health Sciences concluded in 2002 that, for most health outcomes,
there is no evidence that EMFs cause adverse effects.  The agency
further noted that there is some epidemiological evidence of an association with
childhood leukemia, but that the evidence is difficult to interpret without
supporting laboratory evidence.  The U.K. National Radiological
Protection Board (part of the U.K. Health Protection Agency) concluded in 2004
that, while the research on EMFs does not provide a basis to find that EMFs
cause any illness, there is a basis to consider precautionary measures beyond
existing exposure guidelines.  In April 2007, the Stakeholder Group on
Extremely Low Frequency EMF, set up by the U.K. Government, issued its interim
assessment which describes a number of options for reducing public exposure to
EMFs.  This assessment is being considered by the U.K.
Government.  PPL and its subsidiaries believe the current efforts to
determine whether EMFs cause adverse health effects should continue and are
taking steps to reduce EMFs, where practical, in the design of new transmission
and distribution facilities.  PPL and its subsidiaries are unable to
predict what effect, if any, the EMF issue might have on their operations and
facilities either in the U.S. or the U.K., and the associated cost, or what, if
any, liabilities they might incur related to the EMF issue.





Environmental Matters - International(PPL
and PPL Energy Supply)





U.K.





WPD's
distribution businesses are subject to environmental regulatory and statutory
requirements.  PPL believes that WPD has taken and continues to take
measures to comply with the applicable laws and governmental regulations for the
protection of the environment.  There are no material legal or
administrative proceedings pending against WPD with respect to environmental
matters.  See "Environmental Matters - Domestic - Electric and
Magnetic Fields" for a discussion of EMFs.





Other





Nuclear
Insurance(PPL and PPL Energy
Supply)





PPL
Susquehanna is a member of certain insurance programs that provide coverage for
property damage to members' nuclear generating stations.  Facilities
at the Susquehanna station are insured against property damage losses up to
$2.75 billion under these programs.  PPL Susquehanna is also a member
of an insurance program that provides insurance coverage for the cost of
replacement power during prolonged outages of nuclear units caused by certain
specified conditions.  Under the property and replacement power
insurance programs, PPL Susquehanna could be assessed retroactive premiums in
the event of the insurers' adverse loss experience.  At June 30,
2008, this maximum assessment was about $38 million.





In the
event of a nuclear incident at the Susquehanna station, PPL Susquehanna's public
liability for claims resulting from such incident would be limited to about
$10.8 billion under provisions of The Price-Anderson Act Amendments under the
Energy Policy Act of 2005.  PPL Susquehanna is protected against this
liability by a combination of commercial insurance and an industry assessment
program.  In the event of a nuclear incident at any of the reactors
covered by The Price-Anderson Act Amendments under the Energy Policy Act of
2005, PPL Susquehanna could be assessed up to $201 million per incident, payable
at $30 million per year.





Guarantees and Other
Assurances





(PPL,
PPL Energy Supply and PPL Electric)





In the
normal course of business, PPL, PPL Energy Supply and PPL Electric enter into
agreements that provide financial performance assurance to third parties on
behalf of certain subsidiaries.  Such agreements include, for example,
guarantees, stand-by letters of credit issued by financial institutions and
surety bonds issued by insurance companies.  These agreements are
entered into primarily to support or enhance the creditworthiness attributed to
a subsidiary on a stand-alone basis or to facilitate the commercial activities
in which these subsidiaries enter.





(PPL)





PPL fully
and unconditionally guarantees all of the debt securities of PPL Capital
Funding.





(PPL,
PPL Energy Supply and PPL Electric)





The table
below provides an update to those guarantees that are within the scope of FIN 45
and are specifically disclosed in Note 15 to the Financial Statements
contained in each Registrant's 2007 Form 10-K.





Recorded
      Liability at
            
            Exposure
      at
              June 30,
      2008 (a)June 30,
      2008
            
            December
      31, 2007
            
            
            Expiration
      DatePPL
      Energy Supply(b)Letters
      of credit issued on behalf of affiliates
            
            
            
            
            
            
            
            $
            8
            (c)
            
            2009Retroactive
      premiums under nuclear insurance programs
            
            
            
            
            
            
            
            
            38Nuclear
      claims under The Price-Anderson Act Amendments under The Energy Policy Act
      of 2005
            
            
            
            
            
            
            
            
            201
            (d)Indemnifications
      for entities in liquidation and sales of assets
            
            $
            1
            
            $
            1
            
            
            305
            (e)
            
            2009
      to 2012Indemnification
      to operators of jointly-owned facilities
            
            
            
            
            
            
            
            
            6
            (f)
            
            
            (f)Assignment
      of Enron claims
            
            
            
            
            
            
            
            
            
            (g)
            
            
            (g)WPD
      guarantee of pension and other obligations of unconsolidated
      entities
            
            
            2
            
            
            4
            
            
            39
            (h)
            
            2017Tax
      indemnification related to unconsolidated WPD affiliates
            
            
            
            
            
            
            
            
            10
            (i)
            
            2012Guarantee
      of a portion of an unconsolidated entity's debt
            
            
            
            
            
            
            
            
            22
            (j)
            
            2018





(a)
            
            Represents
      the estimated maximum potential amount of future payments that could be
      required to be made under the guarantee.(b)
            
            Other
      than the letters of credit, all guarantees of PPL Energy Supply apply to
      PPL on a consolidated basis.(c)
            
            Represents
      letters of credit issued at the direction of PPL Energy Supply for the
      benefit of third parties for assurance against nonperformance by
      PPL.  This is not a guarantee by PPL on a consolidated
      basis.(d)
            
            Amount
      is per incident.(e)
            
            PPL
      Energy Supply's maximum exposure with respect to certain indemnifications
      and the expiration of the indemnifications cannot be estimated because, in
      the case of certain of the indemnification provisions, the maximum
      potential liability is not capped by the transaction documents and the
      expiration date is based on the applicable statute of
      limitations.  The exposure noted is only for those cases in
      which the agreements provide for a specific limit on the amount of the
      indemnification.
              
              In
      connection with the liquidation of wholly-owned subsidiaries that have
      been deconsolidated upon turning the entities over to the liquidators,
      certain affiliates of PPL Global have agreed to indemnify the liquidators,
      directors and/or the entities themselves for any liabilities or expenses
      arising during the liquidation process, including liabilities and expenses
      of the entities placed into liquidation.  In some cases, the
      indemnifications are limited to a maximum amount that is based on
      distributions made from the subsidiary to its parent either prior or
      subsequent to being placed into liquidation.  In other cases,
      the maximum amount of the indemnifications is not explicitly stated in the
      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 in which
      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.  During the second quarter of
      2008, $8 million of previously disclosed exposure expired.
              
              PPL
      Energy Supply has provided indemnification to the purchaser of a
      generating 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 is triggered only
      if the purchaser's losses reach $1 million in the aggregate, capped at 50%
      of the purchase price (or $95 million), and either expired in May 2007 or
      will expire pursuant to applicable statutes of limitations.  The
      indemnification provision for unknown environmental and tort liabilities
      related to periods prior to PPL Energy Supply's ownership of the real
      property on which the facility is located is capped at $4 million in the
      aggregate and survives for a maximum period of five years after the
      transaction closing.(f)
            
            In
      December 2007, PPL Energy Supply executed revised owners agreements for
      two jointly-owned facilities, the Keystone and Conemaugh generating
      stations.  The agreements require that in the 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 all owners, for each
      station, is currently $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 agreements do not have an expiration
      date.(g)
            
            In
      July 2006, two subsidiaries of PPL Energy Supply assigned their Enron
      claims to an independent third party (claims purchaser).  In
      connection with the assignment, the subsidiaries agreed to repay a pro
      rata share of the purchase price paid by the claims purchaser, plus
      interest, in the 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 in effect until the claims purchaser has received
      all distributions with respect to the assigned claims.  During
      the second quarter of 2008, the exposure expired.(h)
            
            As
      a result of the privatization of the utility industry in the U.K., certain
      electric associations' roles and responsibilities were discontinued or
      modified.  As a result, certain obligations, primarily
      pension-related, associated with these organizations have been guaranteed
      by the participating members.  Costs are allocated to the
      members based on predetermined percentages as outlined in specific
      agreements.  However, if a member becomes insolvent, costs can
      be reallocated to and are guaranteed by the remaining
      members.  At June 30, 2008, 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.(i)
            
            Two
      WPD unconsolidated affiliates were refinanced during
      2005.  Under the terms of the refinancing, WPD has indemnified
      the lender against certain tax and other liabilities.  At this
      time, WPD believes that the likelihood of such liabilities arising is
      remote.(j)
            
            Reflects
      principal payments only.  During June 2008, PPL Energy Supply
      provided a guarantee on a portion of new debt issued by an unconsolidated
      entity.  The debt matures on June 30,
      2018.  Previously, PPL Electric provided a guarantee on this
      unconsolidated entity's debt that expired in June 2008, when the related
      debt was repaid.








PPL, PPL
Energy Supply and PPL Electric and their subsidiaries provide other
miscellaneous guarantees through contracts entered into in the normal course of
business.  These guarantees are primarily in the form of
indemnifications or warranties related to services or equipment and vary in
duration.  The obligated amounts of these guarantees often are not
explicitly stated, and the overall maximum amount of the obligation under such
guarantees cannot be reasonably estimated.  Historically, PPL, PPL
Energy Supply and PPL Electric and their subsidiaries have not made any
significant payments with respect to these types of guarantees.  At
inception, the aggregate fair value of these indemnifications related to
arrangements entered into subsequent to December 31, 2002, was
insignificant.





11.
            Related
      Party Transactions





Affiliate
Trust(PPL and PPL
Energy Supply)





In
February 2007, WPD LLP redeemed all of the 8.23% Subordinated Debentures
maturing in February 2027 that were held by SIUK Capital Trust
I.  Interest expense on this obligation was $2 million for the six
months ended June 30, 2007.  The redemption resulted in a
recorded loss of $2 million during the six months ended June 30,
2007.  This interest expense and loss are both reflected in "Interest
Expense" for PPL and "Interest Expense with Affiliates" for PPL Energy Supply on
the Statement of Income.  See Note 22 in each Registrant's 2007 Form
10-K for additional information on the trust.





PLR
Contracts(PPL Energy
Supply and PPL Electric)





PPL
Electric has power sales agreements with PPL EnergyPlus, effective July 2000 and
January 2002, in which PPL EnergyPlus will supply PPL Electric's entire PLR load
through December 31, 2009.  Under these contracts, PPL EnergyPlus
provides electricity at the predetermined capped prices that PPL Electric is
authorized to charge its PLR customers.  For the three months ended
June 30, 2008 and 2007, these purchases totaled $428 million and $422
million.  For the six months ended June 30, 2008 and 2007, these
purchases totaled $917 million and $903 million.  These purchases
include nuclear decommissioning recovery and amortization of an up-front
contract payment and are included in the Statements of Income as "Wholesale
energy marketing to affiliate" by PPL Energy Supply, and as "Energy purchases
from affiliate" by PPL Electric.





Under one
of the PLR contracts, PPL Electric is required to make performance assurance
deposits with PPL EnergyPlus when the market price of electricity is less than
the contract price by more than its contract collateral
threshold.  Conversely, PPL EnergyPlus is required to make performance
assurance deposits with PPL Electric when the market price of electricity is
greater than the contract price by more than its contract collateral
threshold.  PPL Electric estimated that at June 30, 2008, the
market price of electricity would exceed the contract price by approximately
$3.2 billion.  Accordingly, at June 30, 2008, PPL Energy Supply
was required to provide PPL Electric with performance assurance of $300 million,
the maximum amount required under the contract.  PPL Energy Supply's
deposit with PPL Electric was $300 million at both June 30, 2008 and
December 31, 2007.  This deposit is shown on the Balance Sheets as
"Collateral on PLR energy supply to/from affiliate," a current asset of PPL
Energy Supply and a current liability of PPL Electric.  PPL Electric
pays interest equal to the one-month LIBOR plus 0.5% on this deposit, which is
included in "Interest Expense with Affiliate" on the Statements of
Income.  PPL Energy Supply records the receipt of the interest as
affiliated interest income, which is included in "Other Income - net" on the
Statements of Income.  For the three months ended June 30, 2008
and 2007, interest related to this deposit was $2 million and $5
million.  For the six months ended June 30, 2008 and 2007, interest
related to this deposit was $5 million and $9 million.





In 2001,
PPL Electric made a $90 million up-front payment to PPL EnergyPlus in connection
with the PLR contracts.  The up-front payment is being amortized by
both parties over the term of the PLR contracts.  The unamortized
balance of this payment and other payments under the contract was $18 million
and $24 million at June 30, 2008 and December 31, 2007.  The
current and noncurrent balances are reported on the Balance Sheets as "Deferred
revenue on PLR energy supply to affiliate" by PPL Energy Supply, and as
"Prepayment on PLR energy supply from affiliate" by PPL Electric.





Under
Pennsylvania law and PUC regulations, PPL Electric is required to buy
electricity generation supply for customers who do not choose a competitive
supplier.  PPL Electric has conducted three of its six planned
competitive solicitations for generation supply in 2010, after its existing PLR
contract expires.  Competitive bids have been solicited for 2,550 MW
of generation supply, or one-half of PPL Electric's expected supply requirements
for these customers in 2010.  An independent company, NERA Economic
Consulting (NERA), is managing this competitive solicitation
process.  NERA compiles the results and presents them to the
PUC.  The first 850 MW solicitation results were presented to and
approved by the PUC in July 2007.  The second 850 MW solicitation
results were presented to and approved by the PUC in October
2007.  The third 850 MW solicitation results were presented to and
approved by the PUC in March 2008.  Additional bids will be sought in
the fall of 2008 and twice in 2009 to secure the remainder of supply needed to
serve PPL Electric's customers in 2010.





PPL
EnergyPlus was one of the successful bidders in the July 2007 competitive
solicitation process and has entered into an agreement with PPL Electric to
supply up to 671 MW of total peak load in 2010, at an average price of $91.42
per MWh.





Under the
standard Supply Master Agreement for the bid solicitation process, PPL Electric
requires all suppliers to post collateral once credit exposures exceed defined
credit limits.  In no instance is PPL Electric required to post
collateral to suppliers under these supply contracts.  PPL EnergyPlus
is required to post collateral with PPL Electric when the market price of
electricity to be delivered by PPL EnergyPlus exceeds the contract price for the
forecasted quantity of electricity to be delivered and this market price
exposure exceeds a contractual credit limit.  Based on the current
credit rating of PPL Energy Supply, as guarantor, this credit limit is $35
million.  At June 30, 2008, PPL Energy Supply provided PPL
Electric with a letter of credit for $50 million as performance
assurance.





At
June 30, 2008, PPL Electric has credit exposure to PPL EnergyPlus under the
PLR contracts and the July 2007 supply contract discussed above, of $3.2
billion.  As a result of netting and collateral arrangements, PPL
Electric's credit exposure was reduced to $2.7 billion.





PPL
Energy Supply has credit exposure to PPL Electric under the PLR
contracts.  At June 30, 2008, PPL Energy Supply's credit exposure
with PPL Electric was $151 million, excluding the effects of netting
arrangements.  As a result of netting arrangements, PPL Energy
Supply's credit exposure was reduced to zero.





NUG
Purchases(PPL Energy
Supply and PPL Electric)





PPL
Electric has a reciprocal contract with PPL EnergyPlus to sell electricity
purchased under contracts with NUGs.  PPL Electric purchases
electricity from the NUGs at contractual rates and then sells the electricity at
the same price to PPL EnergyPlus.  For the three months ended
June 30, 2008 and 2007, these NUG purchases totaled $30 million and $37
million.  For the six months ended June 30, 2008 and 2007, these NUG
purchases totaled $58 million and $74 million.  These amounts are
included in the Statements of Income as "Wholesale electric to affiliate" by PPL
Electric, and as "Energy purchases from affiliate" by PPL Energy
Supply.





Allocations of Corporate Service
Costs(PPL
Energy Supply and PPL Electric)





PPL
Services provides corporate functions such as financial, legal, human resources
and information services.  PPL Services charges the respective PPL
subsidiaries for the cost of such services when they can be specifically
identified.  The cost of these services that is not directly charged
to PPL subsidiaries is allocated to certain subsidiaries based on an average of
the subsidiaries' relative invested capital, operation and maintenance expenses,
and number of employees.  PPL Services allocated the following
amounts, which PPL management believes are reasonable, to PPL Energy Supply and
PPL Electric, including amounts applied to accounts that are further distributed
between capital and expense.





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007PPL
      Energy Supply
            
            $
            54
            
            $
            55
            
            $
            105
            
            $
            114PPL
      Electric
            
            
            32
            
            
            30
            
            
            59
            
            
            62





Intercompany
Borrowings





(PPL
Energy Supply)





PPL
Energy Supply had no notes receivable from affiliates at June 30, 2008 and
December 31, 2007.  Interest earned on loans to affiliates, included
in "Other Income - net" on the Statements of Income, was $2 million for the
three months ended June 30, 2007.  Such interest was not
significant for the three months ended June 30, 2008.  Interest earned
for the six months ended June 30, 2008 and 2007, was $2 million and $3
million.





(PPL Electric)





In August
2004, a PPL Electric subsidiary issued a $300 million demand note to an
affiliate.  There was a $75 million balance outstanding at
June 30, 2008, and a $277 million balance outstanding at December 31,
2007.  Interest is due quarterly at a rate equal to the 3-month LIBOR
plus 1%.  This note is shown on the Balance Sheet as "Note receivable
from affiliate."  Interest earned on the note is included in "Other
Income - net" on the Statements of Income, and was $1 million and $4 million for
the three months ended June 30, 2008 and 2007.  For the six
months ended June 30, 2008 and 2007, interest earned was $4 million and $9
million.





Intercompany Derivatives(PPL
Energy Supply)





In 2007
and 2008, PPL Energy Supply entered into a combination of average rate forwards
and average rate options with PPL to sell British pounds
sterling.  These hedging instruments have terms identical to average
rate forwards and average rate options entered into by PPL with third parties to
protect the translation of expected income denominated in British pounds
sterling to U.S. dollars.  At June 30, 2008, the total exposure hedged
was £43 million and the net fair value of these positions was not
significant.  No similar hedging instruments were outstanding at
December 31, 2007.  Gains and losses, both realized and unrealized, on
these types of hedging instruments are included in "Other income - net" on the
Statements of Income.  For the three and six months ended June 30,
2008, PPL Energy Supply recorded net losses of $1 million and $2
million.  "Other income - net" includes net losses of $2 million and
$3 million related to similar average rate forwards and average rate options for
the three and six months ended June 30, 2007.





In 2007,
PPL Energy Supply entered into forward contracts with PPL to sell Chilean
pesos.  These hedging instruments had terms identical to forward sales
contracts entered into by PPL with third parties to protect the value of its net
investment in Emel as well as a portion of the proceeds in excess of its net
investment expected from the then-anticipated sale of Emel.  None of
these contracts were outstanding at June 30, 2008 or December 31,
2007.  "Other income - net" on the Statements of Income includes a net
loss of $2 million for the three and six months ended June 30, 2007, related to
these contracts.





In 2007,
PPL Energy Supply also entered into forward contracts with PPL to sell British
pounds sterling to protect the value of a portion of its net investment in
WPD.  These hedging instruments have terms identical to forward sales
contracts entered into by PPL with third parties.  The total notional
amount of the contracts outstanding at June 30, 2008 was £68 million
(approximately $134 million).  The net fair value of these positions
was $4 million and $3 million at June 30, 2008 and December 31, 2007, and is
reflected in the foreign currency translation adjustment component of
accumulated other comprehensive loss and "Other Noncurrent Assets - Price risk
management assets" on the Balance Sheets.





Trademark Royalties(PPL
Energy Supply)





A PPL
subsidiary owns PPL trademarks and bills certain affiliates for their
use.  PPL Energy Supply was allocated $5 million and $9 million of
this license fee for the three months ended June 30, 2008 and 2007, and $14
million and $18 million for the six months ended June 30, 2008 and
2007.  These allocations of the license fee are primarily included in
"Other operation and maintenance" on the Statements of Income.





12.
            Other
      Income - net





(PPL,
PPL Energy Supply and PPL Electric)





The
breakdown of "Other Income - net" was:





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007PPLOther
      IncomeInterest
      income
            
            $
            7
            
            
            $
            15
            
            
            $
            17
            
            
            $
            27Hyder
      liquidation distributions (Note 8)
            
            
            1
            
            
            
            2
            
            
            
            3
            
            
            
            6Equity
      earnings
            
            
            2
            
            
            
            1
            
            
            
            2
            
            
            
            2Gain
      on sale of property and equipment
            
            
            2
            
            
            
            1
            
            
            
            2
            
            
            
            6Gain
      on transfer of international equity investment (Note 8)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5Earnings
      on nuclear plantdecommissioning
      trust (a)
            
            
            (4
            )
            
            
            5
            
            
            
            (5
            )
            
            
            7Miscellaneous
      - International
            
            
            1
            
            
            
            3
            
            
            
            1
            
            
            
            3Miscellaneous
      - Domestic
            
            
            2
            
            
            
            
            
            
            
            3
            
            
            
            3Total
            
            
            11
            
            
            
            27
            
            
            
            23
            
            
            
            59Other
      DeductionsHedging
      activity
            
            
            1
            
            
            
            3
            
            
            
            1
            
            
            
            4Charitable
      contributions
            
            
            
            
            
            
            
            
            
            
            1
            
            
            
            2Miscellaneous
      - International
            
            
            2
            
            
            
            
            
            
            
            3
            
            
            
            1Miscellaneous
      - Domestic
            
            
            
            
            
            
            3
            
            
            
            2
            
            
            
            4Other
      Income - net
            
            $
            8
            
            
            $
            21
            
            
            $
            16
            
            
            $
            48


PPL Energy
      SupplyOther
      IncomeInterest
      income
            
            $
            6
            
            
            $
            12
            
            
            $
            13
            
            
            $
            20Affiliated
      interest income (Note 11)
            
            
            2
            
            
            
            7
            
            
            
            7
            
            
            
            12Hyder
      liquidation distributions (Note 8)
            
            
            1
            
            
            
            2
            
            
            
            3
            
            
            
            6Equity
      earnings
            
            
            2
            
            
            
            1
            
            
            
            2
            
            
            
            2Gain
      on sale of property and equipment
            
            
            2
            
            
            
            
            
            
            
            2
            
            
            
            1Gain
      on transfer of international equity investment (Note 8)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5Earnings
      on nuclear plant decommissioningtrust
      (a)
            
            
            (4
            )
            
            
            5
            
            
            
            (5
            )
            
            
            7Miscellaneous
      - International
            
            
            1
            
            
            
            3
            
            
            
            1
            
            
            
            3Miscellaneous
      - Domestic
            
            
            1
            
            
            
            
            
            
            
            2
            
            
            
            2Total
            
            
            11
            
            
            
            30
            
            
            
            25
            
            
            
            58Other
      DeductionsHedging
      activity
            
            
            1
            
            
            
            3
            
            
            
            2
            
            
            
            4Miscellaneous
      - International
            
            
            2
            
            
            
            
            
            
            
            3
            
            
            
            1Miscellaneous
      - Domestic
            
            
            1
            
            
            
            3
            
            
            
            2
            
            
            
            5Other
      Income - net
            
            $
            7
            
            
            $
            24
            
            
            $
            18
            
            
            $
            48PPL
      ElectricOther
      IncomeAffiliated
      interest income (Note 11)
            
            $
            1
            
            
            $
            4
            
            
            $
            4
            
            
            $
            9Interest
      income
            
            
            2
            
            
            
            2
            
            
            
            4
            
            
            
            5Gain
      on sale of property
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4Miscellaneous
            
            
            
            
            
            
            1
            
            
            
            
            
            
            
            1Total
            
            
            3
            
            
            
            7
            
            
            
            8
            
            
            
            19Other
      DeductionsOther
      Income - net
            
            $
            3
            
            
            $
            7
            
            
            $
            8
            
            
            $
            19





(a)
            
            The
      three months ended June 30, 2008 and 2007, include charges of $7 million
      and $1 million for other-than-temporary impairments of securities held by
      the trust.  The six months ended June 30, 2008 and 2007, include
      charges of $10 million and $1 million for such
  impairments.





13.
            Fair
      Value Measurements





(PPL,
PPL Energy Supply and PPL Electric)





Adoption
of SFAS 157





Effective
January 1, 2008, PPL and its subsidiaries adopted SFAS 157, as amended, as
discussed in Note 2.  SFAS 157 provides a definition of fair value as
well as a framework for measuring fair value.  In addition, SFAS 157
expands the fair value disclosure requirements of other accounting
pronouncements to require, among other things, disclosure of the methods and
assumptions used to measure fair value as well as the earnings impact of certain
fair value measurement techniques.





As
defined by SFAS 157, fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (an exit price).  Consistent with
the valuation techniques identified in SFAS 157, PPL and its subsidiaries use,
as appropriate, a market approach (generally, data from market transactions), an
income approach (generally, present value techniques), and/or a cost approach
(generally, replacement cost) to measure the fair value of an asset or
liability.  These valuation approaches incorporate inputs such as
observable, independent market data and/or unobservable data that management
believes are predicated on the assumptions market participants would use to
price an asset or liability.  These inputs may incorporate, as
applicable, certain risks such as nonperformance risk, which includes credit
risk.





SFAS 157
established a fair value hierarchy that prioritizes the inputs used to measure
fair value into three broad levels.  The hierarchy gives the highest
priority to quoted prices in active markets for identical assets and liabilities
and the lowest priority to unobservable inputs.  The level in the fair
value hierarchy within which the fair value measurement in its entirety is
classified is determined based on the lowest level input that is significant to
the fair value measurement in its entirety.  SFAS 157 recognizes that
assessing the significance of a particular input requires judgment that
considers factors specific to the asset or liability.  As such, PPL
and its subsidiaries' assessment of the significance of a particular input may
affect the placement of assets and liabilities within the fair value
hierarchy.





The three
levels of the fair value hierarchy as specified by SFAS 157 are:





·
            Level 1 - quoted prices
      in active markets for identical assets or liabilities.  Active
      markets are those in which transactions for the asset or liability occur
      with sufficient frequency and volume to provide pricing information on an
      ongoing basis.·
            Level 2 - inputs other
      than quoted prices in active markets, that are either directly or
      indirectly observable for substantially the full term of the asset or
      liability.·
            Level 3-unobservable
      inputs that management believes are predicated on the assumptions market
      participants would use to price the asset or
  liability.





(PPL
and PPL Energy Supply)





The
assets and liabilities measured at fair value in accordance with SFAS
157 at June 30, 2008 were:





Fair
      Value Measurements UsingTotal
            
            Quoted
      Prices in Active Markets for Identical Assets/
              Liabilities
              (Level
      1)
            
            Significant
      Other Observable Inputs
              (Level
      2)
            
            Significant
      Unobservable Inputs
              (Level
      3)PPLAssetsPrice
      risk management assets:Energy
      commodities
            
            $
            4,079
            
            
            $
            42
            
            
            $
            3,608
            
            
            $
            429Interest
      rate/foreign exchange
            
            
            49
            
            
            
            
            
            
            
            494,128
            
            
            
            42
            
            
            
            3,657
            
            
            
            429Nuclear
      plant decommissioning trust
              funds:Cash
      and cash equivalents
            
            
            15
            
            
            
            15Equity
      securities
            
            
            199
            
            
            
            199Commingled
      equity index funds
            
            
            121
            
            
            
            
            
            
            
            121Debt
      securitiesU.S.
      Treasury
            
            
            79
            
            
            
            
            
            
            
            79Municipality
            
            
            63
            
            
            
            
            
            
            
            63Corporate
            
            
            32
            
            
            
            
            
            
            
            32Other
            
            
            15
            
            
            
            
            
            
            
            15524
            
            
            
            214
            
            
            
            310Auction
      rate securities
            
            
            21
            
            
            
            
            
            
            
            
            
            
            
            21$
            4,673
            
            
            $
            256
            
            
            $
            3,967
            
            
            $
            450LiabilitiesPrice
      risk management liabilities:Energy
      commodities
            
            $
            5,117
            
            
            $
            43
            
            
            $
            4,919
            
            
            $
            155Interest
      rate/foreign exchange
            
            
            138
            
            
            
            
            
            
            
            138$
            5,255
            
            
            $
            43
            
            
            $
            5,057
            
            
            $
            155PPLEnergy
      SupplyAssetsPrice
      risk management assets:Energy
      commodities
            
            $
            4,079
            
            
            $
            42
            
            
            $
            3,608
            
            
            $
            429Interest
      rate/foreign exchange
            
            
            32
            
            
            
            
            
            
            
            324,111
            
            
            
            42
            
            
            
            3,640
            
            
            
            429


Nuclear
      plant decommissioning trust
              funds:Cash
      and cash equivalents
            
            
            15
            
            
            
            15Equity
      securities
            
            
            199
            
            
            
            199Commingled
      equity index funds
            
            
            121
            
            
            
            
            
            
            
            121Debt
      securitiesU.S.
      Treasury
            
            
            79
            
            
            
            
            
            
            
            79Municipality
            
            
            63
            
            
            
            
            
            
            
            63Corporate
            
            
            32
            
            
            
            
            
            
            
            32Other
            
            
            15
            
            
            
            
            
            
            
            15524
            
            
            
            214
            
            
            
            310Auction
      rate securities
            
            
            17
            
            
            
            
            
            
            
            
            
            
            
            17$
            4,652
            
            
            $
            256
            
            
            $
            3,950
            
            
            $
            446


LiabilitiesPrice
      risk management liabilities:Energy
      commodities
            
            $
            5,117
            
            
            $
            43
            
            
            $
            4,919
            
            
            $
            155Interest
      rate/foreign exchange
            
            
            136
            
            
            
            
            
            
            
            136$
            5,253
            
            
            $
            43
            
            
            $
            5,055
            
            
            $
            155





A
reconciliation of assets and liabilities classified as Level 3 at June 30, 2008
is as follows:





Fair
      Value Measurements Using Significant Unobservable Inputs (Level
      3)Three
      Months Ended
            
            Six
      Months EndedEnergy
      Commodities, net
            
            Auction
      Rate Securities
            
            Total
            
            Energy
      Commodities, net
            
            Auction
      Rate Securities
            
            TotalPPLBalance
      at beginning of period
            
            $
            207
            
            
            $
            40
            
            
            $
            247
            
            
            $
            134
            
            
            
            
            
            
            $
            134Total
      gains or losses (realized/unrealized)Included
      in earnings (a)
            
            
            (1
            )
            
            
            
            
            
            
            (1
            )
            
            
            (1
            )
            
            
            
            
            
            
            (1
            )Included
      in other comprehensive loss
            
            
            67
            
            
            
            (8
            )
            
            
            59
            
            
            
            140
            
            
            $
            (8
            )
            
            
            132Purchases,
      sales, issuances and settlements, net
            
            
            1
            
            
            
            (11
            )
            
            
            (10
            )
            
            
            1
            
            
            
            (11
            )
            
            
            (10
            )Transfers
      in and/or out of Level 3
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            40
            
            
            
            40Balance
      at end of period
            
            $
            274
            
            
            $
            21
            
            
            $
            295
            
            
            $
            274
            
            
            $
            21
            
            
            $
            295The
      amount of total gains or losses for the period included in earnings
      attributable to the change in unrealized gains and losses relating to
      assets or liabilities still held at end of period (a)
            
            $
            (1
            )
            
            
            
            
            
            $
            (1
            )
            
            $
            (1
            )
            
            
            
            
            
            $
            (1
            )PPL Energy
      SupplyBalance
      at beginning of period
            
            $
            207
            
            
            $
            35
            
            
            $
            242
            
            
            $
            134
            
            
            
            
            
            
            $
            134Total
      gains or losses (realized/unrealized)Included
      in earnings (a)
            
            
            (1
            )
            
            
            
            
            
            
            (1
            )
            
            
            (1
            )
            
            
            
            
            
            
            (1
            )Included
      in other comprehensive loss
            
            
            67
            
            
            
            (7
            )
            
            
            60
            
            
            
            140
            
            
            $
            (7
            )
            
            
            133Purchases,
      sales, issuances and settlements, net
            
            
            1
            
            
            
            (11
            )
            
            
            (10
            )
            
            
            1
            
            
            
            (11
            )
            
            
            (10
            )Transfers
      in and/or out of Level 3
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            35
            
            
            
            35Balance
      at end of period
            
            $
            274
            
            
            $
            17
            
            
            $
            291
            
            
            $
            274
            
            
            $
            17
            
            
            $
            291The
      amount of total gains or losses for the period included in earnings
      attributable to the change in unrealized gains and losses relating to
      assets or liabilities still held at end of period (a)
            
            $
            (1
            )
            
            
            
            
            
            $
            (1
            )
            
            $
            (1
            )
            
            
            
            
            
            $
            (1
            )





(a)
            
            These
      amounts are classified in "Net energy trading margins" on the Statements
      of Income.





Price Risk Management
Assets/Liabilities - Energy Commodities





The only
energy commodity contracts classified as Level 1 are exchange-traded derivative
gas contracts.  When observable inputs are used to measure most of the
value of a contract, the contract is classified as Level
2.  Over-the-counter (OTC) contracts are valued using quotes obtained
from an exchange, brokers, prices posted by ISOs or published tariff
rates.  These OTC contracts include forwards, swaps, options and
structured deals for electricity, gas, oil, and/or emission allowances and may
be offset with similar positions in exchange-traded markets.  To the
extent possible, fair value measurements utilize various inputs that include
quoted prices for similar contracts or market-corroborated inputs.  In
certain instances, these instruments may be valued using models, including
standard option valuation models and standard industry models.  For
example, the fair value of a structured deal that delivers power to an illiquid
delivery point may be measured by valuing the nearest liquid trading point plus
the value of the basis between the two points.  The basis input may be
from market quotes, FTR prices, or historical prices.  When the
unobservable inputs are significant to the fair value measurement, the contract
is classified as Level 3.  Additionally, Level 2 and Level 3 fair
value measurements include adjustments for credit risk based on PPL's own
creditworthiness (for net liabilities) and its counterparties' creditworthiness
(for net assets) by applying probabilities of default obtained from an
independent service.  PPL assumes that observable market prices
include sufficient adjustments for liquidity and modeling risks, but for Level 3
fair value measurements, PPL also assesses the need for additional adjustments
for liquidity or modeling risks.  The contracts classified as Level 3
represent contracts for which the delivery dates are beyond the dates for which
independent prices are available.





Price Risk Management
Assets/Liabilities - Interest Rate/Foreign Exchange





Treasury
instruments include forward starting swaps, fixed-to-floating swaps, forwards
and options for foreign exchange contracts, and cross currency
swaps.  Fair value for these instruments is obtained from pricing
services; alternatively, the valuation may be done by an independent external
source, such as a bank, and then validated by PPL's risk management
group.  As noted above, these fair value measurements also include
adjustments for credit risk.





Nuclear Plant
Decommissioning Trust Funds





PPL and
PPL Energy Supply generally use the market approach to measure the fair value of
the securities held in the nuclear plant decommissioning trust
funds.





Auction Rate
Securities





At
June 30, 2008, PPL and PPL Energy Supply reported auction rate securities
of $21 million and $17 million as "Investments - Other" on the Balance
Sheet.  PPL's and PPL Energy Supply's auction rate securities include
Federal Family Education Loan Program's guaranteed student loan revenue bonds as
well as various municipal bond issues, all of which are rated investment
grade.





Auction
rate securities have normally been remarketed on a short-term basis with auction
dates commonly set at seven-day, 28-day, 35-day or 49-day
intervals.  Historically, an active market existed for such
investments, and the auctions provided an opportunity for investors either to
continue to hold an investment at a new reset interest rate or to sell the
investment at its par value for immediate liquidity.  In early 2008,
investor concerns about credit and liquidity in the financial markets generally,
as well as investor concerns over specific insurers that guarantee the credit of
certain of the underlying securities, created uncertainty in the auction rate
securities market and these securities generally failed to be remarketed through
their established auction process.  These auction failures and the
resulting illiquidity continued to impact PPL's and PPL Energy Supply's auction
rate securities.  Auction rate securities were transferred into
Level 3 of the fair value hierarchy during the first quarter of
2008.  The failed auctions limit the amount of observable market data
that is available for measuring the fair value of these securities.





At June
30, 2008, the par value of these auction rate securities totaled $29 million for
PPL and $24 million for PPL Energy Supply.  Contractual maturities for
these auction rate securities are approximately 28 years for both PPL and PPL
Energy Supply.  Historically, the par value of auction rate securities
approximated fair value due to the frequent resetting of the interest rates
through the auction process.  During the second quarter of 2008, the
auctions for these outstanding securities failed, and PPL and PPL Energy Supply
continued to earn interest on these investments at contractually prescribed
interest rates.  Such contractually prescribed rates are lower than
those assigned in the first quarter of 2008.





PPL and
PPL Energy Supply estimated the fair value of these auction rate securities
based on the following criteria:  (i) the underlying structure and
credit quality of each security; (ii) the present value of future principal and
interest payments discounted using interest rates for bonds with a credit rating
and remaining term to maturity similar to the stated maturity of the auction
rate securities; and (iii) consideration of the impact of auction failures or
redemption at par for each period.  These estimated fair values could
change significantly based on future market conditions.





At June
30, 2008, the estimated fair value of these auction rate securities was $21
million for PPL, a decline of $8 million from par value, and $17 million for PPL
Energy Supply, a decline of $7 million from par value.  PPL and PPL
Energy Supply intend and have the ability to hold these securities until they
can be liquidated at par value.  Based upon the evaluation of
available information, PPL and PPL Energy Supply believe these investments
continue to be of high credit quality.  PPL and PPL Energy Supply do
not anticipate having to sell these securities in order to fund
operations.  Based on this assessment, the declines in fair value were
deemed temporary and are due to general market
conditions.  Accordingly, unrealized losses of $8 million for PPL and
$7 million for PPL Energy Supply have been recorded on these securities in other
comprehensive loss.





14.
            Derivative
      Instruments and Hedging Activities





(PPL
and PPL Energy Supply)





Fair Value
Hedges





PPL and
PPL Energy Supply enter into financial interest rate swap contracts to hedge
fluctuations in the fair value of existing debt issuances, which range in
maturity through 2047 for PPL and 2011 for PPL Energy Supply.  PPL and
PPL Energy Supply also enter into foreign currency forward contracts to hedge
the exchange rates associated with firm commitments denominated in foreign
currencies; however, at June 30, 2008, there were no existing contracts of this
nature.





For the
three and six months ended June 30, 2008 and 2007, PPL and PPL Energy Supply did
not recognize any gains or losses resulting from hedges of firm commitments that
no longer qualified as fair value hedges and did not recognize any hedge
ineffectiveness on fair value hedges.





Cash Flow
Hedges





PPL and
PPL Energy Supply enter into financial and physical contracts, including
forwards, futures, swaps and options, to hedge the price risk associated with
electric, gas, oil and other commodities.  These contracts range in
maturity through 2017.  Additionally, PPL and PPL Energy Supply enter
into financial interest rate swap contracts to hedge floating interest rate risk
associated with anticipated debt issuances.  There were no such open
contracts at June 30, 2008.  PPL and PPL Energy Supply also enter into
foreign currency contracts to hedge the cash flows associated with foreign
currency-denominated debt, the exchange rates associated with firm commitments
denominated in foreign currencies and the net investment in foreign
operations.  These contracts range in maturity through
2028.


Net
investment hedge activity is reported in the foreign currency translation
adjustment component of other comprehensive loss.  These contracts
range in maturity through 2011.  During the three and six months ended
June 30, 2008, the amount of after tax net investment hedge gains and
losses recognized by PPL and PPL Energy Supply were
insignificant.  During the three and six months ended June 30,
2007, PPL and PPL Energy Supply recognized $5 million and $4 million of net
investment hedge losses, after tax, in other comprehensive loss.  At
June 30, 2008, $3 million of accumulated net investment hedge losses, after
tax, were included in the foreign currency translation adjustment component of
accumulated other comprehensive loss, compared to $4 million at
December 31, 2007.




Cash flow
hedges are discontinued if it is no longer probable that the original forecasted
transaction will occur by the end of the originally specified time
periods.  In certain instances, amounts previously recorded in
accumulated other comprehensive loss are reclassified to
earnings.  There were no such reclassifications during the three and
six months ended June 30, 2008 and 2007.





For the
three months ended June 30, 2008 and 2007, hedge ineffectiveness associated
with energy derivatives was, after tax, insignificant and a loss of $2
million.  For the six months ended June 30, 2008 and 2007, hedge
ineffectiveness associated with energy derivatives was, after tax, a gain of $2
million and a loss of $5 million.


For the
three and six months ended June 30, 2008 and 2007, hedge ineffectiveness
associated with interest rate and foreign currency derivatives was
insignificant.





This
table shows the accumulated net unrealized after-tax losses on qualifying
derivatives (excluding net investment hedges), which are included in accumulated
other comprehensive loss.





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007PPLBeginning
      of period
            
            $
            (218
            )
            
            $
            (19
            )
            
            $
            (192
            )
            
            $
            (51
            )Net
      change associated with current period hedging activities and
      other
            
            
            (456
            )
            
            
            (119
            )
            
            
            (499
            )
            
            
            (103
            )Net
      change from reclassification into earnings
            
            
            (18
            )
            
            
            1
            
            
            
            (1
            )
            
            
            17End
      of period
            
            $
            (692
            )
            
            $
            (137
            )
            
            $
            (692
            )
            
            $
            (137
            )PPL Energy
      SupplyBeginning
      of period
            
            $
            (209
            )
            
            $
            (19
            )
            
            $
            (188
            )
            
            $
            (52
            )Net
      change associated with current period hedging activities and
      other
            
            
            (460
            )
            
            
            (124
            )
            
            
            (500
            )
            
            
            (106
            )Net
      change from reclassification into earnings
            
            
            (19
            )
            
            
            
            
            
            
            
            
            
            
            15End
      of period
            
            $
            (688
            )
            
            $
            (143
            )
            
            $
            (688
            )
            
            $
            (143
            )





At
June 30, 2008, the accumulated net unrealized after-tax losses on
qualifying derivatives that were expected to be reclassified into earnings
during the next 12 months were $4 million for PPL.  Such amounts were
insignificant for PPL Energy Supply.  Amounts are reclassified as the
energy contracts go to delivery and as interest payments are made.





Normal Purchase/Normal Sale
Exception





PPL's and
PPL Energy Supply's "normal" portfolio includes load-following energy contracts,
certain retail energy and physical capacity contracts, and emission allowances
purchased for consumption.  These contracts range in maturity through
2023.  Due to the "normal" election permitted by SFAS 133, these
contracts receive accrual accounting.  The estimated fair value of
these contracts was:


LossesJune 30,
      2008
            
            December
      31, 2007PPL
            
            $
            (1,089
            )
            
            $
            (327
            )PPL
      Energy Supply
            
            
            (1,222
            )
            
            
            (393
            )





Economic
Activity





PPL and
PPL Energy Supply have entered into energy derivative transactions that
economically hedge a specific risk, but do not qualify for hedge accounting
under SFAS 133 or hedge accounting was not elected.  Included in these
transactions are certain load-following energy obligations and related supply
contracts, sold call options and spark spreads on PPL Energy Supply's generating
plants, hedge FTRs, crude oil swaps to hedge rail transportation charges and the
mark-to-market on dedesignated cash flow hedges that are still probable of going
to delivery.  Although these transactions do not receive hedge
accounting treatment, they are considered non-trading activity.  In
addition, the ineffective portion of cash flow hedges is included in economic
activity.  The unrealized gains and (losses) on this activity is
reflected in the Statements of Income as follows.


Unrealized
      Gains (Losses)Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007RevenuesUnregulated
      retail electric and gas
            
            $
            (1
            )
            
            
            
            
            
            $
            (1
            )Wholesale
      energy marketing
            
            
            (616
            )
            
            $
            8
            
            
            
            (796
            )
            
            $
            (99
            )ExpensesFuel
            
            
            (1
            )
            
            
            
            
            
            
            2Energy
      purchases
            
            
            623
            
            
            
            14
            
            
            
            885
            
            
            
            134





The net
unrealized losses recorded in "Wholesale energy marketing" resulted primarily
from certain load-following sales contracts in which PPL and PPL Energy Supply
did not elect the normal purchase/normal sale exception.  The net
unrealized gains recorded in "Energy purchases" resulted primarily from certain
purchase contracts to supply the load-following contracts noted above in which
PPL and PPL Energy Supply did not elect hedge treatment.  Since power
prices have increased significantly during the period, these fixed-price
contracts have resulted in substantial unrealized gains and
losses.





Credit
Concentration





(PPL,
PPL Energy Supply and PPL Electric)





PPL and
its subsidiaries enter into contracts with many entities for the purchase and
sale of energy.  Many of these contracts are considered a normal part
of doing business and, as such, the fair value of these contracts is not
reflected in the financial statements.  However, the fair value of
these contracts is considered when committing to new business from a credit
perspective.





PPL and
its subsidiaries have credit exposure to energy trading partners.  The
majority of these exposures are the fair value of multi-year contracts for
energy sales and purchases.  Therefore, if these counterparties fail
to perform their obligations under such contracts, PPL and its subsidiaries
would not experience an immediate financial loss but would experience lower
revenues or higher costs in future years to the extent that replacement sales or
purchases could not be made at the same prices as those under the defaulted
contracts.





PPL and
its subsidiaries generally have the right to request collateral, in the forms of
cash or letters of credit, from their counterparties in the event that the
counterparties' credit ratings fall below investment grade or their exposure
exceeds an established credit limit.  It is also the policy of PPL and
its subsidiaries to enter into netting agreements with their counterparties to
limit credit exposure.





(PPL)





At June
30, 2008, PPL had credit exposure of $3.9 billion to energy trading partners,
excluding the effects of netting arrangements.  As a result of netting
and collateral arrangements PPL's credit exposure was reduced to $926
million.  One of the counterparties accounted for 29% of this exposure
and no other individual counterparty accounted for more than 6% of the
exposure.  The top ten counterparties accounted for $609 million, or
66%, of the total exposure.  Eight of these counterparties had an
investment grade credit rating from S&P and accounted for 49% of the top 10
exposure.  The two counterparties that are not rated investment grade
have posted collateral in the form of a letter of credit as per the terms and
conditions of their respective contracts, and both counterparties are current on
their obligations.





(PPL
Energy Supply)





At June
30, 2008, PPL Energy Supply had credit exposure of $3.9 billion to energy
trading partners, excluding the effects of netting arrangements.  As a
result of netting and collateral arrangements, PPL Energy Supply's credit
exposure was reduced to $763 million.  One of the counterparties
accounted for 36% of this exposure and no other individual counterparty
accounted for more than 7% of the exposure.  The top ten
counterparties accounted for $566 million, or 74%, of the total
exposure.  Eight of these counterparties had an investment grade
credit rating from S&P and accounted for 46% of the top 10
exposure.  Two of the counterparties that are not rated investment
grade have posted collateral in the form of a letter of credit as per the terms
and conditions of their respective contracts, and both counterparties are
current on their obligations.





PPL
Energy Supply has credit exposure to PPL Electric under the long-term contract
for PPL EnergyPlus to supply PPL Electric's PLR load.  This exposure
is excluded from the exposure discussed above.  See Note 11 for
additional information on this related party credit exposure.





(PPL
Electric)





At June
30, 2008, PPL Electric had credit exposure of $163 million as a result of its
two solicitation bids in 2007 and one solicitation bid in 2008 for the 2010 PLR
supply.  The successful bidders were eight suppliers, all of which had
an investment grade credit rating from S&P.





PPL
EnergyPlus was one of the successful bidders in the first competitive
solicitation process.  PPL Electric has credit exposure to PPL Energy
Supply under the PLR contracts that expire December 31, 2009, and the first
competitive solicitation.  These exposures are excluded from the
exposure discussed above.  See Note 11 for additional information on
the related party credit exposure.





15.
            Goodwill
      and Other Intangible Assets





Goodwill
 
 (PPL
and PPL Energy Supply)
 
 The
changes in the carrying amounts of goodwill by segment were:
 
 Supply
              
              International
      Delivery
              
              TotalBalance
      at December 31, 2007
              $
              94
              
              
              $
              897
              
              
              $
              991Effect
      of foreign currency exchange rates
              
              
              
              
              
              (35
              )
              
              
              (35
              )Balance
      at June 30, 2008
              $
              94
              
              
              $
              862
              
              
              $
              956
 
 (PPL)
 
 At
June 30, 2008 and December 31, 2007, $55 million of goodwill has been
classified as "Assets held for sale" on the Balance Sheets due to the
anticipated sale of the natural gas distribution and propane
businesses.  These businesses are a component of the Pennsylvania
Delivery segment.  See Note 8 for additional
information.
 
 Other
Intangible Assets
 
 (PPL)
 
 The gross
carrying amount and the accumulated amortization of other intangible assets
were:
 
 June
      30, 2008
              
              December
      31, 2007Gross
      Carrying
                Amount
              
              Accumulated
                Amortization
              
              Gross
      Carrying
                Amount
              
              Accumulated
                AmortizationSubject
      to amortization:Land
      and transmission rights
              
              $
              237
              
              
              $
              110
              
              
              $
              235
              
              
              $
              108Emission
      allowances (a)
              
              
              127
              
              
              
              
              
              
              
              123Lease
      arrangement and other (b)
              
              
              332
              
              
              
              42
              
              
              
              109
              
              
              
              41Not
      subject to amortization due to indefinite life:Land
      and transmission rights
              
              
              16
              
              
              
              
              
              
              
              15Easements
              
              
              78
              
              
              
              
              
              
              
              78$
              790
              
              
              $
              152
              
              
              $
              560
              
              
              $
              149
 
 (a)
              
              Removed
      from the Balance Sheets and expensed when consumed or
  sold.(b)
              
              Includes
      costs for the development of licenses, the most significant of which is
      the COLA (see Note 8 for additional information).  These costs
      are expected to be amortized once the related assets are placed in
      service.
 
 Current
intangible assets and long-term intangible assets are included in "Other
intangibles" in their respective areas on the Balance Sheets.
 
 The
increase in "Lease arrangement and other" is primarily related to an intangible
asset with an estimated amortization period of 13 years.
  Amortization
expense, excluding consumption of emission allowances, is estimated at $11
million for the remainder of 2008 and $22 million per year for 2009 through
2013.
 
 (PPL
Energy Supply)
 
 The gross
carrying amount and the accumulated amortization of other intangible assets
were:
 
 June
      30, 2008
              
              December
      31, 2007Gross
      Carrying
                Amount
              
              Accumulated
                Amortization
              
              Gross
      Carrying
                Amount
              
              Accumulated
                AmortizationLand
      and transmission rights
              
              $
              43
              
              
              $
              22
              
              
              $
              43
              
              
              $
              22Emission
      allowances (a)
              
              
              127
              
              
              
              
              
              
              
              123Easements
      (b)
              
              
              78
              
              
              
              
              
              
              
              78Lease
      arrangement and other (c)
              
              
              332
              
              
              
              42
              
              
              
              109
              
              
              
              41$
              580
              
              
              $
              64
              
              
              $
              353
              
              
              $
              63
 
 (a)
              
              Removed
      from the Balance Sheets and expensed when consumed or
  sold.(b)
              
              Not
      subject to amortization due to indefinite life.(c)
              
              Includes
      costs for the development of licenses, the most significant of which is
      the COLA (see Note 8 for additional information).  These costs
      are expected to be amortized once the related assets are placed in
      service.
 
 Current
intangible assets and long-term intangible assets are included in "Other
intangibles" in their respective areas on the Balance Sheets.
 
 The
increase in "Lease arrangement and other" is primarily related to an intangible
asset with an estimated amortization period of 13 years.
  Amortization
expense, excluding consumption of emission allowances, is estimated at $10
million for the remainder of 2008 and $19 million per year for 2009 through
2013.


16.
            Asset
      Retirement Obligations





(PPL
and PPL Energy Supply)





The
change in the carrying amounts of the AROs was:





AROs
      at December 31, 2007
            
            $
            376Liabilities
      incurred
            
            
            2Accretion
      expense
            
            
            14Obligations
      settled
            
            
            (10
            )AROs
      at June 30, 2008
            
            $
            382





Changes
in ARO costs and settlement dates, which affect the carrying value of various
AROs, are reviewed periodically to ensure that any material changes are
incorporated into the latest estimates of the obligation.





Funds in
the nuclear plant decommissioning trust are legally restricted for purposes of
settling PPL's and PPL Energy Supply's ARO related to the decommissioning of the
Susquehanna nuclear station.  PPL Electric collects authorized nuclear
decommissioning costs through the CTC.  These revenues are passed on
to PPL EnergyPlus under the power supply agreements between PPL Electric and PPL
EnergyPlus.  Similarly, these revenues are passed on to PPL
Susquehanna under a power supply agreement between PPL EnergyPlus and PPL
Susquehanna.  These revenues, less applicable taxes, are used to fund
the nuclear plant decommissioning trust funds and can only be used for future
decommissioning costs.  The aggregate fair value of the nuclear plant
decommissioning trust funds was $524 million as of June 30, 2008, and $555
million as of December 31, 2007.  See Note 13 for additional
information on the June 30, 2008 fair value and Note 12 for information
regarding the impairment of certain securities held by the trust.





17.
            Restricted
      Cash and Cash Equivalents





(PPL,
PPL Energy Supply and PPL Electric)





The
following table details the components of restricted cash and cash equivalents
by reporting entity and by type.





June 30,
      2008PPL
            
            PPL
      Energy Supply
            
            PPL
      ElectricCurrent:Collateral
      for letters of credit (a)
            
            $
            52
            
            
            
            
            
            
            $
            52Deposits
      for trading purposes with NYMEX broker (b)
            
            
            414
            
            
            $
            414Counterparty
      collateral
            
            
            9
            
            
            
            9Client
      deposits
            
            
            11WPD
      customer deposits
            
            
            3
            
            
            
            3Total
      current
            
            
            489
            
            
            
            426
            
            
            
            52Noncurrent:Required
      deposits of WPD (c)
            
            
            21
            
            
            
            21PPL
      Transition Bond Company Indenture reserves (d)
            
            
            43
            
            
            
            
            
            
            
            43Escrowed
      funds related to Exempt Facility Revenue Bonds
            
            
            10
            
            
            
            10Total
      noncurrent
            
            
            74
            
            
            
            31
            
            
            
            43$
            563
            
            
            $
            457
            
            
            $
            95





December
      31, 2007PPL
            
            PPL
      Energy Supply
            
            PPL
      ElectricCurrent:Collateral
      for letters of credit (a)
            
            $
            41
            
            
            
            
            
            
            $
            41Deposits
      for trading purposes with NYMEX broker (b)
            
            
            119
            
            
            $
            119Counterparty
      collateral
            
            
            26
            
            
            
            26Client
      deposits
            
            
            16Miscellaneous
            
            
            1
            
            
            
            1
            
            
            
            1Total
      current
            
            
            203
            
            
            
            146
            
            
            
            42Noncurrent:Required
      deposits of WPD (c)
            
            
            18
            
            
            
            18PPL
      Transition Bond Company Indenture reserves (d)
            
            
            42
            
            
            
            
            
            
            
            42Escrowed
      funds related to Exempt Facility Revenue Bonds
            
            
            19
            
            
            
            19Total
      noncurrent
            
            
            79
            
            
            
            37
            
            
            
            42$
            282
            
            
            $
            183
            
            
            $
            84





(a)
            
            Includes
      a deposit with a financial institution of funds from the asset-backed
      commercial paper program to fully collateralize $41 million of letters of
      credit at June 30, 2008 and December 31, 2007.  See Note 7
      for further discussion on the asset-backed commercial paper
      program.(b)
            
            Represents
      margin deposits related to hedging activities.  The increase in
      2008 is attributable to increases in commodity prices and transaction
      volume.(c)
            
            Includes
      insurance reserves of $20 million at June 30, 2008 and $17 million at
      December 31, 2007.(d)
            
            Credit
      enhancement for PPL Transition Bond Company's $2.4 billion Series 1999-1
      Bonds to protect against losses or delays in scheduled
      payments.





18.
            Leases





(PPL and
PPL Energy Supply)





In June
2008, PPL EnergyPlus executed an agreement to acquire the rights to an existing
long-term tolling agreement associated with the capacity and energy of a 664 MW
natural gas-fired power plant in Lebanon, Pennsylvania.  Under the
agreement, PPL EnergyPlus has control over the plant's dispatch into the
electricity grid and will supply the natural gas necessary to operate the
plant.  The tolling agreement extends through 2021 and contains a
lease that will be accounted for as an operating lease.  The fixed
payments under the tolling agreement are subject to adjustment based upon
changes to the facility capacity rating, which may occur up to twice per
year.  Certain costs within the tolling agreement, primarily non-lease
costs, are subject to escalation.





Total
future minimum lease payments for all operating leases, including this
agreement, are estimated to be:





Remainder
      of 2008
            
            $
            562009
            
            
            982010
            
            
            892011
            
            
            902012
            
            
            872013
            
            
            99Thereafter
            
            
            478$
            997





19.
            New
      Accounting Standards Pending
Adoption





(PPL,
PPL Energy Supply and PPL Electric)





FSP
APB 14-1





In May
2008, the FASB issued FSP APB 14-1.  FSP APB 14-1 requires an issuer
to separately account for the liability and equity components of convertible
debt instruments that may be settled in cash (or other assets) upon conversion
in a manner that reflects the issuer's nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods.  The discount that
results from separating the liability and equity components will be amortized
over the life of the debt and recognized as interest expense.





PPL and
its subsidiaries will adopt FSP APB 14-1 effective January 1,
2009.  Early adoption is not permitted.  Retrospective
application to all prior periods presented is required.  The
cumulative effect of the change in accounting principle on periods prior to
those presented will be recognized as of the beginning of the first period
presented as an offsetting adjustment to opening retained earnings for that
period.





FSP APB
14-1 is applicable to PPL Energy Supply's 2-5/8% Convertible Senior Notes due
2023 (Convertible Senior Notes), which upon conversion required cash settlement
of the principal amount and permitted settlement of any conversion premium in
cash or PPL common stock.





During
the six months ended June 30, 2008, all of the Convertible Senior Notes were
either converted at the election of the holders or redeemed at par as a result
of PPL Energy Supply calling the notes for redemption.  See Note 7 for
additional information about these Convertible Senior Notes.  Upon
adoption, FSP APB 14-1 will require only retrospective application with regard
to the Convertible Senior Notes since none of these notes are
outstanding.  The potential impact of adoption has not yet been
determined, but it could be material.





FSP
EITF 03-6-1





In June
2008, the FASB issued FSP EITF 03-6-1.  FSP EITF 03-6-1 addresses
whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in
the earnings allocation in computing EPS under the two-class method described in
SFAS 128.  FSP EITF 03-6-1 requires companies to include in the
computation of EPS pursuant to the two-class method, unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend
equivalents.





FSP EITF
03-6-1 applies to restricted stock and restricted stock units granted under
PPL's stock-based compensation plans.





PPL and
its subsidiaries will apply FSP EITF 03-6-1 retrospectively, effective January
1, 2009.  Early application is not permitted.  The potential
impact of adoption has not yet been determined, but it could be
material.





SFAS
141(R)





In
December 2007, the FASB issued SFAS 141(R), which replaces SFAS
141.  PPL and its subsidiaries will adopt SFAS 141(R) prospectively,
effective January 1, 2009.  The most significant changes to business
combination accounting pursuant to SFAS 141(R) includes requirements or
amendments to:





·
            recognize
      with certain exceptions, 100% of the fair values of assets acquired,
      liabilities assumed, and noncontrolling interests in acquisitions of less
      than a 100% controlling interest when the acquisition constitutes a change
      in control of the acquired entity;·
            measure
      acquirer shares issued in consideration for a business combination at fair
      value on the acquisition date;·
            recognize
      contingent consideration arrangements at the acquisition-date fair values,
      with subsequent changes in fair value generally reflected through
      earnings;·
            recognize
      pre-acquisition loss and gain contingencies at their acquisition-date fair
      values, with certain exceptions;·
            capitalize
      in-process research and development assets acquired;·
            expense,
      as incurred, acquisition-related transaction costs;·
            capitalize
      acquisition-related restructuring costs only if the criteria in SFAS 146
      are met as of the acquisition date;·
            recognize
      changes that result from a business combination transaction in an
      acquirer's existing income tax valuation allowances and tax uncertainty
      accruals as adjustments to income tax expense;·
            recognize
      changes in unrecognized tax benefits acquired in a business combination,
      including business combinations that have occurred prior to January 1,
      2009, in income tax expense rather than in goodwill;
and·
            provide
      guidance on the impairment testing of acquired research and development
      intangible assets and assets that the acquirer intends not to
      use.





The
adoption of SFAS 141(R) will impact the accounting for business combinations for
which the acquisition date is on or after January 1, 2009.  As noted
above, it will 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 is
prohibited.  The potential impact of adoption to the financial
statements is not yet determinable, but it could be material.





SFAS
157, as amended





See Note
2 for information regarding PPL and its subsidiaries' election to defer the
application of SFAS 157, as amended, for eligible nonfinancial assets and
liabilities.





SFAS
160





In
December 2007, the FASB issued SFAS 160.  The objective of SFAS 160 is
to improve the relevancy, comparability, and transparency of the financial
information an entity provides when it has a noncontrolling interest in a
subsidiary and when it deconsolidates a subsidiary.  SFAS 160 requires
that:





·
            The
      ownership interests in subsidiaries held by parties other than the parent
      be clearly identified, labeled, and presented in the consolidated
      statement of financial position within equity, but separate from the
      parent's equity.·
            The
      amount of consolidated net income attributable to the parent and to the
      noncontrolling interest be clearly identified and presented on the face of
      the consolidated statement of income.·
            Changes
      in a parent's ownership interest while the parent retains its controlling
      financial interest in its subsidiary be accounted for
      consistently.  A parent's ownership interest in a subsidiary
      changes if the parent purchases additional ownership interests in its
      subsidiary or if the parent sells some of its ownership interests in its
      subsidiary.  It also changes if the subsidiary reacquires some
      of its ownership interests or the subsidiary issues additional ownership
      interests.  All of those transactions are economically similar,
      and SFAS 160 requires that they be accounted for similarly, as equity
      transactions.·
            When
      a subsidiary is deconsolidated, any retained noncontrolling equity
      investment in the former subsidiary be initially measured at fair
      value.  The gain or loss on the deconsolidation of the
      subsidiary is measured using the fair value of any noncontrolling equity
      investment rather than the carrying amount of that retained
      investment.·
            Entities
      provide sufficient disclosures that clearly identify and distinguish
      between the interests of the parent and the interests of the
      noncontrolling owners.





PPL and
its subsidiaries will adopt SFAS 160 prospectively, effective January 1, 2009,
concurrent with the adoption of SFAS 141(R), except for the presentation and
disclosure requirements, which require retrospective application.  The
potential impact of adoption to the financial statements is not yet
determinable, but it could be material.





SFAS
161





In March
2008, the FASB issued SFAS 161, which applies to all derivative instruments,
including bifurcated derivative instruments and nonderivative instruments that
are designated and qualify as hedging instruments pursuant to SFAS 133, as well
as related hedged items accounted for under SFAS 133.  SFAS 161 requires
entities to expand its disclosures to provide greater transparency about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under SFAS 133 and (c) how derivative
instruments and related hedged items affect an entity's financial position,
results of operations and cash flows.





PPL and
its subsidiaries will adopt SFAS 161 effective January 1, 2009.  SFAS
161 permits early adoption and encourages, but does not require, comparative
disclosures for earlier periods at initial adoption.  SFAS 161 was
issued to provide greater transparency by enhancing existing disclosures;
therefore, the adoption is not expected to have a material impact on PPL and its
subsidiaries' financial statements.





PPL
CORPORATION AND SUBSIDIARIES




Item
2.  Management's Discussion and Analysis of Financial Condition and
Results of Operations





Overview





PPL is an
energy and utility holding company with headquarters in Allentown,
Pennsylvania.  In PPL's 2007 Form 10-K, descriptions of its domestic
and international businesses are found in "Item 1. Business -
Background."  Through its subsidiaries, PPL is primarily engaged in
the generation and marketing of electricity in two key markets - the
northeastern and western U.S. - and in the delivery of electricity in
Pennsylvania and the U.K.  PPL's reportable segments are Supply,
International Delivery and Pennsylvania Delivery.  In 2007, PPL sold
its regulated electricity delivery businesses in Latin America, which were
included in the International Delivery segment.  In July 2007, PPL
announced its intention to sell its natural gas distribution and propane
businesses, which are included in the Pennsylvania Delivery
segment.  See Note 8 to the Financial Statements for information on
the sales and planned divestitures.  See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview" in PPL's 2007 Form 10-K for a discussion of PPL's strategy and the
risks and the challenges that it faces in its business.  See
"Forward-Looking Information," Note 10 to the Financial Statements and the rest
of Item 2 in this Form 10-Q and "Item 1A. Risk Factors" and the rest of Item 7
in PPL's 2007 Form 10-K for more information concerning the material risks and
uncertainties that PPL faces in its businesses and with respect to its future
earnings.





The
following information should be read in conjunction with PPL's Condensed
Consolidated Financial Statements and the accompanying Notes and with PPL's 2007
Form 10-K.





Terms and
abbreviations are explained in the glossary.  Dollars are in millions,
except per share data, unless otherwise noted.





Results of
Operations





The
following discussion begins with a summary of PPL's
earnings.  "Results of Operations" continues with a review of results
by reportable segment and a description of key factors by segment that
management expects may impact future earnings.  This section ends with
explanations of significant changes in principal items on PPL's Statements of
Income, comparing the three and six months ended June 30, 2008, with the
same periods in 2007.





Earnings





Net
income and the related EPS were:





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Net
      income
            
            $
            190
            
            
            $
            345
            
            
            $
            450
            
            
            $
            548EPS
      - basic
            
            $
            0.51
            
            
            $
            0.89
            
            
            $
            1.21
            
            
            $
            1.42EPS
      - diluted
            
            $
            0.50
            
            
            $
            0.88
            
            
            $
            1.19
            
            
            $
            1.41





The
changes in net income from period to period were, in part, attributable to
several special items that management considers significant.  Details
of these special items are provided within the review of each segment's
earnings.





The
period-to-period changes in significant earnings components are explained in the
"Statement of Income Analysis."





The
results for interim periods can be disproportionately influenced by various
factors and developments and by seasonal variations, and as such, the results of
operations for interim periods do not necessarily indicate results or trends for
the year or for future operating results.





Segment
Results





Net
income by segment was:





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Supply
            
            $
            97
            
            
            $
            132
            
            
            $
            199
            
            
            $
            249International
      Delivery
            
            
            62
            
            
            
            183
            
            
            
            160
            
            
            
            211Pennsylvania
      Delivery
            
            
            31
            
            
            
            30
            
            
            
            91
            
            
            
            88Total
            
            $
            190
            
            
            $
            345
            
            
            $
            450
            
            
            $
            548





Supply
Segment





The
Supply segment primarily consists of the domestic energy marketing, domestic
generation and domestic development operations of PPL Energy
Supply.  In August 2007, PPL completed the sale of its domestic
telecommunication operations.  See Note 8 to the Financial Statements
for additional information.





Supply
segment net income was:





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Energy
      revenuesExternal
      (a)
            
            $
            (88
            )
            
            $
            410
            
            
            $
            202
            
            
            $
            690Intersegment
            
            
            428
            
            
            
            422
            
            
            
            917
            
            
            
            903Energy-related
      businesses
            
            
            122
            
            
            
            176
            
            
            
            229
            
            
            
            351Total
      operating revenues
            
            
            462
            
            
            
            1,008
            
            
            
            1,348
            
            
            
            1,944Fuel
      and energy purchasesExternal
      (a)
            
            
            (150
            )
            
            
            345
            
            
            
            107
            
            
            
            649Intersegment
            
            
            30
            
            
            
            38
            
            
            
            59
            
            
            
            75Other
      operation and maintenance
            
            
            207
            
            
            
            178
            
            
            
            434
            
            
            
            353Depreciation
            
            
            50
            
            
            
            42
            
            
            
            94
            
            
            
            83Taxes,
      other than income
            
            
            7
            
            
            
            10
            
            
            
            9
            
            
            
            18Energy-related
      businesses
            
            
            116
            
            
            
            197
            
            
            
            221
            
            
            
            394Total
      operating expenses
            
            
            260
            
            
            
            810
            
            
            
            924
            
            
            
            1,572Other
      Income - net
            
            
            4
            
            
            
            8
            
            
            
            4
            
            
            
            12Interest
      Expense
            
            
            50
            
            
            
            40
            
            
            
            91
            
            
            
            75Income
      Taxes
            
            
            58
            
            
            
            34
            
            
            
            137
            
            
            
            59Minority
      Interest
            
            
            1
            
            
            
            
            
            
            
            1
            
            
            
            1Net
      Income
            
            $
            97
            
            
            $
            132
            
            
            $
            199
            
            
            $
            249





(a)
            
            Includes
      unrealized gains and losses from economic hedge activity.  See
      Note 14 to the Financial Statements for additional
      information.





The
after-tax change in net income between these periods was due to the following
factors.





June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedEastern
      U.S. non-trading margins
            
            $
            (24
            )
            
            $
            (36
            )Western
      U.S. non-trading margins
            
            
            1
            
            
            
            2Net
      energy trading margins
            
            
            25
            
            
            
            19Taxes,
      other than income
            
            
            1
            
            
            
            5Depreciation
            
            
            (5
            )
            
            
            (7
            )Other
      operating expenses
            
            
            (2
            )
            
            
            (12
            )Earnings
      from synfuel projects
            
            
            (7
            )
            
            
            (34
            )Realized
      earnings on nuclear plant decommissioning trust
            
            
            
            
            
            
            (3
            )Financing
      costs
            
            
            (5
            )
            
            
            (9
            )Other
            
            
            (6
            )
            
            
            (3
            )Special
      items
            
            
            (13
            )
            
            
            28$
            (35
            )
            
            $
            (50
            )





·
            See
      "Domestic Gross Energy Margins" for an explanation of non-trading margins
      by geographic region and for an explanation of net energy trading
      margins.·
            Higher
      other operating expenses for the six months ended June 30, 2008, were
      attributable to higher operating costs at the fossil/hydro generating
      stations (including higher outage costs at the Eastern U.S. fossil/hydro
      stations) and higher operating costs in the energy marketing
      business.  Partially offsetting these increases were lower
      outage costs at the Susquehanna nuclear station.·
            Lower
      earnings contribution from synfuel projects for both periods was the
      result of the expiration of federal tax credits and closure of the synfuel
      facilities at the end of 2007.





The
following after-tax amounts, which management considers special items, also had
a significant impact on the Supply segment earnings.  See the
indicated Notes to the Financial Statements for additional
information.





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Mark-to-market
      adjustments from certain economic hedges (a)
            
            $
            4
            
            
            $
            16
            
            
            $
            54
            
            
            $
            26Impairment
      of nuclear plant decommissioning trust investments (Note
    12)
            
            
            (4
            )
            
            
            
            
            
            
            (4
            )Sale
      of domestic telecommunication operations (Note 8)
            
            
            
            
            
            
            (2
            )
            
            
            
            
            
            
            (20
            )PJM
      billing dispute (b)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1
            )Off-site
      remediation of ash basin leak (Note 10)
            
            
            1
            
            
            
            
            
            
            
            1Colstrip
      groundwater litigation (Note 10)
            
            
            
            
            
            
            
            
            
            
            (5
            )Synthetic
      fuel tax adjustment (Note 10)
            
            
            
            
            
            
            
            
            
            
            (13
            )Total
            
            $
            1
            
            
            $
            14
            
            
            $
            33
            
            
            $
            5





(a)
            
            These
      economic hedge transactions do not qualify for hedge accounting under SFAS
      133, or hedge accounting was not elected; however, they economically hedge
      a specific risk and do not represent speculative trading
      activity.  These transactions are highly probable of going to
      physical delivery; therefore, the mark-to-market gains or losses on these
      transactions will reverse by the time the transactions settle in the
      future.  See "Domestic Gross Energy Margins by Region" and Note
      14 to the Financial Statements for additional information regarding
      economic activity.(b)
            
            Represents
      additional interest related to the settlement of this litigation in
      2007.





Outlook





Excluding
special items, PPL projects lower earnings for its Supply segment in 2008
compared with 2007 as a result of the loss of synfuel-related benefits and
higher depreciation and operating expenses for scrubbers that have been or will
be installed during 2008 at its Montour and Brunner Island coal-fired power
plants.  PPL now expects its energy margins to be flat in 2008
compared with 2007.  During the second half of 2008, increased margins
as a result of higher-valued wholesale energy contracts and higher expected
base-load generation are expected to be offset by higher coal commodity and
transportation costs, and lower expected margins from PPL's marketing and
trading activities as a result of reduced liquidity in certain energy
markets.
 
 The
earnings projection for 2008 does not include the impact of a potential
impairment of PPL's emission allowances.  In July 2008, the United
States Court of Appeals for the D.C. Circuit invalidated the EPA's Clean Air
Interstate Rule (CAIR), stating that a regional cap-and-trade program cannot be
used to facilitate attainment of the ozone and fine particulates
standards.
 
 As a
result of this Court decision, PPL now anticipates that its annual nitrogen
oxide allowances and its sulfur dioxide allowances may be
impaired.  The combined book value for these emission allowances was
approximately $100 million at June 30, 2008, excluding the seasonal nitrogen
oxide allowances unaffected by the Court's ruling.  The amount of any
third quarter 2008 impairment charge will be based on, among other factors, an
assessment of the emission allowances PPL expects to consume in future periods,
and prevailing market prices.  As a result of the Court's decision,
PPL also is reviewing aspects of its previously announced program to install
certain pollution control equipment to meet the CAIR requirements.  In
addition, as a part of the analysis of the potential financial impacts of this
decision, PPL is reviewing the relevant contracts for the purchase of these
allowances.  See Note 10 to the Financial Statements for additional
information.
 
 Although
the annual planning cycle is not yet completed, PPL expects 2009 earnings for
its Supply segment to be lower than projected 2008 earnings, excluding special
items.  Factors contributing to these lower earnings are rising
delivered fuel prices and the completion of the scrubber construction program,
coupled with lower sulfur dioxide allowance prices.  PPL's ability to
recover these fuel cost increases is constrained by the existence of the
fixed-price PLR contract that expires at the end of 2009.


As
discussed in "Item 1A. Risk Factors" in PPL's 2007 Form 10-K, activities by the
FERC, other governmental authorities and other involved parties can have a
significant effect on market prices for wholesale electricity, and thus on the
margins that PPL EnergyPlus achieves on its future sales of
energy.  In April 2008, the FERC denied PJM's request to increase the
Cost of New Entry element of the PJM capacity pricing formula.  In a
separate action, in connection with Duquesne Light Company's (Duquesne) decision
to leave PJM, in April 2008 the FERC ruled that PJM may grant capacity resources
in the Duquesne zone transmission rights that would facilitate inclusion of such
capacity in PJM's Reliability Pricing Model (RPM) capacity markets, beginning
with the 2011-2012 planning year auction, notwithstanding that such capacity
would be treated as external generation to PJM at the time it had to be
delivered.  In response, PJM has indicated that it will grant
generators in the Duquesne zone of PJM the necessary transmission
rights.  These FERC and PJM actions reduced capacity prices for the
2011-2012 RPM capacity auction that took place in May 2008 and could reduce
capacity prices for future RPM capacity auctions.  Because a large
portion of PPL's generating capacity is located in PJM, the impact of any such
reduced RPM capacity prices on PPL could be material.  PPL cannot
predict the ultimate outcome of these or related FERC proceedings and the impact
on capacity prices in PJM or on PPL's financial results.  See Note 10
to the Financial Statements for information on recent FERC litigation related to
the RPM pricing model.





International Delivery
Segment





The
International Delivery segment includes operations of the international energy
businesses of PPL Global that are primarily focused on the distribution of
electricity.  PPL Global's major remaining international business is
located in the U.K.  In 2007, PPL completed the sale of its Latin
American operating businesses.  In the first quarter of 2008, PPL
Global recognized income tax adjustments and other expenses in Discontinued
Operations as the dissolution of the remaining Latin American holding companies
commenced.  PPL Global may recognize additional adjustments and/or
expenses in Discontinued Operations until this process is
complete.  See Note 8 to the Financial Statements for additional
information.





The
International Delivery segment results in 2008 and 2007 reflect the
reclassification of Latin American revenues and expenses to Discontinued
Operations.





International
Delivery segment net income was:





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Utility
      revenues
            
            $
            211
            
            
            $
            218
            
            
            $
            452
            
            
            $
            434Energy-related
      businesses
            
            
            9
            
            
            
            9
            
            
            
            18
            
            
            
            19Total
      operating revenues
            
            
            220
            
            
            
            227
            
            
            
            470
            
            
            
            453Other
      operation and maintenance
            
            
            50
            
            
            
            69
            
            
            
            96
            
            
            
            125Depreciation
            
            
            35
            
            
            
            35
            
            
            
            71
            
            
            
            78Taxes,
      other than income
            
            
            17
            
            
            
            16
            
            
            
            34
            
            
            
            32Energy-related
      businesses
            
            
            3
            
            
            
            4
            
            
            
            6
            
            
            
            9Total
      operating expenses
            
            
            105
            
            
            
            124
            
            
            
            207
            
            
            
            244Other
      Income - net
            
            
            1
            
            
            
            6
            
            
            
            4
            
            
            
            17Interest
      Expense
            
            
            34
            
            
            
            45
            
            
            
            72
            
            
            
            94Income
      Taxes
            
            
            20
            
            
            
            (18
            )
            
            
            40
            
            
            
            (3
            )Income
      from Discontinued Operations
            
            
            
            
            
            
            101
            
            
            
            5
            
            
            
            76Net
      Income
            
            $
            62
            
            
            $
            183
            
            
            $
            160
            
            
            $
            211





The
after-tax change in net income between these periods was due to the following
factors, including Discontinued Operations.





June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedU.K.:Delivery
      margins
            $
            2
            
            
            $
            18Depreciation
            
            
            
            
            
            5Other
      operating expenses
            
            5
            
            
            
            11Interest
      expense
            
            3
            
            
            
            6Income
      taxes
            
            (1
            )
            
            
            12Foreign
      currency exchange rates
            
            1
            
            
            
            2Hyder
      liquidation distributions (Note 8)
            
            (1
            )
            
            
            (3
            )Gain
      on transfer of equity investment (Note 8)
            
            
            
            
            
            (5
            )Other
            
            (1
            )
            
            
            (4
            )Discontinued
      operations (Note 8)
            
            (18
            )
            
            
            (28
            )Change
      in tax reserves (Note 5)
            
            (31
            )
            
            
            (31
            )Other
            
            3
            
            
            
            9Special
      item
            
            (83
            )
            
            
            (43
            )$
            (121
            )
            
            $
            (51
            )





·
            The
      U.K.'s earnings for the six months ended June 30, 2008, were favorably
      impacted by higher delivery margins primarily due to higher prices, which
      include the annual regulatory adjustment for inflation.·
            Lower
      U.K. other operating expenses for both periods were primarily due to lower
      pension expense resulting from an improvement in the fair value of pension
      assets and an increase in the discount rate, partially offset by lower
      mortality rates.·
            Lower
      U.K. income taxes for the six months ended June 30, 2008, were primarily
      due to a favorable U.K. taxing authority determination in 2008 related to
      deductibility of imputed interest on a loan from
  Hyder.





The
following after-tax amount, which management considers a special item, also had
a significant impact on the International Delivery segment
earnings.





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Sale
      of Latin American businesses (Note 8)
            
            
            
            
            
            $
            83
            
            
            
            
            
            
            $
            43





Outlook





Excluding
special items, PPL projects the earnings of its International Delivery segment
will decline in 2008 compared with 2007.  This decline is a result of
the 2007 sale of PPL's Latin American businesses and higher U.S. income taxes
primarily driven by certain U.S. income tax benefits realized in
2007.  Partially offsetting the impact of these negative earnings
drivers are lower U.K. pension expense and lower financing costs.





Pennsylvania Delivery
Segment





The
Pennsylvania Delivery segment includes the regulated electric and gas delivery
operations of PPL Electric and PPL Gas Utilities.  In 2007, PPL
announced its intention to sell its natural gas distribution and propane
businesses.  See Note 8 to the Financial Statements for additional
information.





The
Pennsylvania Delivery segment results in 2008 and 2007 reflect the
reclassification of the natural gas distribution and propane businesses'
revenues and expenses to Discontinued Operations.





Pennsylvania
Delivery segment net income was:





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Operating
      revenuesExternal
            
            $
            770
            
            
            $
            760
            
            
            $
            1,649
            
            
            $
            1,625Intersegment
            
            
            30
            
            
            
            38
            
            
            
            59
            
            
            
            75Total
      operating revenues
            
            
            800
            
            
            
            798
            
            
            
            1,708
            
            
            
            1,700Fuel
      and energy purchasesExternal
            
            
            44
            
            
            
            50
            
            
            
            85
            
            
            
            101Intersegment
            
            
            428
            
            
            
            422
            
            
            
            917
            
            
            
            903Other
      operation and maintenance
            
            
            103
            
            
            
            100
            
            
            
            207
            
            
            
            194Amortization
      of recoverable transition costs
            
            
            68
            
            
            
            70
            
            
            
            144
            
            
            
            151Depreciation
            
            
            33
            
            
            
            33
            
            
            
            65
            
            
            
            65Taxes,
      other than income
            
            
            48
            
            
            
            46
            
            
            
            104
            
            
            
            100Total
      operating expenses
            
            
            724
            
            
            
            721
            
            
            
            1,522
            
            
            
            1,514Other
      Income - net
            
            
            3
            
            
            
            7
            
            
            
            8
            
            
            
            19Interest
      Expense
            
            
            26
            
            
            
            35
            
            
            
            55
            
            
            
            71Income
      Taxes
            
            
            19
            
            
            
            15
            
            
            
            49
            
            
            
            44Dividends
      on Preferred Securities
            
            
            4
            
            
            
            4
            
            
            
            9
            
            
            
            9Income
      from Discontinued Operations
            
            
            1
            
            
            
            
            
            
            
            10
            
            
            
            7Net
      Income
            
            $
            31
            
            
            $
            30
            
            
            $
            91
            
            
            $
            88





The
after-tax change in net income between these periods was due to the following
factors, including Discontinued Operations.





June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedDelivery
      revenues (net of CTC/ITC amortization, interest expense on transition
      bonds and ancillary charges)
            $
            6
            
            
            $
            16Operating
      expenses
            
            (3
            )
            
            
            (10
            )Other
            
            (1
            )
            
            
            (2
            )Special
      item
            
            (1
            )
            
            
            (1
            )$
            1
            
            
            $
            3





·
            Higher
      delivery revenues were attributable to normal load growth and a PPL
      Electric base rate increase effective January 1,
  2008.·
            Higher
      operating expenses were primarily due to increased usage of contractors
      and other inflationary increases.





The
following after-tax amount, which management considers a special item, also had
an impact on the Pennsylvania Delivery segment earnings.





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Impairment
      of gas and propane businesses (Note 8)
            
            $
            (1
            )
            
            
            
            
            
            $
            (1
            )





Outlook





Excluding
special items, PPL projects higher earnings for its Pennsylvania Delivery
segment, driven by higher revenues as a result of PPL Electric's new
distribution rates that became effective January 1, 2008, partially offset
by higher operating expenses.





In May
2007, the PUC approved final regulations regarding the obligation of
Pennsylvania electric utilities to provide default electricity supply in 2011
and beyond.  The new regulations provide that default service
providers will acquire electricity supply at prevailing market prices pursuant
to procurement and implementation plans approved by the PUC.  The
regulations also address the utilities' recovery of market supply
costs.  The final regulations became effective in September
2007.





In May
2007, the PUC approved PPL Electric's plan to procure default electricity supply
in 2007-2009 for retail customers who do not choose an alternative competitive
supplier in 2010 after PPL Electric's PLR contract with an affiliate
expires.  Under the plan, PPL Electric was approved to issue a series
of competitive bids for such supply in 2007, 2008 and 2009.  Each
solicitation is for 850 MW of expected generation supply, or one-sixth of PPL
Electric's expected PLR supply requirement in 2010.  The average
generation supply prices (per MWh), including Pennsylvania gross receipts tax
and an adjustment for line losses, for the first three solicitations were as
follows:





Residential
            
            Small
      Commercial and Small IndustrialJuly
      2007
            
            $
            101.77
            
            
            $
            105.11October
      2007
            
            
            105.08
            
            
            
            105.75March
      2008
            
            
            108.80
            
            
            
            108.76





As a
result, PPL Electric has contracted for one-half of the electricity supply it
expects to need for 2010.  If the average prices paid for the supply
purchased so far were to be the same for the remaining three purchases, the
average residential customer's monthly bill in 2010 would increase about 34.4%
over 2009 levels, while small commercial and small industrial bills would
increase in the range of 23.8% to 42.8%.  The estimated increases
include Pennsylvania gross receipts tax, an adjustment for line losses, PPL
Electric's January 1, 2008 rate increase and a court-ordered rate adjustment in
2007.  Actual 2010 prices will not be known until all six supply
purchases have been made.  The fourth solicitation will be conducted
in September 2008.





In
addition, the Governor of Pennsylvania proposed an Energy Independence Strategy
(Strategy) in early 2007 which, among other things, contains initiatives to
address PLR issues.  For example, under the Strategy as originally
proposed, retail customers could elect to phase-in over three years any initial
generation rate increase approved by the PUC.  Also, PLR providers
would be required to obtain a "least cost portfolio" of supply by purchasing
power in the spot market and through contracts of varying lengths, and the
provider would be required to procure energy conservation resources before
acquiring additional power.  In addition, PLR providers could enter
into long-term contracts with large energy users and alternative energy
developers.  It is uncertain at this time whether the details of
implementing the Strategy, including the issues of deferral of costs and
recovery of interest for the customer rate phase-in program and the timing of
PUC approval for PLR supply portfolios, will be delegated to the
PUC.





Components
of the Strategy are included in various bills.  One such bill that
passed in the Pennsylvania House of Representatives in February 2008 contains
conservation and demand-side management targets and mandatory deployment of
smart metering technology.  The bill provides for full and current
cost recovery through an energy efficiency and demand-side management recovery
mechanism.





In
September 2007, the Pennsylvania General Assembly (General Assembly) convened a
special session to address the proposals in the Governor's
Strategy.  The Pennsylvania Senate has formed a special committee to
manage legislation for the special legislative session.  As an
alternative to the $850 million Energy Independence Fund that the Governor
initially proposed, the General Assembly passed, and the Governor signed, a bill
that would create a $650 million fund for clean energy projects, conservation
and energy efficiency initiatives and pollution control projects that would be
funded through revenue bonds and gross receipts tax revenue, which will increase
as rate caps expire.





Since
September 2007, PPL and PPL Electric have been working with Pennsylvania
legislators, regulators and other stakeholders to develop constructive measures
to help customers transition to market rates after 2009, including a variety of
rate mitigation, educational and energy conservation programs, consistent with
several initiatives being developed by the state administration and
legislature.  In this regard, in November 2007, PPL Electric requested
the PUC to approve a plan under which its residential and small commercial
customers could smooth the impact of price increases when generation rate caps
expire in 2010.  The proposed phase-in plan provided that customers
could pay additional amounts on their electric bills beginning in mid-2008 and
continuing through 2009, and such additional amounts, plus accrued interest,
would be applied to their 2010 and 2011 electric bills, mitigating the impact of
the rate cap expiration.  PPL Electric requested expedited
consideration of the proposal by the PUC.  Ten parties filed responses
to PPL Electric's petition, primarily because the proposal offered the program
on an "opt-out" basis (i.e., customers would be enrolled automatically and
affirmatively have to "opt-out" if they choose not to
participate).  The parties negotiated a settlement
agreement  under which PPL Electric agreed to change the "opt-out"
approach to an "opt-in" approach (i.e., customers would have to affirmatively
enroll) and to make the program available to customers enrolled in budget
billing.  In March 2008, the Administrative Law Judge assigned to this
case recommended that the PUC approve the settlement agreement.  The
PUC has postponed taking action on the approval of the agreement.  In
May 2008, as a result of this postponement, PPL Electric announced that it must
delay the planned start date for the proposed phase-in option to allow adequate
time for PPL Electric to publicize the plan and for eligible customers to make
an informed choice about whether to enroll.  PPL Electric cannot
predict if and when the PUC will take further action in this
matter.





Certain
Pennsylvania legislators have introduced or are contemplating the introduction
of legislation to extend generation rate caps or otherwise limit cost recovery
through rates for Pennsylvania utilities beyond their transition periods, which
in PPL Electric's case would be December 31, 2009.  PPL and PPL
Electric have expressed strong concern regarding the severe potential
consequences of such legislation on customer service, system reliability,
adequate future generation supply and PPL Electric's financial
viability.  If such legislation or similar legislation is enacted, PPL
Electric could experience substantial operating losses, cash flow shortfalls and
other adverse financial impacts.  In addition, continuing uncertainty
regarding PPL Electric's ability to recover its market supply and other costs of
operation after 2009 could adversely impact its credit quality, financing costs
and availability of credit facilities necessary to operate its
business.  In addition, PPL and PPL Electric believe that such an
extension of rate caps, if enacted into law, would violate federal 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.





Statement
of Income Analysis --





Domestic
Gross Energy Margins





Non-GAAP Financial
Measure





The
following discussion includes financial information prepared in accordance with
GAAP, as well as a non-GAAP financial measure, "Domestic Gross Energy
Margins."  The presentation of "Domestic Gross Energy Margins" is
intended to supplement the investors' understanding of PPL's domestic
non-trading and trading activities by combining applicable income statement line
items and related adjustments to calculate a single financial
measure.  PPL believes that "Domestic Gross Energy Margins" is useful
and meaningful to investors because it provides them with the results of PPL's
domestic non-trading and trading activities as another criterion in making their
investment decisions.  PPL's management also uses "Domestic Gross
Energy Margins" in measuring certain corporate performance goals used in
determining variable compensation.  Other companies may use different
measures to present the results of their non-trading and trading
activities.  Additionally, "Domestic Gross Energy Margins" is not
intended to replace "Operating Income," which is determined in accordance with
GAAP, as an indicator of overall operating performance.  The following
table provides a reconciliation between "Domestic Gross Energy Margins" as
defined by PPL and "Operating Income."





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Operating
      Income (a)
            
            $
            393
            
            
            $
            378
            
            
            $
            873
            
            
            $
            767Adjustments:Energy-related
      businesses, net (b)
            
            
            (12
            )
            
            
            16
            
            
            
            (20
            )
            
            
            33Other
      operation and maintenance (a)
            
            
            360
            
            
            
            347
            
            
            
            737
            
            
            
            672Amortization
      of recoverable transition costs (a)
            
            
            68
            
            
            
            70
            
            
            
            144
            
            
            
            151Depreciation
      (a)
            
            
            118
            
            
            
            110
            
            
            
            230
            
            
            
            226Taxes,
      other than income (a)
            
            
            72
            
            
            
            72
            
            
            
            147
            
            
            
            150Revenue
      adjustments (c)
            
            
            (535
            )
            
            
            (511
            )
            
            
            (1,141
            )
            
            
            (1,056
            )Expense
      adjustments (c)
            
            
            (11
            )
            
            
            (15
            )
            
            
            (29
            )
            
            
            (33
            )Domestic
      gross energy margins
            
            $
            453
            
            
            $
            467
            
            
            $
            941
            
            
            $
            910





(a)
            
            As
      reported on the Statements of Income.(b)
            
            Amount
      represents the net of "Energy-related businesses" revenue and expense as
      reported on the Statements of Income.(c)
            
            The
      components of these adjustments are detailed in the table
      below.





The
following table provides the income statement line items and other adjustments
that comprise domestic gross energy margins.





Three
      Months Ended June 30,2008
            
            2007
            
            ChangeRevenueUtility
      (a)
            
            $
            981
            
            
            $
            977
            
            
            $
            4Unregulated
      retail electric and gas (a)
            
            
            33
            
            
            
            23
            
            
            
            10Wholesale
      energy marketing (a)
            
            
            (173
            )
            
            
            379
            
            
            
            (552
            )Net
      energy trading margins (a)
            
            
            52
            
            
            
            9
            
            
            
            43Revenue
      adjustments (b)WPD
      utility revenue
            
            
            (211
            )
            
            
            (218
            )
            
            
            7Domestic
      delivery component of utility revenue
            
            
            (310
            )
            
            
            (307
            )
            
            
            (3
            )Other
      utility revenue
            
            
            (14
            )
            
            
            (12
            )
            
            
            (2
            )Gains
      from sale of emission allowances (c)
            
            
            
            
            
            
            26
            
            
            
            (26
            )Total
      revenue adjustments
            
            
            (535
            )
            
            
            (511
            )
            
            
            (24
            )358
            
            
            
            877
            
            
            
            (519
            )ExpenseFuel
      (a)
            
            
            208
            
            
            
            202
            
            
            
            6Energy
      purchases (a)
            
            
            (314
            )
            
            
            193
            
            
            
            (507
            )Expense
      adjustments (b)Domestic
      electric ancillaries (d)
            
            
            (14
            )
            
            
            (12
            )
            
            
            (2
            )Gross
      receipts tax (e)
            
            
            27
            
            
            
            26
            
            
            
            1Other
            
            
            (2
            )
            
            
            1
            
            
            
            (3
            )Total
      expense adjustments
            
            
            11
            
            
            
            15
            
            
            
            (4
            )(95
            )
            
            
            410
            
            
            
            (505
            )Domestic
      gross energy margins
            
            $
            453
            
            
            $
            467
            
            
            $
            (14
            )





Six
      Months Ended June 30,2008
            
            2007
            
            ChangeRevenueUtility
      (a)
            
            $
            2,101
            
            
            $
            2,058
            
            
            $
            43Unregulated
      retail electric and gas (a)
            
            
            67
            
            
            
            45
            
            
            
            22Wholesale
      energy marketing (a)
            
            
            85
            
            
            
            628
            
            
            
            (543
            )Net
      energy trading margins (a)
            
            
            50
            
            
            
            18
            
            
            
            32Revenue
      adjustments (b)WPD
      utility revenue
            
            
            (452
            )
            
            
            (434
            )
            
            
            (18
            )Domestic
      delivery component of utility revenue
            
            
            (664
            )
            
            
            (655
            )
            
            
            (9
            )Other
      utility revenue
            
            
            (26
            )
            
            
            (24
            )
            
            
            (2
            )Gains
      from sale of emission allowances (c)
            
            
            1
            
            
            
            57
            
            
            
            (56
            )Total
      revenue adjustments
            
            
            (1,141
            )
            
            
            (1,056
            )
            
            
            (85
            )1,162
            
            
            
            1,693
            
            
            
            (531
            )ExpenseFuel
      (a)
            
            
            451
            
            
            
            435
            
            
            
            16Energy
      purchases (a)
            
            
            (259
            )
            
            
            315
            
            
            
            (574
            )Expense
      adjustments (b)Domestic
      electric ancillaries (d)
            
            
            (26
            )
            
            
            (26
            )Gross
      receipts tax (e)
            
            
            57
            
            
            
            56
            
            
            
            1Other
            
            
            (2
            )
            
            
            3
            
            
            
            (5
            )Total
      expense adjustments
            
            
            29
            
            
            
            33
            
            
            
            (4
            )221
            
            
            
            783
            
            
            
            (562
            )Domestic
      gross energy margins
            
            $
            941
            
            
            $
            910
            
            
            $
            31





(a)
            
            As
      reported on the Statements of Income.(b)
            
            To
      include/exclude the impact of any revenues and expenses not associated
      with domestic gross energy margins, consistent with the way management
      reviews domestic gross energy margins internally.(c)
            
            Included
      in "Other operation and maintenance" on the Statements of
      Income.(d)
            
            Included
      in "Energy purchases" on the Statements of Income.(e)
            
            Included
      in "Taxes, other than income" on the Statements of
  Income.





Domestic Gross Energy
Margins By Region





Domestic
gross energy margins are generated through PPL's non-trading and trading
activities.  PPL manages its non-trading energy business on a
geographic basis that is aligned with its generation assets.  PPL
further segregates non-trading activities into two categories:  hedge
activity and economic activity.  Economic activity represents the net
unrealized effect of derivative transactions that are entered into as economic
hedges, and that do not qualify for hedge accounting, or hedge accounting was
not elected under SFAS 133.





Three
      Months Ended June 30,2008
            
            2007
            
            ChangeNon-tradingEastern
      U.S.
            
            $
            346
            
            
            $
            393
            
            
            $
            (47
            )Western
      U.S.
            
            
            55
            
            
            
            65
            
            
            
            (10
            )Net
      energy trading
            
            
            52
            
            
            
            9
            
            
            
            43Domestic
      gross energy margins
            
            $
            453
            
            
            $
            467
            
            
            $
            (14
            )





Six
      Months Ended June 30,2008
            
            2007
            
            ChangeNon-tradingEastern
      U.S.
            
            $
            769
            
            
            $
            759
            
            
            $
            10Western
      U.S.
            
            
            122
            
            
            
            133
            
            
            
            (11
            )Net
      energy trading
            
            
            50
            
            
            
            18
            
            
            
            32Domestic
      gross energy margins
            
            $
            941
            
            
            $
            910
            
            
            $
            31





Eastern
U.S.





Eastern
U.S. non-trading margins, excluding unrealized results from economic activity
and hedge ineffectiveness, were $39 million and $62 million lower during the
three and six months ended June 30, 2008, compared with the same periods in
2007.  The decrease for the three and six months ended was primarily
due to higher average fuel prices, which were up 17% and 12%, and lower
base-load generation which was down 2% for both periods primarily due to the
retirement of the Martins Creek coal units in September
2007.  Partially offsetting these lower margins was a 1.4% increase in
PLR sales prices in accordance with the schedule established by the PUC Final
Order.





Eastern
U.S. non-trading margins that resulted from unrealized economic activity and
hedge ineffectiveness were $8 million lower during the three months ended June
30, 2008, compared with the same period in 2007.  This decrease was
due to unrealized losses on dedesignated cash flow hedges, partially offset by
unrealized gains on hedge FTRs and load-following deals.  For the six
months ended June 30, 2008, eastern U.S. non-trading margins that resulted
from unrealized economic activity and hedge ineffectiveness were $72 million
higher compared with the same period in 2007.  This increase was due
to unrealized gains on hedge FTRs and purchases to supply load-following
contracts, which was driven by increases in power and gas prices, partially
offset by unrealized losses on dedesignated cash flow hedges.





Western
U.S.




Western
U.S. non-trading margins, excluding unrealized results from economic activity
and hedge ineffectiveness were insignificant for the three months ended June 30,
2008, compared with the same period in 2007.  For the six months ended
June 30, 2008, non-trading margins excluding unrealized results from economic
activity and hedge ineffectiveness, were $4 million higher compared with the
same period in 2007.  The increase for the six months ended is
primarily due to higher margins from wholesale activity due to favorable
pricing, partially offset by lower hydro generation.


Western
U.S. non-trading margins that resulted from unrealized economic activity and
hedge ineffectiveness were lower for the three and six months ended June 30,
2008, by $9 million and $15 million compared with the same periods in
2007.  This decrease was primarily due to unrealized losses on
dedesignated cash flow hedges.





Net
Energy Trading





PPL
enters into energy contracts to take advantage of market
opportunities.  As a result, PPL may at times create a net open
position in its portfolio that could result in significant losses if prices do
not move in the manner or direction anticipated.  The margins from
these trading activities are reflected in the Statements of Income as "Net
energy trading margins."  These physical and financial contracts cover
trading activity associated with electricity, gas and oil.





During
the three months ended June 30, 2008, net energy trading margins increased by
$43 million, compared with the same period in 2007.  This increase
consists of $26 million of higher realized gains and $17 million of higher
unrealized gains, both driven by increased FTR activity.  During the
six months ended June 30, 2008, net energy trading margins increased by $32
million, compared with the same period in 2007.  This increase
consists of $25 million of higher realized gains and $7 million of higher
unrealized gains, both driven by increased FTR activity.





The
realized physical volumes for electricity and gas associated with energy trading
were:





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007GWh
            
            
            4,429
            
            
            
            2,559
            
            
            
            8,867
            
            
            
            5,347Bcf
            
            
            4.9
            
            
            
            2.9
            
            
            
            10.5
            
            
            
            8.2





Utility
Revenues





The
increases in utility revenues were attributable to:





June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedDomestic:Retail
      electric revenue (PPL Electric)PLR
            
            $
            7
            
            
            $
            15Delivery
            
            
            1
            
            
            
            8Other
            
            
            3
            
            
            
            2International:U.K.
      retail electric revenue
            
            
            (8
            )
            
            
            14U.K.
      foreign currency exchange rates
            
            
            1
            
            
            
            4$
            4
            
            
            $
            43





Higher
PLR and delivery revenues for both periods were attributable to normal load
growth.  A base rate increase effective January 1, 2008, also
contributed to higher delivery revenues.





The
decrease in U.K. utility revenues for the three months ended June 30, 2008,
compared with the same period in 2007, excluding foreign currency exchange rate
impacts, was primarily due to a decrease in engineering services performed for
third parties, partially offset by an increase in sales volume.





The
increase in U.K. utility revenues for the six months ended June 30, 2008,
compared with the same period in 2007, excluding foreign currency exchange rate
impacts, was primarily due to an increase in prices effective April 1, partially
offset by a decrease in engineering services performed for third
parties.





Energy-related
Businesses





Energy-related
businesses contributed $28 million more to operating income for the three months
ended June 30, 2008, compared with the same period in 2007.  The
increase was primarily attributable to:





·
            $19
      million less in operating losses from synfuel projects.  The
      projects ceased operation at the end of 2007;·
            a
      $3 million impairment in 2007 of domestic telecommunication assets that
      were subsequently sold in 2007 (see Note 8 to the Financial Statements);
      and·
            a
      $7 million net loss recorded in 2007 on options purchased to hedge the
      risk associated with the phase-out of the synthetic fuel tax
      credits.  No such options were held in 2008, as PPL's synthetic
      fuel operations have ceased; partially offset by·
            $3
      million less in earnings from those domestic telecommunication assets that
      were sold in 2007.





Energy-related
businesses contributed $53 million more to operating income for the six months
ended June 30, 2008, compared with the same period in 2007.  The
increase was primarily attributable to:





·
            $34
      million less in operating losses from synfuel projects.  The
      projects ceased operation at the end of 2007; and·
            a
      $34 million impairment in 2007 of domestic telecommunication assets that
      were subsequently sold in 2007 (see Note 8 to the Financial Statements);
      partially offset by·
            a
      $14 million net gain recorded in 2007 on options purchased to hedge the
      risk associated with the phase-out of the synthetic fuel tax
      credits.  No such options were held in 2008, as PPL's synthetic
      fuel operations have ceased; and·
            $5
      million less in earnings from those domestic telecommunication assets that
      were sold in 2007.





See Note
10 to the Financial Statements for additional information on the synthetic fuel
tax credits and the synfuel projects.





Other
Operation and Maintenance





The
increases in other operation and maintenance expenses were due to:





June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedLower
      gains on sale of emission allowances
            
            $
            27
            
            
            $
            56Salary
      expense
            
            
            (8
            )
            
            
            17Uncollectible
      accounts
            
            
            8
            
            
            
            9Colstrip
      groundwater litigation (Note 10)
            
            
            1
            
            
            
            8Outage
      costs at Western and Eastern U.S. fossil/hydro stations
            
            
            1
            
            
            
            8Contractor
      expense
            
            
            2
            
            
            
            5PUC-reportable
      storm costs
            
            
            (3
            )
            
            
            2Regulatory
      asset amortization
            
            
            1
            
            
            
            2U.K.
      foreign currency exchange rates
            
            
            1
            
            
            
            1Off-site
      remediation of ash basin leak (Note 10)
            
            
            (2
            )
            
            
            (2
            )Stock-based
      compensation
            
            
            
            
            
            
            (2
            )Outage
      costs at Susquehanna nuclear station
            
            
            (2
            )
            
            
            (4
            )WPD
      recoverable engineering services
            
            
            (11
            )
            
            
            (12
            )Defined
      benefit costs
            
            
            (11
            )
            
            
            (20
            )Other
            
            
            9
            
            
            
            (3
            )$
            13
            
            
            $
            65





Depreciation





The
increases in depreciation expense were due to:





June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedAdditions
      to PP&E
            
            $
            11
            
            
            $
            17Extension
      of useful lives of certain WPD network assets in 2007
            
            
            (3
            )
            
            
            (13
            )$
            8
            
            
            $
            4





Taxes,
Other Than Income





Taxes,
other than income decreased by $3 million during the six months ended June 30,
2008, compared with the same period in 2007.The decrease was
primarily due to a decrease in PPL Montana's property taxes, as the 2008 period
included a $7 million refund credit.  This credit was partially offset
by a $4 million increase in domestic gross receipts tax expense and a $1 million
increase in WPD property taxes.





Other
Income - net





See Note
12 to the Financial Statements for details of other income.





Financing
Costs





The
decreases in financing costs, which include "Interest Expense" and "Dividends on
Preferred Securities of a Subsidiary," were due to:





June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedLong-term
      debt interest expense
            
            $
            (5
            )
            
            $
            (3
            )Redemption
      of 8.23% Subordinated Debentures in 2007 (Note 11)
            
            
            
            
            
            
            (4
            )Capitalized
      interest
            
            
            (1
            )
            
            
            (10
            )Hedging
      activities
            
            
            (6
            )
            
            
            (8
            )Other
            
            
            2
            
            
            
            3$
            (10
            )
            
            $
            (22
            )





Income
Taxes





The
increases in income taxes were due to:





June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedDecrease
      in synthetic fuel and other tax credits
            
            $
            25
            
            
            $
            64Tax
      reserve adjustments (Note 5)
            
            
            52
            
            
            
            41Higher
      pre-tax book income
            
            
            7
            
            
            
            37Tax
      expense on foreign earnings
            
            
            2
            
            
            
            5Domestic
      manufacturing deduction
            
            
            (3
            )
            
            
            (5
            )Tax
      return adjustments
            
            
            (17
            )
            
            
            (17
            )Other
            
            
            
            
            
            
            1$
            66
            
            
            $
            126





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





Discontinued
Operations





Income
from Discontinued Operations decreased by $100 million during the three months
ended June 30, 2008, compared with the same period in 2007.  The
decrease was primarily attributable to a $101 million decrease in income from
PPL's Latin American operating businesses that were sold in 2007, which included
an $89 million after-tax gain from the sale of its El Salvadoran
business.





Income
from Discontinued Operations decreased by $68 million during the six months
ended June 30, 2008, compared with the same period in 2007.  The
decrease was primarily attributable to a $71 million decrease in income from
PPL's Latin American operating businesses that were sold in 2007, which included
an $89 million after-tax gain from the sale of its El Salvadoran business and an
after-tax impairment charge of $19 million to its Bolivian
businesses.





See
"Discontinued Operations" in Note 8 to the Financial Statements for additional
information on the 2007 sale of PPL's Latin American operating businesses and
the anticipated sale of PPL's natural gas distribution and propane
businesses.





Financial
Condition





Liquidity
and Capital Resources





PPL had
the following at:





June 30,2008
            
            December
      31, 2007Cash
      and cash equivalents
            
            $
            466
            (a)
            
            $
            430Short-term
      investments (b)
            
            
            89
            
            
            
            108$
            555
            
            
            $
            538Short-term
      debt
            
            $
            491
            
            
            $
            92





(a)
            
            Excludes
      $2 million of cash related to the natural gas distribution and propane
      businesses that is included in "Assets held for sale" on the Balance
      Sheet.(b)
            
            Includes
      $15 million of auction rate securities at December 31,
      2007.  See below for further discussion of auction rate
      securities.





The $36
million increase in PPL's cash and cash equivalents position, which includes the
effects of the cash flows of the Discontinued Operations, was primarily the net
result of:





·
            $933
      million of cash provided by operating activities;·
            a
      net increase in short-term debt of $400 million (excluding the impact of
      foreign currency translation adjustments);·
            proceeds
      of $399 million from the issuance of long-term debt;·
            proceeds
      of $17 million from the issuance of common stock;·
            $661
      million of capital expenditures;·
            a
      net increase of $281 million in restricted cash and cash
      equivalents;·
            $249
      million in net expenditures for intangible
    assets;·
            the
      payment of $239 million of common stock dividends;·
            the
      retirement of $217 million of long-term debt;·
            the
      repurchase of PPL common stock for $38 million under the common stock
      repurchase program that was authorized by PPL's Board of Directors in June
      2007;·
            $13
      million in net purchases of nuclear plant decommissioning trust
      investments; and·
            $14
      million in net purchases of other
investments.





Auction Rate
Securities





PPL had
auction rate securities totaling $21 million at June 30, 2008, which were
classified as "Investments - Other," and $15 million at December 31, 2007, which
were classified as "Short-term investments" on the Balance
Sheets.  Historically, an active market existed for such investments,
and the auctions provided an opportunity for investors either to continue to
hold an investment at a new reset interest rate or to sell the investment at its
par value for immediate liquidity.  In early 2008, investor concerns
about credit and liquidity in the financial markets generally, as well as
investor concerns over specific insurers that guarantee the credit of certain of
the underlying securities, created uncertainty in the auction rate securities
market and these securities generally failed to be remarketed through their
established auction process.  These auction failures and the resulting
illiquidity continued to impact PPL's auction rate securities.





At June
30, 2008, PPL concluded that the fair market value of these auction rate
securities was $21 million, a decline of $8 million from par
value.  Because PPL intends and has the ability to hold these auction
rate securities until they can be liquidated at par value, PPL believes that it
does not have material realized loss exposure.  Based upon the
evaluation of available information, PPL believes these investments continue to
be of high credit quality.  Additionally, PPL does not anticipate
having to sell these securities in order to fund operations.  As such,
the decline in fair value was deemed temporary and is due to general market
conditions.  See Note 13 to the Financial Statements for further
discussion of auction rate securities.





Commercial
Paper





PPL
Energy Supply had $350 million of commercial paper, with a weighted-average
interest rate of 3.00%, outstanding at June 30, 2008, under its $500 million
commercial paper program.





Credit
Facilities





In March
2008, PPL Energy Supply increased the capacity of its 364-day reimbursement
agreement, under which it can cause the bank to issue letters of credit, from
$200 million to $300 million and extended the expiration date of the agreement
to March 2009.





PPL
Energy Supply and PPL Electric currently do not expect to make any modifications
in 2008, including extending the expiration date, to PPL Energy Supply's $3.4
billion or PPL Electric's $200 million five-year credit facilities, both of
which expire in 2012.  At June 30, 2008, PPL Energy Supply had cash
borrowings of $100 million, at an interest rate of 2.94%, outstanding under its
facility.





At June
30, 2008 and December 31, 2007, PPL Energy Supply had $1.8 billion and $683
million of letters of credit outstanding under its domestic credit
facilities.  This change primarily related to increased collateral
requirements in connection with energy marketing and trading
activities.





In
January 2008, WPDH Limited extended the expiration date of its £150 million
(approximately $296 million) five-year committed credit facility to January
2013, and it has the option to extend the expiration date by another year in
January 2009.





The
credit agreement related to PPL Electric's and a subsidiary's participation in
an asset-backed commercial paper program expired in July 2008.  PPL
Electric and the subsidiary expect to enter into a similar asset-backed
commercial paper program with a different financial institution and commercial
paper conduit in the third quarter of 2008.





Financing
Activities





In March
2008, PPL Energy Supply issued $400 million of 6.50% Senior Notes due 2018
(6.50% Notes).  The 6.50% Notes may be redeemed any time prior to
maturity at PPL Energy Supply's option at make-whole redemption
prices.  PPL Energy Supply received proceeds of $396 million, net of a
discount and underwriting fees, from the issuance of the 6.50%
Notes.  The proceeds have been used for general corporate purposes,
including capital expenditures relating to the installation of pollution control
equipment by PPL Energy Supply subsidiaries.





In April
2008, PPL Energy Supply elected to change the interest rate mode on the Exempt
Facilities Revenue Bonds, Series 2007 due 2037 (Bonds) that were issued by the
Pennsylvania Economic Development Financing Authority on behalf of PPL Energy
Supply in December 2007.  The interest rate mode was converted from a
rate that was reset daily through daily remarketing of the Bonds to a term rate
of 1.80% for one year.





The terms
of PPL Energy Supply's 2-5/8% Convertible Senior Notes due 2023 (Convertible
Senior Notes) included a market price trigger that permitted holders to convert
the notes during any fiscal quarter if the closing sale price of PPL's common
stock exceeded $29.83 for at least 20 trading days in the 30 consecutive trading
days ending on the last trading day of the preceding fiscal
quarter.  The holders of the Convertible Senior Notes also had the
right to require PPL Energy Supply to purchase all or any part (equal to $1,000
principal amount or an integral multiple thereof) of the Convertible Senior
Notes on May 15, 2008 at 100% of the principal amount, plus accrued and unpaid
interest thereon as of such date.  In April 2008, the holders were
notified that, in accordance with the terms of the Convertible Senior Notes, PPL
Energy Supply was calling for redemption on May 20, 2008 all outstanding
Convertible Senior Notes at 100% of the principal amount, plus accrued and
unpaid interest thereon as of such date.





The
Convertible Senior Notes were subject to conversion at the election of the
holders any time prior to May 20, 2008 as a result of the market price trigger
being met and the notes being called for redemption.  Upon conversion
of the Convertible Senior Notes, PPL Energy Supply was required to settle the
principal amount in cash and any conversion premium in cash or PPL common
stock.  During the six months ended June 30, 2008, Convertible Senior
Notes in an aggregate principal amount of $57 million were presented for
conversion.  The total conversion premium related to these conversions
was $56 million, which was settled with 1,128,341 shares of PPL common stock,
together with an insignificant amount of cash in lieu of fractional
shares.  On May 20, 2008, PPL Energy Supply redeemed an insignificant
amount of Convertible Senior Notes.  As of June 30, 2008, no
Convertible Senior Notes remain outstanding.





In July
2008, PPL Energy Supply issued $300 million of 6.30% Senior Notes due 2013
(6.30% Notes).  The 6.30% Notes may be redeemed any time prior to
maturity at PPL Energy Supply's option at make-whole redemption
prices.  PPL Energy Supply received proceeds of $298 million, net of a
discount and underwriting fees, from the issuance of the 6.30%
Notes.  The proceeds have been used to repay short-term
debt.





In July
2008, PPL notified the holders of PPL Gas Utilities' 8.70% Senior Notes due
December 2022 of PPL Gas Utilities' intent to prepay the entire $10 million
aggregate principal amount of the notes in August 2008.  PPL Gas
Utilities expects to pay a premium of approximately $3 million in connection
with the prepayment.





Leases





In June
2008, PPL EnergyPlus executed an agreement to acquire the rights to an existing
long-term tolling agreement associated with the capacity and energy of a 664 MW
natural gas-fired power plant in Lebanon, Pennsylvania.  Under the
agreement, PPL EnergyPlus has control over the plant's dispatch into the
electricity grid and will supply the natural gas necessary to operate the
plant.  The tolling agreement extends through 2021 and contains a
lease that will be accounted for as an operating lease.  See Note 18
to the Financial Statements for additional information.





Common Stock
Dividends





In
February 2008, PPL announced an increase to its quarterly common stock dividend,
effective April 1, 2008, to 33.5 cents per share (equivalent to $1.34 per
annum).  Future dividends, declared at the discretion of the Board of
Directors, will be dependent upon future earnings, cash flows, financial
requirements and other factors.





Anticipated Sale of Gas and
Propane Businesses





In March
2008, PPL signed a definitive agreement to sell its natural gas distribution and
propane businesses for $268 million in cash plus working capital, pursuant to a
stock purchase agreement and following the receipt of necessary regulatory
approvals.  PPL expects the sale to close before the end of
2008.  Proceeds from the sale are expected to be used to invest in
growth opportunities in PPL's core electricity supply and delivery businesses
and/or for the repurchase of securities.  See Note 8 to the Financial
Statements for additional information.





Rating Agency
Decisions





Moody's,
S&P and Fitch periodically review the credit ratings on the debt and
preferred securities of PPL and its subsidiaries.  Based on their
respective independent reviews, the rating agencies may make certain ratings
revisions or ratings affirmations.





A credit
rating reflects an assessment by the rating agency of the creditworthiness
associated with an issuer and particular securities that it
issues.  The credit ratings of PPL and its subsidiaries are based on
information provided by PPL and other sources.  The ratings of
Moody's, S&P and Fitch are not a recommendation to buy, sell or hold any
securities of PPL or its subsidiaries.  Such ratings may be subject to
revisions or withdrawal by the agencies at any time and should be evaluated
independently of each other and any other rating that may be assigned to the
securities.  A downgrade in PPL's or its subsidiaries' credit ratings
could result in higher borrowing costs and reduced access to capital
markets.





Moody's
and S&P did not take any actions related to PPL and its rated subsidiaries
during the six months ended June 30, 2008.  In March 2008, Fitch
completed a review of its credit ratings for PPL, PPL Capital Funding, PPL
Energy Supply and PPL Electric and affirmed all ratings related to these
entities, with the exception that it lowered the preferred stock rating of PPL
Electric to BBB from BBB+.  Fitch stated in the related press release
that the lower preferred stock rating reflects its junior position in the
capital structure and does not reflect any change in credit
quality.  In May 2008, Fitch changed its outlook for WPDH Limited, WPD
LLP, WPD (South Wales) and WPD (South West) to positive from
stable.





For
additional information on PPL's liquidity and capital resources, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," in PPL's 2007 Form 10-K.





Risk
Management - Energy Marketing & Trading and Other





Market
Risk





Commodity
Price Risk (Non-trading)





PPL's
non-trading commodity derivative contracts mature at various times through
2017.  PPL segregates its non-trading activities into two
categories:  hedge activity and economic
activity.  Transactions that are accounted for as hedge activity
qualify for hedge accounting treatment under SFAS 133.  The majority
of PPL's energy transactions qualify for accrual or hedge
accounting.  The economic activity category includes transactions that
address a specific risk, but were not eligible for hedge accounting or for which
hedge accounting was not elected.  Although they do not receive hedge
accounting treatment, these transactions are considered non-trading
activity.  The net fair value of economic positions at June 30,
2008 and December 31, 2007, including net premiums on options, was $116
million and $67 million.





The
following chart sets forth the net fair value of PPL's non-trading commodity
derivative contracts.  For the periods ended June 30, 2008, these
amounts reflect fair value as defined by SFAS 157, as amended.  See
Notes 13 and 14 to the Financial Statements for additional
information.





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Fair
      value of contracts outstanding at the beginning of the
    period
            
            $
            (268
            )
            
            $
            (13
            )
            
            $
            (305
            )
            
            $
            (111
            )Contracts
      realized or otherwise settled during the period
            
            
            (96
            )
            
            
            (37
            )
            
            
            (87
            )
            
            
            (14
            )Fair
      value of new contracts entered into during the period
            
            
            70
            
            
            
            (48
            )
            
            
            170
            
            
            
            44Changes
      in fair value attributable to changes in valuation techniques
      (a)
            
            
            
            
            
            
            
            
            
            
            55Other
      changes in fair value
            
            
            (760
            )
            
            
            (146
            )
            
            
            (887
            )
            
            
            (163
            )Fair
      value of contracts outstanding at the end of the period
            
            $
            (1,054
            )
            
            $
            (244
            )
            
            $
            (1,054
            )
            
            $
            (244
            )





(a)
            
            Amount
      represents the reduction of valuation reserves related to capacity and FTR
      contracts upon the adoption of SFAS
157.





The
following chart segregates fair values of PPL's non-trading commodity derivative
contracts at June 30, 2008, based on whether the fair values are determined
by quoted market prices for identical instruments or other more subjective
means.





Fair
      Value of Contracts at Period-EndGains
      (Losses)Maturity
              Less
      Than
              1
      Year
            
            Maturity
              1-3
      Years
            
            Maturity
              4-5
      Years
            
            Maturity
              in
      Excess
              of
      5 Years
            
            Total
      Fair
              ValueSource
      of Fair ValuePrices
      quoted in active markets for identical instruments
            
            $
            9
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            9Prices
      based on significant other observable inputs
            
            
            151
            
            
            $
            (1,103
            )
            
            $
            (388
            )
            
            $
            1
            
            
            
            (1,339
            )Prices
      based on significant unobservable inputs
            
            
            
            
            
            
            1
            
            
            
            58
            
            
            
            217
            
            
            
            276Fair
      value of contracts outstanding at the end of the period
            
            $
            160
            
            
            $
            (1,102
            )
            
            $
            (330
            )
            
            $
            218
            
            
            $
            (1,054
            )





Because
of PPL's efforts to hedge the value of energy from its generation assets, PPL
sells electricity, capacity and related services and buys fuel on a forward
basis, resulting in open contractual positions.  If PPL were unable to
deliver firm capacity and energy or to accept the delivery of fuel under its
agreements, under certain circumstances it could be required to pay
damages.  These damages would be based on the difference between the
market price and the contract price of the commodity.  Depending on
price volatility in the wholesale energy markets, such damages could be
significant.  Extreme weather conditions, unplanned power plant
outages, transmission disruptions, nonperformance by counterparties (or their
own counterparties) with which it has energy contracts and other factors could
affect PPL's ability to meet its obligations, or cause significant increases in
the market price of replacement energy.  Although PPL attempts to
mitigate these risks, there can be no assurance that it will be able to fully
meet its firm obligations, that it will not be required to pay damages for
failure to perform, or that it will not experience counterparty nonperformance
in the future.





Commodity
Price Risk (Trading)





PPL's
trading contracts mature at various times through 2013.  The following
chart sets forth PPL's net fair value of trading contracts.  The three
and six months ended June 30, 2008, reflect fair value as defined by SFAS
157.  See Note 13 for additional information.





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Fair
      value of contracts outstanding at the beginning of the
    period
            
            $
            22
            
            
            $
            45
            
            
            $
            16
            
            
            $
            41Contracts
      realized or otherwise settled during the period
            
            
            (56
            )
            
            
            (14
            )
            
            
            (41
            )
            
            
            (27
            )Fair
      value of new contracts entered into during the period
            
            
            31
            
            
            
            5
            
            
            
            23
            
            
            
            21Other
      changes in fair value
            
            
            19
            
            
            
            12
            
            
            
            18
            
            
            
            13Fair
      value of contracts outstanding at the end of the period
            
            $
            16
            
            
            $
            48
            
            
            $
            16
            
            
            $
            48








PPL will
reverse unrealized gains of approximately $11 million over the next three months
as the transactions are realized.





The
following chart segregates fair values of PPL's trading portfolio at
June 30, 2008, based on whether the fair values are determined by quoted
market prices for identical instruments or other more subjective
means.





Fair
      Value of Contracts at Period-EndGains
      (Losses)Maturity
              Less
      Than
              1
      Year
            
            Maturity
              1-3
      Years
            
            Maturity
              4-5
      Years
            
            Maturity
              in
      Excess
              of
      5 Years
            
            Total
      Fair
              ValueSource
      of Fair ValuePrices
      quoted in active markets for identical instruments
            
            $
            (10
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (10
            )Prices
      based on significant other observable inputs
            
            
            14
            
            
            $
            15
            
            
            $
            (1
            )
            
            
            
            
            
            
            28Prices
      based on significant unobservable inputs
            
            
            (2
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2
            )Fair
      value of contracts outstanding at the end of the period
            
            $
            2
            
            
            $
            15
            
            
            $
            (1
            )
            
            
            
            
            
            $
            16





Commodity
Price Risk Summary





In
accordance with its marketing strategy, PPL often elects not to completely hedge
its generation output or fuel requirements.  PPL estimates that for
its entire portfolio, including all generation, emissions and physical and
financial energy positions, a 10% adverse change in power prices across all
geographic zones and time periods would decrease expected 2008 gross margins by
$14 million.  Similarly, a 10% adverse movement in all fossil fuel
prices would decrease expected 2008 gross margins by $13 million.





VaR
Models





PPL
utilizes a VaR model to measure commodity price risk in its non-trading and
trading portfolios.  This approach is consistent with how PPL's Risk
Management Committee assesses the market risk of its commodity
business.  VaR is a statistical model that attempts to predict the
value of potential loss, under normal market conditions, based on historical
market price volatility.  PPL calculates VaR using a Monte Carlo
simulation technique, which uses historical data from the past 12-month
period.  The VaR is the estimated nominal loss of earnings based on a
one-day holding period at a 95% confidence interval.  At June 30,
2008, the VaR for PPL's portfolio was as follows:





TradingVaR
            
            Non-Trading
      MTM VaR95%
      Confidence Level, One-Day Holding PeriodPeriod
      End
            $
            2
            
            
            $
            41Average
      for the Period
            
            3
            
            
            
            30High
            
            4
            
            
            
            41Low
            
            2
            
            
            
            24





Interest
Rate Risk





PPL and
its subsidiaries have issued debt to finance their operations, which exposes
them to interest rate risk.  PPL utilizes various financial derivative
products to adjust the mix of fixed and floating interest rates in its debt
portfolio, adjust the duration of its debt portfolio and lock in Treasury rates
(and interest rate spreads over Treasuries) in anticipation of future financing,
when appropriate.  Risk limits under the risk management program are
designed to balance risk exposure to volatility in interest expense and changes
in the fair value of PPL's debt portfolio due to changes in the absolute level
of interest rates.





At
June 30, 2008, PPL's potential annual exposure to increased interest
expense, based on a 10% increase in interest rates, was $6 million.





PPL is
also exposed to changes in the fair value of its domestic and international debt
portfolios.  PPL estimated that a 10% decrease in interest rates at
June 30, 2008, would increase the fair value of its debt portfolio by $338
million.





PPL
utilizes various risk management instruments to reduce its exposure to the
expected future cash flow variability of its debt instruments.  These
risks include exposure to adverse interest rate movements for outstanding
variable rate debt and for future anticipated financing.  While PPL is
exposed to changes in the fair value of these instruments, any changes in the
fair value of these instruments are recorded in equity and then reclassified
into earnings in the same period during which the item being hedged affects
earnings.  At June 30, 2008, PPL had none of these instruments
outstanding.





PPL also
utilizes various risk management instruments to adjust the mix of fixed and
floating interest rates in its debt portfolio.  The change in fair
value of these instruments, as well as the offsetting change in the value of the
hedged exposure of the debt, is reflected in earnings.  At
June 30, 2008, the fair value of these instruments was a net asset of $19
million.  PPL estimated that a 10% adverse movement in interest rates
at June 30, 2008, would decrease the net asset by $17 million.





WPDH
Limited holds a net position in cross-currency swaps totaling $527 million to
hedge the interest payments and principal of its U.S. dollar-denominated bonds
with maturity dates ranging from December 2008 to December
2028.  While PPL is exposed to changes in the fair value of these
instruments, any changes in the fair value of these instruments are recorded in
equity and then reclassified into earnings in the same period during which the
item being hedged affects earnings.  The estimated fair value of this
position at June 30, 2008, was a net liability of $113
million.  WPDH Limited estimated that a 10% adverse movement in
foreign currency exchange rates and interest rates at June 30, 2008, would
increase the net liability by $99 million.





Foreign
Currency Risk





PPL is
exposed to foreign currency risk, primarily through investments in U.K.
affiliates.  In addition, PPL's domestic operations may make purchases
of equipment in currencies other than U.S. dollars.





PPL has
adopted a foreign currency risk management program designed to hedge certain
foreign currency exposures, including firm commitments, recognized assets or
liabilities, anticipated transactions and net investments.  In
addition, PPL enters into financial instruments to protect against foreign
currency translation risk of expected earnings.





In 2007,
PPL executed forward contracts to sell British pounds sterling to protect the
value of a portion of its net investment in WPD.  The total notional
amount of the contracts outstanding at June 30, 2008, was £68
million.  The settlement dates of these contracts range from March
2009 through June 2011.  At June 30, 2008, the fair value of
these positions was a net asset of $4 million.  PPL estimated that a
10% adverse movement in foreign currency exchange rates at June 30, 2008,
would decrease the net asset by $12 million.





To
economically hedge the translation of 2008 expected income denominated in
British pounds sterling to U.S. dollars, PPL entered into a combination of
average rate forwards and average rate options to sell British pounds
sterling.  At June 30, 2008, the total exposure hedged was £43
million.  These forwards and options have termination dates ranging
from July 2008 to December 2008.  At June 30, 2008, the net fair
value of these positions was not significant.  PPL estimated that a
10% adverse movement in foreign currency exchange rates at June 30, 2008,
would increase the net liability position by $7 million.





Nuclear
Plant Decommissioning Trust Funds - Securities Price Risk





In
connection with certain NRC requirements, PPL Susquehanna maintains trust funds
to fund certain costs of decommissioning the Susquehanna nuclear
station.  At June 30, 2008, these funds were invested primarily
in domestic equity securities and fixed-rate, fixed-income securities and are
reflected at fair value on PPL's Balance Sheet.  The mix of securities
is designed to provide returns sufficient to fund Susquehanna's decommissioning
and to compensate for inflationary increases in decommissioning
costs.  However, the equity securities included in the trusts are
exposed to price fluctuation in equity markets, and the values of fixed-rate,
fixed-income securities are exposed to changes in interest rates.  PPL
actively monitors the investment performance and periodically reviews asset
allocation in accordance with its nuclear plant decommissioning trust policy
statement.  At June 30, 2008, a hypothetical 10% increase in
interest rates and a 10% decrease in equity prices would have resulted in an
estimated $36 million reduction in the fair value of the trust
assets.  See Note 21 in PPL's 2007 Form 10-K for additional
information regarding the nuclear plant decommissioning trust
funds.





Related
Party Transactions





PPL is
not aware of any material ownership interests or operating responsibility by
senior management of PPL, PPL Energy Supply or PPL Electric in outside
partnerships, including leasing transactions with variable interest entities, or
other entities doing business with PPL.





For
additional information on related party transactions, see Note 11 to the
Financial Statements.





Acquisitions,
Development and Divestitures





PPL
continuously evaluates strategic options for its business segments and, from
time to time, PPL and its subsidiaries are involved in negotiations with third
parties regarding acquisitions and dispositions of businesses and assets, joint
ventures and development projects, which may or may not result in definitive
agreements.  Any such transactions may impact future financial
results.  See Note 8 to the Financial Statements for information
regarding recent transactions.





During
the second quarter of 2008, PPL increased the capacity of several existing
generating facilities.  The aggregate capacity increase was 66
MW.  PPL is currently planning additional incremental capacity
increases of 265 MW at its existing generating facilities.  See Note 8
to the Financial Statements for additional information on the progress of the
PPL Susquehanna nuclear plant uprate project.  Offsetting this
increase is an expected 30 MW reduction in net generation capability at each of
the Brunner Island and Montour plants, due to the estimated increases in station
service usage during the scrubber operation.  See Note 10 to the
Financial Statements for additional information.





In June
2008, PPL EnergyPlus executed an agreement to acquire the rights to an existing
long-term tolling agreement associated with the capacity and energy of a 664 MW
natural gas-fired power plant in Lebanon, Pennsylvania.  The tolling
agreement extends through 2021 and contains a lease that will be accounted for
as an operating lease.  As a result of this agreement, PPL EnergyPlus
recognized an intangible asset for an upfront payment.  See Notes 15
and 18 to the Financial Statements for additional information.





PPL
continuously reexamines development projects based on market conditions and
other factors to determine whether to proceed with the projects, sell, cancel or
expand them, execute tolling agreements or pursue other options.





Environmental
Matters





See Note
10 to the Financial Statements for a discussion of environmental
matters.





New Accounting
Standards





See Note
2 to the Financial Statements for a discussion of new accounting standards
adopted and Note 19 to the Financial Statements for a discussion of new
accounting standards pending adoption.





Application of Critical
Accounting Policies





PPL's
financial condition and results of operations are impacted by the methods,
assumptions and estimates used in the application of critical accounting
policies.  The following accounting policies are particularly
important to the financial condition or results of operations of PPL, and
require estimates or other judgments of matters inherently uncertain: price risk
management, defined benefits, asset impairment, leasing, loss accruals, asset
retirement obligations and income tax uncertainties.





See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations," in PPL's 2007 Form 10-K for a discussion of each critical
accounting policy.  PPL's senior management has reviewed these
critical accounting policies, and the estimates and assumptions regarding them,
with its Audit Committee.  In addition, PPL's senior management
reviewed the Form 10-K disclosures regarding the application of these critical
accounting policies with the Audit Committee.





Following
are updates to the critical accounting policies disclosed in PPL's 2007 Form
10-K.





Leasing





In June
2008, PPL EnergyPlus executed an agreement to acquire the rights to an existing
long-term tolling agreement associated with the capacity and energy of a 664 MW
natural gas-fired power plant in Lebanon, Pennsylvania.  The tolling
agreement extends through 2021 and contains a lease that will be accounted for
as an operating lease.  See Notes 15 and 18 to the Financial
Statements for additional information.





In
accounting for leases, management makes various assumptions, including the
discount rate, the fair market value of the leased assets and the estimated
useful life, in determining whether a lease should be classified as operating or
capital.  Changes in these assumptions could result in the difference
between whether a lease is determined to be an operating lease or a capital
lease.  If this transaction were to be accounted for as a capital
lease, PPL would have recorded approximately $284 million of additional assets
and liabilities on the Balance Sheet at June 30, 2008.





Loss
Accruals





In June
2008, PPL Montana's management assessed the loss exposure related to the Montana
hydroelectric litigation, given the June 2008 decision by the Montana First
Judicial District Court (District Court).  The District Court awarded
compensation of approximately $34 million for the years 2000 through 2006, and
approximately $6 million for 2007 compensation as rent for the use of the State
of Montana's streambeds by PPL Montana's hydroelectric
facilities.  The District Court also deferred the determination of
compensation for 2008 and subsequent years to the Montana State Land Board (Land
Board).  PPL Montana intends to appeal the decision of the District
Court to the Montana Supreme Court and will continue to vigorously defend its
position.  It also intends to seek a stay of judgment, including a
stay of the Land Board's authority to assess compensation against PPL Montana
for 2008 and future periods.  See Note 10 to the Financial Statements
for additional information on this litigation.





PPL
Montana's management concluded, based on its assessment and after consultations
with its trial counsel, that it has meritorious arguments on appeal for the
years 2000 through 2006.  PPL Montana assessed the likelihood of a
loss for these years as reasonably possible.  However, PPL Montana has
not recorded a loss accrual for these years, as the likelihood of a loss was not
deemed probable.





For 2007
and subsequent years, PPL Montana's management believes that while it also has
meritorious arguments, it is probable that its hydroelectric projects will be
subject to annual estimated compensation ranging from $300,000 to $6
million.  Given
that there was no single amount within that range more likely than any other,
PPL Montana recorded a loss accrual equal to the low end of this
range.




PPL
Montana will continue to assess the loss exposure for the Montana hydro
litigation in future periods.





SFAS
157





In 2006,
the FASB issued SFAS 157.  Among other things, SFAS 157 provides a
definition of fair value as well as a framework for measuring fair
value.  In February 2008, the FASB amended SFAS 157 through the
issuance of FSP FAS 157-1 and FSP FAS 157-2.  FSP FAS 157-1 amends
SFAS 157 to exclude from its scope, certain accounting pronouncements that
address fair value measurements associated with leases.  FSP FAS 157-2
delays the effective date of SFAS 157 to fiscal years beginning after November
15, 2008, for nonfinancial assets and nonfinancial liabilities that are not
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually).





As
permitted by this guidance, PPL partially applied SFAS 157, as amended,
prospectively, effective January 1, 2008.  In the current year, the
partial application of this standard affected, or will affect, fair value
measurement concepts used or embedded in PPL's critical accounting policies
related to "Price Risk Management" and "Defined Benefits."  PPL's
election to defer the application of SFAS 157, as amended, for eligible assets
and liabilities will primarily affect the fair value component of PPL's critical
accounting policies related to "Asset Impairment" and "Asset Retirement
Obligations" in 2009.  See Notes 2 and 13 to the Financial Statements
for additional information regarding SFAS 157, as amended.








PPL ENERGY
SUPPLY, LLC AND SUBSIDIARIES




Item
2.  Management's Discussion and Analysis of Financial Condition and
Results of Operations





Overview





PPL
Energy Supply is an energy company with headquarters in Allentown,
Pennsylvania.  In PPL Energy Supply's 2007 Form 10-K, descriptions of
its domestic and international businesses are found in "Item 1. Business -
Background."  Through its subsidiaries, PPL Energy Supply is primarily
engaged in the generation and marketing of electricity in two key markets - the
northeastern and western U.S. - and in the delivery of electricity in the
U.K.  PPL Energy Supply's reportable segments are Supply and
International Delivery.  In 2007, PPL Energy Supply sold its regulated
electricity delivery businesses in Latin America, which were included in the
International Delivery segment.  See Note 8 to the Financial
Statements for information on the sales.  See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview" in PPL Energy Supply's 2007 Form 10-K for a discussion of PPL Energy
Supply's strategy and the risks and the challenges that it faces in its
business.  See "Forward-Looking Information," Note 10 to the Financial
Statements and the rest of Item 2 in this Form 10-Q and "Item 1A. Risk Factors"
and the rest of Item 7 in PPL Energy Supply's 2007 Form 10-K for more
information concerning the material risks and uncertainties that PPL Energy
Supply faces in its businesses and with respect to its future
earnings.





The
following information should be read in conjunction with PPL Energy Supply's
Condensed Consolidated Financial Statements and the accompanying Notes and with
PPL Energy Supply's 2007 Form 10-K.





Terms and
abbreviations are explained in the glossary.  Dollars are in millions
unless otherwise noted.





Results of
Operations





The
following discussion begins with a summary of PPL Energy Supply's
earnings.  "Results of Operations" continues with a review of results
by reportable segment and a description of key factors by segment that
management expects may impact future earnings.  This section ends with
explanations of significant changes in principal items on PPL Energy Supply's
Statements of Income, comparing the three and six months ended June 30,
2008, with the same periods in 2007.





Earnings





Net
income was:





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007$
            157
            
            
            $
            320
            
            
            $
            361
            
            
            $
            467





The
changes in net income from period to period were, in part, attributable to
several special items that management considers significant.  Details
of these special items are provided within the review of each segment's
earnings.





The
period-to-period changes in significant earnings components are explained in the
"Statement of Income Analysis."





The
results for interim periods can be disproportionately influenced by various
factors and developments and by seasonal variations, and as such, the results of
operations for interim periods do not necessarily indicate results or trends for
the year or for future operating results.





Segment
Results





Net
income by segment was:





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Supply
            
            $
            95
            
            
            $
            137
            
            
            $
            201
            
            
            $
            256International
      Delivery
            
            
            62
            
            
            
            183
            
            
            
            160
            
            
            
            211Total
            
            $
            157
            
            
            $
            320
            
            
            $
            361
            
            
            $
            467





Supply
Segment





The
Supply segment primarily consists of the domestic energy marketing, domestic
generation and domestic development operations of PPL Energy
Supply.  In August 2007, PPL Energy Supply completed the sale of its
domestic telecommunication operations.  See Note 8 to the Financial
Statements for additional information.





Supply
segment net income was:





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Energy
      revenues (a)
            
            $
            340
            
            
            $
            833
            
            
            $
            1,119
            
            
            $
            1,594Energy-related
      businesses
            
            
            120
            
            
            
            174
            
            
            
            225
            
            
            
            347Total
      operating revenues
            
            
            460
            
            
            
            1,007
            
            
            
            1,344
            
            
            
            1,941Fuel
      and energy purchases (a)
            
            
            (121
            )
            
            
            383
            
            
            
            164
            
            
            
            724Other
      operation and maintenance
            
            
            217
            
            
            
            192
            
            
            
            454
            
            
            
            380Depreciation
            
            
            47
            
            
            
            39
            
            
            
            88
            
            
            
            77Taxes,
      other than income
            
            
            9
            
            
            
            10
            
            
            
            11
            
            
            
            18Energy-related
      businesses
            
            
            115
            
            
            
            196
            
            
            
            218
            
            
            
            392Total
      operating expenses
            
            
            267
            
            
            
            820
            
            
            
            935
            
            
            
            1,591Other
      Income - net
            
            
            6
            
            
            
            18
            
            
            
            14
            
            
            
            31Interest
      Expense
            
            
            42
            
            
            
            27
            
            
            
            75
            
            
            
            54Income
      Taxes
            
            
            61
            
            
            
            41
            
            
            
            146
            
            
            
            70Minority
      Interest
            
            
            1
            
            
            
            
            
            
            
            1
            
            
            
            1Net
      Income
            
            $
            95
            
            
            $
            137
            
            
            $
            201
            
            
            $
            256





(a)
            
            Includes
      unrealized gains and losses from economic hedge activity.  See
      Note 14 to the Financial Statements for additional
      information.





The
after-tax change in net income between these periods was due to the following
factors.





June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedEastern
      U.S. non-trading margins
            
            $
            (24
            )
            
            $
            (36
            )Western
      U.S. non-trading margins
            
            
            1
            
            
            
            2Net
      energy trading margins
            
            
            25
            
            
            
            19Taxes,
      other than income
            
            
            
            
            
            
            4Depreciation
            
            
            (6
            )
            
            
            (6
            )Other
      operating expenses
            
            
            1
            
            
            
            (10
            )Interest
      expense
            
            
            (8
            )
            
            
            (12
            )Earnings
      from synfuel projects
            
            
            (7
            )
            
            
            (34
            )Realized
      earnings on nuclear plant decommissioning trust
            
            
            
            
            
            
            (3
            )Other
            
            
            (11
            )
            
            
            (7
            )Special
      items
            
            
            (13
            )
            
            
            28$
            (42
            )
            
            $
            (55
            )





·
            See
      "Domestic Gross Energy Margins" for an explanation of non-trading margins
      by geographic region and for an explanation of net energy trading
      margins.·
            Higher
      other operating expenses for the six months ended June 30, 2008, were
      attributable to higher operating costs at the fossil/hydro generating
      stations (including higher outage costs at the Eastern U.S. fossil/hydro
      stations) and higher operating costs in the energy marketing
      business.  Partially offsetting these increases were lower
      outage costs at the Susquehanna nuclear station.·
            Lower
      earnings contribution from synfuel projects for both periods was the
      result of the expiration of federal tax credits and closure of the synfuel
      facilities at the end of 2007.·
            Interest
      expense was higher for both periods primarily due to higher interest
      expense on long-term debt.





The
following after-tax amounts, which management considers special items, also had
a significant impact on the Supply segment earnings.  See the
indicated Notes to the Financial Statements for additional
information.





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Mark-to-market
      adjustments from certain economic hedges (a)
            
            $
            4
            
            
            $
            16
            
            
            $
            54
            
            
            $
            26Impairment
      of nuclear plant decommissioning trust investments (Note
    12)
            
            
            (4
            )
            
            
            
            
            
            
            (4
            )Sale
      of domestic telecommunication operations (Note 8)
            
            
            
            
            
            
            (2
            )
            
            
            
            
            
            
            (20
            )PJM
      billing dispute (b)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1
            )Off-site
      remediation of ash basin leak (Note 10)
            
            
            1
            
            
            
            
            
            
            
            1Colstrip
      groundwater litigation (Note 10)
            
            
            
            
            
            
            
            
            
            
            (5
            )Synthetic
      fuel tax adjustment (Note 10)
            
            
            
            
            
            
            
            
            
            
            (13
            )Total
            
            $
            1
            
            
            $
            14
            
            
            $
            33
            
            
            $
            5





(a)
            
            These
      economic hedge transactions do not qualify for hedge accounting under SFAS
      133, or hedge accounting was not elected; however, they economically hedge
      a specific risk and do not represent speculative trading
      activity.  These transactions are highly probable of going to
      physical delivery; therefore, the mark-to-market gains or losses on these
      transactions will reverse by the time the transactions settle in the
      future.  See "Domestic Gross Energy Margins by Region" and Note
      14 to the Financial Statements for additional information regarding
      economic activity.(b)
            
            Represents
      additional interest related to the settlement of this litigation in
      2007.





Outlook





Excluding
special items, PPL Energy Supply projects lower earnings for its Supply segment
in 2008 compared with 2007 as a result of the loss of synfuel-related benefits
and higher depreciation and operating expenses for scrubbers that have been or
will be installed during 2008 at its Montour and Brunner Island coal-fired power
plants.  PPL Energy Supply now expects its energy margins to be flat
in 2008 compared with 2007.  During the second half of 2008, increased
margins as a result of higher-valued wholesale energy contracts and higher
expected base-load generation are expected to be offset by higher coal commodity
and transportation costs, and lower expected margins from PPL Energy Supply's
marketing and trading activities as a result of reduced liquidity in certain
energy markets.
 
 The
earnings projection for 2008 does not include the impact of a potential
impairment of PPL Energy Supply's emission allowances.  In July 2008,
the United States Court of Appeals for the D.C. Circuit invalidated the EPA's
Clean Air Interstate Rule (CAIR), stating that a regional cap-and-trade program
cannot be used to facilitate attainment of the ozone and fine particulates
standards.
 
 As a
result of this Court decision, PPL Energy Supply now anticipates that its annual
nitrogen oxide allowances and its sulfur dioxide allowances may be
impaired.  The combined book value for these emission allowances was
approximately $100 million at June 30, 2008, excluding the seasonal nitrogen
oxide allowances unaffected by the Court's ruling.  The amount of any
third quarter 2008 impairment charge will be based on, among other factors, an
assessment of the emission allowances PPL Energy Supply expects to consume in
future periods, and prevailing market prices.  As a result of the
Court's decision, PPL Energy Supply also is reviewing aspects of its previously
announced program to install certain pollution control equipment to meet the
CAIR requirements.  In addition, as a part of the analysis of the
potential financial impacts of this decision, PPL Energy Supply is reviewing the
relevant contracts for the purchase of these allowances.  See Note 10
to the Financial Statements for additional information.
 
 Although
the annual planning cycle is not yet completed, PPL Energy Supply expects 2009
earnings for its Supply segment to be lower than projected 2008 earnings,
excluding special items.  Factors contributing to these lower earnings
are rising delivered fuel prices and the completion of the scrubber construction
program, coupled with lower sulfur dioxide allowance prices.  PPL
Energy Supply's ability to recover these fuel cost increases is constrained by
the existence of the fixed-price PLR contract that expires at the end of
2009.


As
discussed in "Item 1A. Risk Factors" in PPL Energy Supply's 2007 Form 10-K,
activities by the FERC, other governmental authorities and other involved
parties can have a significant effect on market prices for wholesale
electricity, and thus on the margins that PPL EnergyPlus achieves on its future
sales of energy.  In April 2008, the FERC denied PJM's request to
increase the Cost of New Entry element of the PJM capacity pricing
formula.  In a separate action, in connection with Duquesne Light
Company's (Duquesne) decision to leave PJM, in April 2008 the FERC ruled that
PJM may grant capacity resources in the Duquesne zone transmission rights that
would facilitate inclusion of such capacity in PJM's Reliability Pricing Model
(RPM) capacity markets, beginning with the 2011-2012 planning year auction,
notwithstanding that such capacity would be treated as external generation to
PJM at the time it had to be delivered.  In response, PJM has
indicated that it will grant generators in the Duquesne zone of PJM the
necessary transmission rights.  These FERC and PJM actions reduced
capacity prices for the 2011-2012 RPM capacity auction that took place in May
2008 and could reduce capacity prices for future RPM capacity
auctions.  Because a large portion of PPL Energy Supply's generating
capacity is located in PJM, the impact of any such reduced RPM capacity prices
on PPL Energy Supply could be material.  PPL Energy Supply cannot
predict the ultimate outcome of these or related FERC proceedings and the impact
on capacity prices in PJM or on PPL Energy Supply's financial
results.  See Note 10 to the Financial Statements for information on
recent FERC litigation related to the RPM pricing model.





International Delivery
Segment





The
International Delivery segment includes operations of the international energy
businesses of PPL Global that are primarily focused on the distribution of
electricity.  PPL Global's major remaining international business is
located in the U.K.  In 2007, PPL completed the sale of its Latin
American operating businesses.  In the first quarter of 2008, PPL
Global recognized income tax adjustments and other expenses in Discontinued
Operations as the dissolution of the remaining Latin American holding companies
commenced.  PPL Global may recognize additional adjustments and/or
expenses in Discontinued Operations until this process is
complete.  See Note 8 to the Financial Statements for additional
information.





The
International Delivery segment results in 2008 and 2007 reflect the
reclassification of Latin American revenues and expenses to Discontinued
Operations.





International
Delivery segment net income was:





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Utility
      revenues
            
            $
            211
            
            
            $
            218
            
            
            $
            452
            
            
            $
            434Energy-related
      businesses
            
            
            9
            
            
            
            9
            
            
            
            18
            
            
            
            19Total
      operating revenues
            
            
            220
            
            
            
            227
            
            
            
            470
            
            
            
            453Other
      operation and maintenance
            
            
            50
            
            
            
            69
            
            
            
            96
            
            
            
            125Depreciation
            
            
            35
            
            
            
            35
            
            
            
            71
            
            
            
            78Taxes,
      other than income
            
            
            17
            
            
            
            16
            
            
            
            34
            
            
            
            32Energy-related
      businesses
            
            
            3
            
            
            
            4
            
            
            
            6
            
            
            
            9Total
      operating expenses
            
            
            105
            
            
            
            124
            
            
            
            207
            
            
            
            244Other
      Income - net
            
            
            1
            
            
            
            6
            
            
            
            4
            
            
            
            17Interest
      Expense
            
            
            34
            
            
            
            45
            
            
            
            72
            
            
            
            94Income
      Taxes
            
            
            20
            
            
            
            (18
            )
            
            
            40
            
            
            
            (3
            )Income
      from Discontinued Operations
            
            
            
            
            
            
            101
            
            
            
            5
            
            
            
            76Net
      Income
            
            $
            62
            
            
            $
            183
            
            
            $
            160
            
            
            $
            211





The
after-tax change in net income between these periods was due to the following
factors, including Discontinued Operations.





June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedU.K.:Delivery
      margins
            $
            2
            
            
            $
            18Depreciation
            
            
            
            
            
            5Other
      operating expenses
            
            5
            
            
            
            11Interest
      expense
            
            3
            
            
            
            6Income
      taxes
            
            (1
            )
            
            
            12Foreign
      currency exchange rates
            
            1
            
            
            
            2Hyder
      liquidation distributions (Note 8)
            
            (1
            )
            
            
            (3
            )Gain
      on transfer of equity investment (Note 8)
            
            
            
            
            
            (5
            )Other
            
            (1
            )
            
            
            (4
            )Discontinued
      operations (Note 8)
            
            (18
            )
            
            
            (28
            )Change
      in tax reserves (Note 5)
            
            (31
            )
            
            
            (31
            )Other
            
            3
            
            
            
            9Special
      item
            
            (83
            )
            
            
            (43
            )$
            (121
            )
            
            $
            (51
            )





·
            The
      U.K.'s earnings for the six months ended June 30, 2008, were favorably
      impacted by higher delivery margins primarily due to higher prices, which
      include the annual regulatory adjustment for inflation.·
            Lower
      U.K. other operating expenses for both periods were primarily due to lower
      pension expense resulting from an improvement in the fair value of pension
      assets and an increase in the discount rate, partially offset by lower
      mortality rates.·
            Lower
      U.K. income taxes for the six months ended June 30, 2008, were primarily
      due to a favorable U.K. taxing authority determination in 2008 related to
      deductibility of imputed interest on a loan from
  Hyder.





The
following after-tax amount, which management considers a special item, also had
a significant impact on the International Delivery segment
earnings.





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Sale
      of Latin American businesses (Note 8)
            
            
            
            
            
            $
            83
            
            
            
            
            
            
            $
            43





Outlook





Excluding
special items, PPL Energy Supply projects the earnings of its International
Delivery segment will decline in 2008 compared with 2007.  This
decline is a result of the 2007 sale of PPL Energy Supply's Latin American
businesses and higher U.S. income taxes primarily driven by certain U.S. income
tax benefits realized in 2007.  Partially offsetting the impact of
these negative earnings drivers are lower U.K. pension expense and lower
financing costs.





Statement
of Income Analysis --





Domestic
Gross Energy Margins





Non-GAAP Financial
Measure





The
following discussion includes financial information prepared in accordance with
GAAP, as well as a non-GAAP financial measure, "Domestic Gross Energy
Margins."  The presentation of "Domestic Gross Energy Margins" is
intended to supplement the investors' understanding of PPL Energy Supply's
domestic non-trading and trading activities by combining applicable income
statement line items and related adjustments to calculate a single financial
measure.  PPL Energy Supply believes that "Domestic Gross Energy
Margins" is useful and meaningful to investors because it provides them with the
results of PPL Energy Supply's domestic non-trading and trading activities as
another criterion in making their investment decisions.  PPL Energy
Supply's management also uses "Domestic Gross Energy Margins" in measuring
certain corporate performance goals used in determining variable
compensation.  Other companies may use different measures to present
the results of their non-trading and trading
activities.  Additionally, "Domestic Gross Energy Margins" is not
intended to replace "Operating Income," which is determined in accordance with
GAAP, as an indicator of overall operating performance.  The following
table provides a reconciliation between "Domestic Gross Energy Margins" as
defined by PPL Energy Supply and "Operating Income."





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Operating
      Income (a)
            
            $
            308
            
            
            $
            290
            
            
            $
            672
            
            
            $
            559Adjustments:Utility
      (a)
            
            
            (211
            )
            
            
            (218
            )
            
            
            (452
            )
            
            
            (434
            )Energy-related
      businesses, net (b)
            
            
            (11
            )
            
            
            17
            
            
            
            (19
            )
            
            
            35Other
      operation and maintenance (a)
            
            
            267
            
            
            
            261
            
            
            
            550
            
            
            
            505Depreciation
      (a)
            
            
            82
            
            
            
            74
            
            
            
            159
            
            
            
            155Taxes,
      other than income (a)
            
            
            26
            
            
            
            26
            
            
            
            45
            
            
            
            50Revenue
      adjustments (c)
            
            
            (5
            )
            
            
            21
            
            
            
            (8
            )
            
            
            48Expense
      adjustments (c)
            
            
            (3
            )
            
            
            (4
            )
            
            
            (6
            )
            
            
            (8
            )Domestic
      gross energy margins
            
            $
            453
            
            
            $
            467
            
            
            $
            941
            
            
            $
            910





(a)
            
            As
      reported on the Statements of Income.(b)
            
            Amount
      represents the net of "Energy-related businesses" revenue and expense as
      reported on the Statements of Income.(c)
            
            The
      components of these adjustments are detailed in the table
      below.





The
following table provides the income statement line items and other adjustments
that comprise domestic gross energy margins.





Three
      Months Ended June 30,2008
            
            2007
            
            ChangeRevenueWholesale
      energy marketing to affiliate (a)
            
            $
            428
            
            
            $
            422
            
            
            $
            6Unregulated
      retail electric and gas (a)
            
            
            33
            
            
            
            23
            
            
            
            10Wholesale
      energy marketing (a)
            
            
            (173
            )
            
            
            379
            
            
            
            (552
            )Net
      energy trading margins (a)
            
            
            52
            
            
            
            9
            
            
            
            43Revenue
      adjustments (b)Miscellaneous
      wholesale energy marketing to affiliate
            
            
            (3
            )
            
            
            (4
            )
            
            
            1Gains
      from sale of emission allowances (c)
            
            
            
            
            
            
            26
            
            
            
            (26
            )Other
            
            
            (2
            )
            
            
            (1
            )
            
            
            (1
            )Total
      revenue adjustments
            
            
            (5
            )
            
            
            21
            
            
            
            (26
            )335
            
            
            
            854
            
            
            
            (519
            )ExpenseFuel
      (a)
            
            
            208
            
            
            
            202
            
            
            
            6Energy
      purchases (a)
            
            
            (359
            )
            
            
            144
            
            
            
            (503
            )Energy
      purchases from affiliate (a)
            
            
            30
            
            
            
            37
            
            
            
            (7
            )Expense
      adjustments (b)
            
            
            3
            
            
            
            4
            
            
            
            (1
            )(118
            )
            
            
            387
            
            
            
            (505
            )Domestic
      gross energy margins
            
            $
            453
            
            
            $
            467
            
            
            $
            (14
            )





Six
      Months Ended June 30,2008
            
            2007
            
            ChangeRevenueWholesale
      energy marketing to affiliate (a)
            
            $
            917
            
            
            $
            903
            
            
            $
            14Unregulated
      retail electric and gas (a)
            
            
            67
            
            
            
            45
            
            
            
            22Wholesale
      energy marketing (a)
            
            
            85
            
            
            
            628
            
            
            
            (543
            )Net
      energy trading margins (a)
            
            
            50
            
            
            
            18
            
            
            
            32Revenue
      adjustments (b)Miscellaneous
      wholesale energy marketing to affiliate
            
            
            (7
            )
            
            
            (8
            )
            
            
            1Gains
      from sale of emission allowances (c)
            
            
            1
            
            
            
            57
            
            
            
            (56
            )Other
            
            
            (2
            )
            
            
            (1
            )
            
            
            (1
            )Total
      revenue adjustments
            
            
            (8
            )
            
            
            48
            
            
            
            (56
            )1,111
            
            
            
            1,642
            
            
            
            (531
            )ExpenseFuel
      (a)
            
            
            451
            
            
            
            435
            
            
            
            16Energy
      purchases (a)
            
            
            (345
            )
            
            
            215
            
            
            
            (560
            )Energy
      purchases from affiliate (a)
            
            
            58
            
            
            
            74
            
            
            
            (16
            )Expense
      adjustments (b)
            
            
            6
            
            
            
            8
            
            
            
            (2
            )170
            
            
            
            732
            
            
            
            (562
            )Domestic
      gross energy margins
            
            $
            941
            
            
            $
            910
            
            
            $
            31





(a)
            
            As
      reported on the Statements of Income.(b)
            
            To
      include/exclude the impact of any revenues and expenses not associated
      with domestic gross energy margins, consistent with the way management
      reviews domestic gross energy margins internally.(c)
            
            Included
      in "Other operation and maintenance" on the Statements of
      Income.





Domestic Gross Energy
Margins By Region





Domestic
gross energy margins are generated through PPL Energy Supply's non-trading and
trading activities.  PPL Energy Supply manages its non-trading energy
business on a geographic basis that is aligned with its generation
assets.  PPL Energy Supply further segregates non-trading activities
into two categories:  hedge activity and economic
activity.  Economic activity represents the net unrealized effect of
derivative transactions that are entered into as economic hedges, and that do
not qualify for hedge accounting, or hedge accounting was not elected under
SFAS 133.





Three
      Months Ended June 30,2008
            
            2007
            
            ChangeNon-tradingEastern
      U.S.
            
            $
            346
            
            
            $
            393
            
            
            $
            (47
            )Western
      U.S.
            
            
            55
            
            
            
            65
            
            
            
            (10
            )Net
      energy trading
            
            
            52
            
            
            
            9
            
            
            
            43Domestic
      gross energy margins
            
            $
            453
            
            
            $
            467
            
            
            $
            (14
            )





Six
      Months Ended June 30,2008
            
            2007
            
            ChangeNon-tradingEastern
      U.S.
            
            $
            769
            
            
            $
            759
            
            
            $
            10Western
      U.S.
            
            
            122
            
            
            
            133
            
            
            
            (11
            )Net
      energy trading
            
            
            50
            
            
            
            18
            
            
            
            32Domestic
      gross energy margins
            
            $
            941
            
            
            $
            910
            
            
            $
            31





Eastern
U.S.





Eastern
U.S. non-trading margins, excluding unrealized results from economic activity
and hedge ineffectiveness, were $39 million and $62 million lower during the
three and six months ended June 30, 2008, compared with the same periods in
2007.  The decrease for the three and six months ended was primarily
due to higher average fuel prices, which were up 17% and 12%, and lower
base-load generation which was down 2% for both periods primarily due to the
retirement of the Martins Creek coal units in September
2007.  Partially offsetting these lower margins was a 1.4% increase in
PLR sales prices in accordance with the schedule established by the PUC Final
Order.





Eastern
U.S. non-trading margins that resulted from unrealized economic activity and
hedge ineffectiveness were $8 million lower during the three months ended June
30, 2008, compared with the same period in 2007.  This decrease was
due to unrealized losses on dedesignated cash flow hedges, partially offset by
unrealized gains on hedge FTRs and load-following deals.  For the six
months ended June 30, 2008, eastern U.S. non-trading margins that resulted
from unrealized economic activity and hedge ineffectiveness were $72 million
higher compared with the same period in 2007.  This increase was due
to unrealized gains on hedge FTRs and purchases to supply load-following
contracts, which was driven by increases in power and gas prices, partially
offset by unrealized losses on dedesignated cash flow hedges.





Western
U.S.





Western
U.S. non-trading margins, excluding unrealized results from economic activity
and hedge ineffectiveness were insignificant for the three months ended June 30,
2008, compared with the same period in 2007.  For the six months ended
June 30, 2008, non-trading margins excluding unrealized results from economic
activity and hedge ineffectiveness, were $4 million higher compared with the
same period in 2007.  The increase for the six months ended is
primarily due to higher margins from wholesale activity due to favorable
pricing, partially offset by lower hydro generation.


Western
U.S. non-trading margins that resulted from unrealized economic activity and
hedge ineffectiveness were lower for the three and six months ended June 30,
2008, by $9 million and $15 million compared with the same periods in
2007.  This decrease was primarily due to unrealized losses on
dedesignated cash flow hedges.





Net
Energy Trading





PPL
Energy Supply enters into energy contracts to take advantage of market
opportunities.  As a result, PPL Energy Supply may at times create a
net open position in its portfolio that could result in significant losses if
prices do not move in the manner or direction anticipated.  The
margins from these trading activities are reflected in the Statements of Income
as "Net energy trading margins."  These physical and financial
contracts cover trading activity associated with electricity, gas and
oil.





During
the three months ended June 30, 2008, net energy trading margins increased by
$43 million, compared with the same period in 2007.  This increase
consists of $26 million of higher realized gains and $17 million of higher
unrealized gains, both driven by increased FTR activity.  During the
six months ended June 30, 2008, net energy trading margins increased by $32
million, compared with the same period in 2007.  This increase
consists of $25 million of higher realized gains and $7 million of higher
unrealized gains, both driven by increased FTR activity.





The
realized physical volumes for electricity and gas associated with energy trading
were:





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007GWh
            
            
            4,429
            
            
            
            2,559
            
            
            
            8,867
            
            
            
            5,347Bcf
            
            
            4.9
            
            
            
            2.9
            
            
            
            10.5
            
            
            
            8.2





Utility
Revenues





The
changes in utility revenues were attributable to:





June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedU.K.
      retail electric revenue
            
            $
            (8
            )
            
            $
            14U.K.
      foreign currency exchange rates
            
            
            1
            
            
            
            4$
            (7
            )
            
            $
            18





The
decrease in U.K. utility revenues for the three months ended June 30, 2008,
compared with the same period in 2007, excluding foreign currency exchange rate
impacts, was primarily due to a decrease in engineering services performed for
third parties, partially offset by an increase in sales volume.





The
increase in U.K. utility revenues for the six months ended June 30, 2008,
compared with the same period in 2007, excluding foreign currency exchange rate
impacts, was primarily due to an increase in prices effective April 1, partially
offset by a decrease in engineering services performed for third
parties.





Energy-related
Businesses





Energy-related
businesses contributed $28 million more to operating income for the three months
ended June 30, 2008, compared with the same period in 2007.  The
increase was primarily attributable to:





·
            $19
      million less in operating losses from synfuel projects.  The
      projects ceased operation at the end of 2007;·
            a
      $3 million impairment in 2007 of domestic telecommunication assets that
      were subsequently sold in 2007 (see Note 8 to the Financial Statements);
      and·
            a
      $7 million net loss recorded in 2007 on options purchased to hedge the
      risk associated with the phase-out of the synthetic fuel tax
      credits.  No such options were held in 2008, as PPL Energy
      Supply's synthetic fuel operations have ceased; partially offset
      by·
            $3
      million less in earnings from those domestic telecommunication assets that
      were sold in 2007.





Energy-related
businesses contributed $54 million more to operating income for the six months
ended June 30, 2008, compared with the same period in 2007.  The
increase was primarily attributable to:





·
            $34
      million less in operating losses from synfuel projects.  The
      projects ceased operation at the end of 2007; and·
            a
      $34 million impairment in 2007 of domestic telecommunication assets that
      were subsequently sold in 2007 (see Note 8 to the Financial Statements);
      partially offset by·
            a
      $14 million net gain recorded in 2007 on options purchased to hedge the
      risk associated with the phase-out of the synthetic fuel tax
      credits.  No such options were held in 2008, as PPL Energy
      Supply's synthetic fuel operations have ceased; and·
            $5
      million less in earnings from those domestic telecommunication assets that
      were sold in 2007.





See Note
10 to the Financial Statements for additional information on the synthetic fuel
tax credits and the synfuel projects.





Other
Operation and Maintenance





The
increases in other operation and maintenance expenses were due to:





June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedLower
      gains on sale of emission allowances
            
            $
            27
            
            
            $
            56Salary
      expense
            
            
            2
            
            
            
            17Colstrip
      groundwater litigation (Note 10)
            
            
            1
            
            
            
            8Outage
      costs at Western and Eastern U.S. fossil/hydro stations
            
            
            1
            
            
            
            8U.K.
      foreign currency exchange rates
            
            
            1
            
            
            
            1Off-site
      remediation of ash basin leak (Note 10)
            
            
            (2
            )
            
            
            (2
            )Outage
      costs at Susquehanna nuclear station
            
            
            (2
            )
            
            
            (4
            )Allocation
      of corporate service costs (Note 11)
            
            
            (1
            )
            
            
            (9
            )WPD
      recoverable engineering services
            
            
            (11
            )
            
            
            (12
            )Defined
      benefit costs
            
            
            (7
            )
            
            
            (15
            )Other
            
            
            (3
            )
            
            
            (3
            )$
            6
            
            
            $
            45





Depreciation





The
increases in depreciation expense were due to:





June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedAdditions
      to PP&E
            
            $
            11
            
            
            $
            17Extension
      of useful lives of certain WPD network assets in 2007
            
            
            (3
            )
            
            
            (13
            )$
            8
            
            
            $
            4





Taxes,
Other Than Income





Taxes,
other than income decreased by $5 million during the six months ended June 30,
2008, compared with the same period in 2007.The decrease was
primarily due to a decrease in PPL Montana's property taxes, as the 2008 period
included a $7 million refund credit.  The credit was partially offset
by a $1 million increase in WPD property taxes.





Other
Income - net





See Note
12 to the Financial Statements for details of other income.





Interest
Expense





The
changes in interest expense, which includes "Interest Expense with
Affiliates," were due to:





June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedLong-term
      debt interest expense
            
            $
            4
            
            
            $
            7Amortization
      of debt issuance costs
            
            
            
            
            
            
            2Redemption
      of 8.23% Subordinated Debentures in 2007 (Note 11)
            
            
            
            
            
            
            (4
            )Capitalized
      interest
            
            
            (1
            )
            
            
            (9
            )Other
            
            
            1
            
            
            
            3$
            4
            
            
            $
            (1
            )





Income
Taxes





The
increases in income taxes were due to:





June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedDecrease
      in synthetic fuel and other tax credits
            
            $
            25
            
            
            $
            64Tax
      reserve adjustments (Note 5)
            
            
            51
            
            
            
            40Higher
      pre-tax book income
            
            
            1
            
            
            
            34Tax
      expense on foreign earnings
            
            
            2
            
            
            
            5Domestic
      manufacturing deduction
            
            
            (3
            )
            
            
            (5
            )Tax
      return adjustments
            
            
            (17
            )
            
            
            (17
            )Other
            
            
            (1
            )
            
            
            (2
            )$
            58
            
            
            $
            119





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





Discontinued
Operations





Income
from Discontinued Operations decreased by $101 million during the three months
ended June 30, 2008, compared with the same period in 2007.  The
decrease was primarily attributable to a $101 million decrease in income from
PPL Energy Supply's Latin American operating businesses that were sold in 2007,
which included an $89 million after-tax gain from the sale of its El Salvadoran
business.





Income
from Discontinued Operations decreased by $71 million during the six months
ended June 30, 2008, compared with the same period in 2007.  The
decrease was primarily attributable to a $71 million decrease in income from PPL
Energy Supply's Latin American operating businesses that were sold in 2007,
which included an $89 million after-tax gain from the sale of its El Salvadoran
business and an after-tax impairment charge of $19 million to its Bolivian
businesses.





See
"Discontinued Operations" in Note 8 to the Financial Statements for additional
information on the 2007 sale of PPL Energy Supply's Latin American operating
businesses.





Financial
Condition





Liquidity
and Capital Resources





PPL
Energy Supply had the following at:





June
      30,2008
            
            December
      31, 2007Cash
      and cash equivalents
            
            $
            355
            
            
            $
            355Short-term
      investments (a)
            
            
            89
            
            
            
            102$
            444
            
            
            $
            457Short-term
      debt
            
            $
            450
            
            
            $
            51





(a)
            
            Includes
      $10 million of auction rate securities at December 31,
      2007.  See below for further discussion of auction rate
      securities.





PPL
Energy Supply's cash and cash equivalents position was unchanged as of June 30,
2008, compared to December 31, 2007, which is primarily the net result
of:





·
            $799
      million of cash provided by operating activities;·
            a
      net increase in short-term debt of $400 million (excluding the impact of
      foreign currency translation adjustments);·
            proceeds
      of $399 million from the issuance of long-term debt;·
            $95
      million of contributions from Member;·
            distributions
      to Member of $567 million;·
            $516
      million of capital expenditures;·
            a
      net increase of $275 million in restricted cash and cash
      equivalents;·
            $247
      million in net expenditures for intangible
    assets;·
            the
      retirement of $57 million of long-term debt;·
            $13
      million in net purchases of nuclear plant decommissioning trust
      investments; and·
            $14
      million in net purchases of other
investments.





Auction Rate
Securities





PPL
Energy Supply had auction rate securities totaling $17 million at June 30,
2008, which were classified as "Investments - Other," and $10 million at
December 31, 2007, which were classified as "Short-term investments" on the
Balance Sheets.  Historically, an active market existed for such
investments, and the auctions provided an opportunity for investors either to
continue to hold an investment at a new reset interest rate or to sell the
investment at its par value for immediate liquidity.  In early 2008,
investor concerns about credit and liquidity in the financial markets generally,
as well as investor concerns over specific insurers that guarantee the credit of
certain of the underlying securities, created uncertainty in the auction rate
securities market and these securities generally failed to be remarketed through
their established auction process.  These auction failures and the
resulting illiquidity continued to impact PPL Energy Supply's auction rate
securities.





At June
30, 2008, PPL Energy Supply concluded that the fair market value of these
auction rate securities was $17 million, a decline of $7 million from par
value.  Because PPL Energy Supply intends and has the ability to hold
these auction rate securities until they can be liquidated at par value, PPL
Energy Supply believes that it does not have material realized loss
exposure.  Based upon the evaluation of available information, PPL
Energy Supply believes these investments continue to be of high credit
quality.  Additionally, PPL Energy Supply does not anticipate having
to sell these securities in order to fund operations.  As such, the
decline in fair value was deemed temporary and is due to general market
conditions.  See Note 13 to the Financial Statements for further
discussion of auction rate securities.





Commercial
Paper





PPL
Energy Supply had $350 million of commercial paper, with a weighted-average
interest rate of 3.00%, outstanding at June 30, 2008, under its $500 million
commercial paper program.





Credit
Facilities





In March
2008, PPL Energy Supply increased the capacity of its 364-day reimbursement
agreement, under which it can cause the bank to issue letters of credit, from
$200 million to $300 million and extended the expiration date of the agreement
to March 2009.





PPL
Energy Supply currently does not expect to make any modifications in 2008,
including extending the expiration date, to its $3.4 billion five-year credit
facility that expires in June 2012.  At June 30, 2008, PPL Energy
Supply had cash borrowings of $100 million, at an interest rate of 2.94%,
outstanding under this facility.





At June
30, 2008 and December 31, 2007, PPL Energy Supply had $1.8 billion and $683
million of letters of credit outstanding under its domestic credit
facilities.  This change primarily related to increased collateral
requirements in connection with energy marketing and trading
activities.





In
January 2008, WPDH Limited extended the expiration date of its £150 million
(approximately $296 million) five-year committed credit facility to January
2013, and it has the option to extend the expiration date by another year in
January 2009.





Financing
Activities





In March
2008, PPL Energy Supply issued $400 million of 6.50% Senior Notes due 2018
(6.50% Notes).  The 6.50% Notes may be redeemed any time prior to
maturity at PPL Energy Supply's option at make-whole redemption
prices.  PPL Energy Supply received proceeds of $396 million, net of a
discount and underwriting fees, from the issuance of the 6.50%
Notes.  The proceeds have been used for general corporate purposes,
including capital expenditures relating to the installation of pollution control
equipment by PPL Energy Supply subsidiaries.





In April
2008, PPL Energy Supply elected to change the interest rate mode on the Exempt
Facilities Revenue Bonds, Series 2007 due 2037 (Bonds) that were issued by the
Pennsylvania Economic Development Financing Authority on behalf of PPL Energy
Supply in December 2007.  The interest rate mode was converted from a
rate that was reset daily through daily remarketing of the Bonds to a term rate
of 1.80% for one year.





The terms
of PPL Energy Supply's 2-5/8% Convertible Senior Notes due 2023 (Convertible
Senior Notes) included a market price trigger that permitted holders to convert
the notes during any fiscal quarter if the closing sale price of PPL's common
stock exceeded $29.83 for at least 20 trading days in the 30 consecutive trading
days ending on the last trading day of the preceding fiscal
quarter.  The holders of the Convertible Senior Notes also had the
right to require PPL Energy Supply to purchase all or any part (equal to $1,000
principal amount or an integral multiple thereof) of the Convertible Senior
Notes on May 15, 2008 at 100% of the principal amount, plus accrued and unpaid
interest thereon as of such date.  In April 2008, the holders were
notified that, in accordance with the terms of the Convertible Senior Notes, PPL
Energy Supply was calling for redemption on May 20, 2008 all outstanding
Convertible Senior Notes at 100% of the principal amount, plus accrued and
unpaid interest thereon as of such date.





The
Convertible Senior Notes were subject to conversion at the election of the
holders any time prior to May 20, 2008 as a result of the market price trigger
being met and the notes being called for redemption.  Upon conversion
of the Convertible Senior Notes, PPL Energy Supply was required to settle the
principal amount in cash and any conversion premium in cash or PPL common
stock.  During the six months ended June 30, 2008, Convertible Senior
Notes in an aggregate principal amount of $57 million were presented for
conversion.  The total conversion premium related to these conversions
was $56 million, which was settled with 1,128,341 shares of PPL common stock,
together with an insignificant amount of cash in lieu of fractional
shares.  On May 20, 2008, PPL Energy Supply redeemed an insignificant
amount of Convertible Senior Notes.  As of June 30, 2008, no
Convertible Senior Notes remain outstanding.





In July
2008, PPL Energy Supply issued $300 million of 6.30% Senior Notes due 2013
(6.30% Notes).  The 6.30% Notes may be redeemed any time prior to
maturity at PPL Energy Supply's option at make-whole redemption
prices.  PPL Energy Supply received proceeds of $298 million, net of a
discount and underwriting fees, from the issuance of the 6.30%
Notes.  The proceeds have been used to repay short-term
debt.





Leases





In June
2008, PPL EnergyPlus executed an agreement to acquire the rights to an existing
long-term tolling agreement associated with the capacity and energy of a 664 MW
natural gas-fired power plant in Lebanon, Pennsylvania.  Under the
agreement, PPL EnergyPlus has control over the plant's dispatch into the
electricity grid and will supply the natural gas necessary to operate the
plant.  The tolling agreement extends through 2021 and contains a
lease that will be accounted for as an operating lease.  See Note 18
to the Financial Statements for additional information.





Rating Agency
Decisions





Moody's,
S&P and Fitch periodically review the credit ratings on the debt and
preferred securities of PPL Energy Supply and its subsidiaries.  Based
on their respective independent reviews, the rating agencies may make certain
ratings revisions or ratings affirmations.





A credit
rating reflects an assessment by the rating agency of the creditworthiness
associated with an issuer and particular securities that it
issues.  The credit ratings of PPL Energy Supply and its subsidiaries
are based on information provided by PPL Energy Supply and other
sources.  The ratings of Moody's, S&P and Fitch are not a
recommendation to buy, sell or hold any securities of PPL Energy Supply or its
subsidiaries.  Such ratings may be subject to revisions or withdrawal
by the agencies at any time and should be evaluated independently of each other
and any other rating that may be assigned to the securities.  A
downgrade in PPL Energy Supply's or its subsidiaries' credit ratings could
result in higher borrowing costs and reduced access to capital
markets.





Moody's
and S&P did not take any actions related to PPL Energy Supply and its rated
subsidiaries during the six months ended June 30, 2008.  In March
2008, Fitch completed a review of its credit ratings for PPL Energy Supply and
affirmed all its ratings.  In May 2008, Fitch changed its outlook for
WPDH Limited, WPD LLP, WPD (South Wales) and WPD (South West) to positive from
stable.





For
additional information on PPL Energy Supply's liquidity and capital resources,
see "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations," in PPL Energy Supply's 2007 Form 10-K.





Risk
Management - Energy Marketing & Trading and Other





Market
Risk





Commodity
Price Risk (Non-trading)





PPL
Energy Supply's non-trading commodity derivative contracts mature at various
times through 2017.  PPL Energy Supply segregates its non-trading
activities into two categories:  hedge activity and economic
activity.  Transactions that are accounted for as hedge activity
qualify for hedge accounting treatment under SFAS 133.  The majority
of PPL Energy Supply's energy transactions qualify for accrual or hedge
accounting.  The economic activity category includes transactions that
address a specific risk, but were not eligible for hedge accounting or for which
hedge accounting was not elected.  Although they do not receive hedge
accounting treatment, these transactions are considered non-trading
activity.  The net fair value of economic positions at June 30,
2008 and December 31, 2007, including net premiums on options, was $116 million
and $67 million.





The
following chart sets forth the net fair value of PPL Energy Supply's non-trading
commodity derivative contracts.  For the periods ended June 30,
2008, these amounts reflect fair value as defined by SFAS 157, as
amended.  See Notes 13 and 14 to the Financial Statements for
additional information.





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Fair
      value of contracts outstanding at the beginning of the
    period
            
            $
            (268
            )
            
            $
            (13
            )
            
            $
            (305
            )
            
            $
            (111
            )Contracts
      realized or otherwise settled during the period
            
            
            (96
            )
            
            
            (38
            )
            
            
            (87
            )
            
            
            (20
            )Fair
      value of new contracts entered into during the period
            
            
            70
            
            
            
            (48
            )
            
            
            170
            
            
            
            44Changes
      in fair value attributable to changes in valuation techniques
      (a)
            
            
            
            
            
            
            
            
            
            
            55Other
      changes in fair value
            
            
            (760
            )
            
            
            (146
            )
            
            
            (887
            )
            
            
            (158
            )Fair
      value of contracts outstanding at the end of the period
            
            $
            (1,054
            )
            
            $
            (245
            )
            
            $
            (1,054
            )
            
            $
            (245
            )





(a)
            
            Amount
      represents the reduction of valuation reserves related to capacity and FTR
      contracts upon the adoption of SFAS
157.





The
following chart segregates fair values of PPL Energy Supply's non-trading
commodity derivative contracts at June 30, 2008, based on whether the fair
values are determined by quoted market prices for identical instruments or other
more subjective means.








Fair
      Value of Contracts at Period-EndGains
      (Losses)Maturity
              Less
      Than
              1
      Year
            
            Maturity
              1-3
      Years
            
            Maturity
              4-5
      Years
            
            Maturity
              in
      Excess
              of
      5 Years
            
            Total
      Fair
              ValueSource
      of Fair ValuePrices
      quoted in active markets for identical instruments
            
            $
            9
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            9Prices
      based on significant other observable inputs
            
            
            151
            
            
            $
            (1,103
            )
            
            $
            (388
            )
            
            $
            1
            
            
            
            (1,339
            )Prices
      based on significant unobservable inputs
            
            
            
            
            
            
            1
            
            
            
            58
            
            
            
            217
            
            
            
            276Fair
      value of contracts outstanding at the end of the period
            
            $
            160
            
            
            $
            (1,102
            )
            
            $
            (330
            )
            
            $
            218
            
            
            $
            (1,054
            )





Because
of PPL Energy Supply's efforts to hedge the value of energy from its generation
assets, PPL Energy Supply sells electricity, capacity and related services and
buys fuel on a forward basis, resulting in open contractual
positions.  If PPL Energy Supply were unable to deliver firm capacity
and energy or to accept the delivery of fuel under its agreements, under certain
circumstances it could be required to pay damages.  These damages
would be based on the difference between the market price and the contract price
of the commodity.  Depending on price volatility in the wholesale
energy markets, such damages could be significant.  Extreme weather
conditions, unplanned power plant outages, transmission disruptions,
nonperformance by counterparties (or their own counterparties) with which it has
energy contracts and other factors could affect PPL Energy Supply's ability to
meet its obligations, or cause significant increases in the market price of
replacement energy.  Although PPL Energy Supply attempts to mitigate
these risks, there can be no assurance that it will be able to fully meet its
firm obligations, that it will not be required to pay damages for failure to
perform, or that it will not experience counterparty nonperformance in the
future.





Commodity
Price Risk (Trading)





PPL
Energy Supply's trading contracts mature at various times through
2013.  The following chart sets forth PPL Energy Supply's net fair
value of trading contracts.  The three and six months ended
June 30, 2008, reflect fair value as defined by SFAS 157.  See
Note 13 for additional information.





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007Fair
      value of contracts outstanding at the beginning of the
    period
            
            $
            22
            
            
            $
            45
            
            
            $
            16
            
            
            $
            41Contracts
      realized or otherwise settled during the period
            
            
            (56
            )
            
            
            (14
            )
            
            
            (41
            )
            
            
            (27
            )Fair
      value of new contracts entered into during the period
            
            
            31
            
            
            
            5
            
            
            
            23
            
            
            
            21Other
      changes in fair value
            
            
            19
            
            
            
            12
            
            
            
            18
            
            
            
            13Fair
      value of contracts outstanding at the end of the period
            
            $
            16
            
            
            $
            48
            
            
            $
            16
            
            
            $
            48





PPL
Energy Supply will reverse unrealized gains of approximately $11 million over
the next three months as the transactions are realized.





The
following chart segregates fair values of PPL Energy Supply's trading portfolio
at June 30, 2008, based on whether the fair values are determined by quoted
market prices for identical instruments or other more subjective
means.





Fair
      Value of Contracts at Period-EndGains
      (Losses)Maturity
              Less
      Than
              1
      Year
            
            Maturity
              1-3
      Years
            
            Maturity
              4-5
      Years
            
            Maturity
              in
      Excess
              of
      5 Years
            
            Total
      Fair
              ValueSource
      of Fair ValuePrices
      quoted in active markets for identical instruments
            
            $
            (10
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (10
            )Prices
      based on significant other observable inputs
            
            
            14
            
            
            $
            15
            
            
            $
            (1
            )
            
            
            
            
            
            
            28Prices
      based on significant unobservable inputs
            
            
            (2
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2
            )Fair
      value of contracts outstanding at the end of the period
            
            $
            2
            
            
            $
            15
            
            
            $
            (1
            )
            
            
            
            
            
            $
            16





Commodity
Price Risk Summary





In
accordance with its marketing strategy, PPL Energy Supply often elects not to
completely hedge its generation output or fuel requirements.  PPL
Energy Supply estimates that for its entire portfolio, including all generation,
emissions and physical and financial energy positions, a 10% adverse change in
power prices across all geographic zones and time periods would decrease
expected 2008 gross margins by $14 million.  Similarly, a 10% adverse
movement in all fossil fuel prices would decrease expected 2008 gross margins by
$13 million.





VaR
Models





PPL
Energy Supply utilizes a VaR model to measure commodity price risk in its
non-trading and trading portfolios.  This approach is consistent with
how PPL's Risk Management Committee assesses the market risk of its commodity
business.  VaR is a statistical model that attempts to predict the
value of potential loss, under normal market conditions, based on historical
market price volatility.  PPL Energy Supply calculates VaR using a
Monte Carlo simulation technique, which uses historical data from the past
12-month period.  The VaR is the estimated nominal loss of earnings
based on a one-day holding period at a 95% confidence interval.  At
June 30, 2008, the VaR for PPL Energy Supply's portfolio was as
follows:





TradingVaR
            
            Non-Trading
      MTM VaR95%
      Confidence Level, One-Day Holding PeriodPeriod
      End
            $
            2
            
            
            $
            41Average
      for the Period
            
            3
            
            
            
            30High
            
            4
            
            
            
            41Low
            
            2
            
            
            
            24





Interest
Rate Risk





PPL
Energy Supply and its subsidiaries have issued debt to finance their operations,
which exposes them to interest rate risk.  Both PPL and PPL Energy
Supply manage the interest rate risk of PPL Energy Supply by using various
financial derivative products to adjust the mix of fixed and floating interest
rates in PPL Energy Supply's debt portfolio, adjust the duration of its debt
portfolio and lock in Treasury rates (and interest rate spreads over Treasuries)
in anticipation of future financing, when appropriate.  Risk limits
under the risk management program are designed to balance risk exposure to
volatility in interest expense and changes in the fair value of PPL Energy
Supply's debt portfolio due to changes in the absolute level of interest
rates.





At
June 30, 2008, PPL Energy Supply's potential annual exposure to increased
interest expense, based on a 10% increase in interest rates, was $3
million.





PPL
Energy Supply is also exposed to changes in the fair value of its domestic and
international debt portfolios.  PPL Energy Supply estimated that a 10%
decrease in interest rates at June 30, 2008, would increase the fair value
of its debt portfolio by $248 million.





PPL and
PPL Energy Supply utilize various risk management instruments to reduce PPL
Energy Supply's exposure to the expected future cash flow variability of its
debt instruments.  These risks include exposure to adverse interest
rate movements for outstanding variable rate debt and for future anticipated
financing.  While PPL Energy Supply is exposed to changes in the fair
value of these instruments, any changes in the fair value of these instruments
are recorded in equity and then reclassified into earnings in the same period
during which the item being hedged affects earnings.  At June 30,
2008, PPL Energy Supply had none of these instruments outstanding.





PPL and
PPL Energy Supply also utilize various risk management instruments to adjust the
mix of fixed and floating interest rates in PPL Energy Supply's debt
portfolio.  The change in fair value of these instruments, as well as
the offsetting change in the value of the hedged exposure of the debt, is
reflected in earnings.  At June 30, 2008, the fair value of these
instruments was a net asset of $1 million.  PPL Energy Supply
estimated that a 10% adverse movement in interest rates at June 30, 2008,
would decrease the net asset by $1 million.





WPDH
Limited holds a net position in cross-currency swaps totaling $527 million to
hedge the interest payments and principal of its U.S. dollar-denominated bonds
with maturity dates ranging from December 2008 to December
2028.  While PPL Energy Supply is exposed to changes in the fair value
of these instruments, any changes in the fair value of these instruments are
recorded in equity and then reclassified into earnings in the same period during
which the item being hedged affects earnings.  The estimated fair
value of this position at June 30, 2008, was a net liability of $113
million.  WPDH Limited estimated that a 10% adverse movement in
foreign currency exchange rates and interest rates at June 30, 2008, would
increase the net liability by $99 million.





Foreign
Currency Risk





PPL
Energy Supply is exposed to foreign currency risk, primarily through investments
in U.K. affiliates.  In addition, PPL Energy Supply's domestic
operations may make purchases of equipment in currencies other than U.S.
dollars.





PPL and
PPL Energy Supply have adopted a foreign currency risk management program
designed to hedge certain foreign currency exposures, including firm
commitments, recognized assets or liabilities, anticipated transactions and net
investments.  In addition, PPL and PPL Energy Supply enter into
financial instruments to protect against foreign currency translation risk of
expected earnings.





In 2007,
PPL executed forward contracts to sell British pounds sterling to protect the
value of a portion of PPL Energy Supply's net investment in WPD.  In
connection with these transactions, PPL Energy Supply entered into forward
contracts with PPL that have terms identical to those executed by
PPL.  The total notional amount of the contracts outstanding at
June 30, 2008, was £68 million.  The settlement dates of these
contracts range from March 2009 through June 2011.  At June 30,
2008, the fair value of these positions was a net asset of $4
million.  PPL Energy Supply estimated that a 10% adverse movement in
foreign currency exchange rates at June 30, 2008, would decrease the net
asset by $12 million.





To
economically hedge the translation of 2008 expected income denominated in
British pounds sterling to U.S. dollars, PPL entered into a combination of
average rate forwards and average rate options to sell British pounds
sterling.  In connection with these transactions, PPL Energy Supply
entered into average rate forwards and average rate options with PPL that have
terms identical to those executed by PPL.  At June 30, 2008, the
total exposure hedged was £43 million.  These forwards and options
have termination dates ranging from July 2008 to December 2008.  At
June 30, 2008, the net fair value of these positions was not
significant.  PPL Energy Supply estimated that a 10% adverse movement
in foreign currency exchange rates at June 30, 2008, would increase the net
liability position by $7 million.





Nuclear
Plant Decommissioning Trust Funds - Securities Price Risk





In
connection with certain NRC requirements, PPL Susquehanna maintains trust funds
to fund certain costs of decommissioning the Susquehanna nuclear
station.  At June 30, 2008, these funds were invested primarily
in domestic equity securities and fixed-rate, fixed-income securities and are
reflected at fair value on PPL Energy Supply's Balance Sheet.  The mix
of securities is designed to provide returns sufficient to fund Susquehanna's
decommissioning and to compensate for inflationary increases in decommissioning
costs.  However, the equity securities included in the trusts are
exposed to price fluctuation in equity markets, and the values of fixed-rate,
fixed-income securities are exposed to changes in interest rates.  PPL
actively monitors the investment performance and periodically reviews asset
allocation in accordance with its nuclear plant decommissioning trust policy
statement.  At June 30, 2008, a hypothetical 10% increase in
interest rates and a 10% decrease in equity prices would have resulted in an
estimated $36 million reduction in the fair value of the trust
assets.  See Note 21 in PPL Energy Supply's 2007 Form 10-K for
additional information regarding the nuclear plant decommissioning trust
funds.





Related
Party Transactions





PPL
Energy Supply is not aware of any material ownership interests or operating
responsibility by senior management of PPL Energy Supply in outside
partnerships, including leasing transactions with variable interest entities, or
other entities doing business with PPL Energy Supply.





For
additional information on related party transactions, see Note 11 to the
Financial Statements.





Acquisitions,
Development and Divestitures





PPL
Energy Supply continuously evaluates strategic options for its business segments
and, from time to time, PPL Energy Supply and its subsidiaries are involved in
negotiations with third parties regarding acquisitions and dispositions of
businesses and assets, joint ventures and development projects, which may or may
not result in definitive agreements.  Any such transactions may impact
future financial results.  See Note 8 to the Financial Statements for
information regarding recent transactions.





During
the second quarter of 2008, PPL Energy Supply increased the capacity of several
existing generating facilities.  The aggregate capacity increase was
66 MW.  PPL Energy Supply is currently planning additional incremental
capacity increases of 265 MW at its existing generating
facilities.  See Note 8 to the Financial Statements for additional
information on the progress of the PPL Susquehanna nuclear plant uprate
project.  Offsetting this increase is an expected 30 MW reduction in
net generation capability at each of the Brunner Island and Montour plants, due
to the estimated increases in station service usage during the scrubber
operation.  See Note 10 to the Financial Statements for additional
information.





In June
2008, PPL EnergyPlus executed an agreement to acquire the rights to an existing
long-term tolling agreement associated with the capacity and energy of a 664 MW
natural gas-fired power plant in Lebanon, Pennsylvania.  The tolling
agreement extends through 2021 and contains a lease that will be accounted for
as an operating lease.  As a result of this agreement, PPL EnergyPlus
recognized an intangible asset for an upfront payment.  See Notes 15
and 18 to the Financial Statements for additional information.





PPL
Energy Supply continuously reexamines development projects based on market
conditions and other factors to determine whether to proceed with the projects,
sell, cancel or expand them, execute tolling agreements or pursue other
options.





Environmental
Matters





See Note
10 to the Financial Statements for a discussion of environmental
matters.





New Accounting
Standards





See Note
2 to the Financial Statements for a discussion of new accounting standards
adopted and Note 19 to the Financial Statements for a discussion of new
accounting standards pending adoption.





Application of Critical
Accounting Policies





PPL
Energy Supply's financial condition and results of operations are impacted by
the methods, assumptions and estimates used in the application of critical
accounting policies.  The following accounting policies are
particularly important to the financial condition or results of operations of
PPL Energy Supply, and require estimates or other judgments of matters
inherently uncertain: price risk management, defined benefits, asset impairment,
leasing, loss accruals, asset retirement obligations and income tax
uncertainties.





See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations," in PPL Energy Supply's 2007 Form 10-K for a discussion of each
critical accounting policy.  PPL's senior management has reviewed
these critical accounting policies, and the estimates and assumptions regarding
them, with its Audit Committee.  In addition, PPL's senior management
reviewed the Form 10-K disclosures regarding the application of these critical
accounting policies with the Audit Committee.





Following
are updates to the critical accounting policies disclosed in PPL Energy Supply's
2007 Form 10-K.





Leasing





In June
2008, PPL EnergyPlus executed an agreement to acquire the rights to an existing
long-term tolling agreement associated with the capacity and energy of a 664 MW
natural gas-fired power plant in Lebanon, Pennsylvania.  The tolling
agreement extends through 2021 and contains a lease that will be accounted for
as an operating lease.  See Notes 15 and 18 to the Financial
Statements for additional information.





In
accounting for leases, management makes various assumptions, including the
discount rate, the fair market value of the leased assets and the estimated
useful life, in determining whether a lease should be classified as operating or
capital.  Changes in these assumptions could result in the difference
between whether a lease is determined to be an operating lease or a capital
lease.  If this transaction were to be accounted for as a capital
lease, PPL would have recorded approximately $284 million of additional assets
and liabilities on the Balance Sheet at June 30, 2008.





Loss
Accruals





In June
2008, PPL Montana's management assessed the loss exposure related to the Montana
hydroelectric litigation, given the June 2008 decision by the Montana First
Judicial District Court (District Court).  The District Court awarded
compensation of approximately $34 million for the years 2000 through 2006, and
approximately $6 million for 2007 compensation as rent for the use of the State
of Montana's streambeds by PPL Montana's hydroelectric
facilities.  The District Court also deferred the determination of
compensation for 2008 and subsequent years to the Montana State Land Board (Land
Board).  PPL Montana intends to appeal the decision of the District
Court to the Montana Supreme Court and will continue to vigorously defend its
position.  It also intends to seek a stay of judgment, including a
stay of the Land Board's authority to assess compensation against PPL Montana
for 2008 and future periods.  See Note 10 to the Financial Statements
for additional information on this litigation.





PPL
Montana's management concluded, based on its assessment and after consultations
with its trial counsel, that it has meritorious arguments on appeal for the
years 2000 through 2006.  PPL Montana assessed the likelihood of a
loss for these years as reasonably possible.  However, PPL Montana has
not recorded a loss accrual for these years, as the likelihood of a loss was not
deemed probable.





For 2007
and subsequent years, PPL Montana's management believes that while it also has
meritorious arguments, it is probable that its hydroelectric projects will be
subject to annual estimated compensation ranging from $300,000 to $6
million.  Given
that there was no single amount within that range more likely than any other,
PPL Montana recorded a loss accrual equal to the low end of this
range.




PPL
Montana will continue to assess the loss exposure for the Montana hydro
litigation in future periods.








SFAS
157





In 2006,
the FASB issued SFAS 157.  Among other things, SFAS 157 provides a
definition of fair value as well as a framework for measuring fair
value.  In February 2008, the FASB amended SFAS 157 through the
issuance of FSP FAS 157-1 and FSP FAS


157-2.  FSP
FAS 157-1 amends SFAS 157 to exclude from its scope, certain accounting
pronouncements that address fair value measurements associated with
leases.  FSP FAS 157-2 delays the effective date of SFAS 157 to fiscal
years beginning after November 15, 2008, for nonfinancial assets and
nonfinancial liabilities that are not recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually).





As
permitted by this guidance, PPL Energy Supply partially applied SFAS 157, as
amended, prospectively, effective January 1, 2008.  In the current
year, the partial application of this standard affected, or will affect, fair
value measurement concepts used or embedded in PPL Energy Supply's critical
accounting policies related to "Price Risk Management" and "Defined
Benefits."  PPL Energy Supply's election to defer the application of
SFAS 157, as amended, for eligible assets and liabilities will primarily affect
the fair value component of PPL Energy Supply's critical accounting policies
related to "Asset Impairment" and "Asset Retirement Obligations" in
2009.  See Notes 2 and 13 to the Financial Statements for additional
information regarding SFAS 157, as amended.







PPL ELECTRIC
UTILITIES CORPORATION AND SUBSIDIARIES




Item
2.  Management's Discussion and Analysis of Financial Condition and
Results of Operations





Overview





PPL
Electric provides electricity delivery service in eastern and central
Pennsylvania.  Its headquarters are in Allentown,
Pennsylvania.  In PPL Electric's 2007 Form 10-K, see "Item 1. Business
- Background" for a description of its business and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview" for a discussion of its strategy and the risks and the challenges that
it faces in its business.  See "Forward-Looking Information," Note 10
to the Financial Statements and the rest of Item 2 in this Form 10-Q and "Item
1A. Risk Factors" and the rest of Item 7 in PPL Electric's 2007 Form 10-K for
more information concerning the material risks and uncertainties that PPL
Electric faces in its business and with respect to its future
earnings.





The
following information should be read in conjunction with PPL Electric's
Condensed Consolidated Financial Statements and the accompanying Notes and with
PPL Electric's 2007 Form 10-K.





Terms and
abbreviations are explained in the glossary.  Dollars are in millions
unless otherwise noted.





Results of
Operations





The
following discussion begins with a summary of PPL Electric's earnings and
continues with a description of key factors that management expects may impact
future earnings.  This section ends with explanations of significant
changes in principal items on PPL Electric's Statements of Income, comparing the
three and six months ended June 30, 2008, with the same periods in
2007.





The
results for interim periods can be disproportionately influenced by various
factors and developments and by seasonal variations, and as such, the results of
operations for interim periods do not necessarily indicate results or trends for
the year or for future operating results.





Earnings





Income
available to PPL was:





Three
      Months EndedJune
      30,
            
            Six
      Months EndedJune
      30,2008
            
            2007
            
            2008
            
            2007$
            32
            
            
            $
            30
            
            
            $
            83
            
            
            $
            82





The
after-tax change in income available to PPL between these periods was due to the
following factors.








June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedDelivery
      revenues (net of CTC/ITC amortization, interest expense on transition
      bonds and ancillary charges)
            
            $
            6
            
            
            $
            16Operating
      expenses
            
            
            (1
            )
            
            
            (8
            )Other
      income  - net
            
            
            (2
            )
            
            
            (6
            )Other
            
            
            (1
            )
            
            
            (1
            )$
            2
            
            
            $
            1





The
period-to-period changes in significant earnings components are explained in the
"Statement of Income Analysis."





PPL
Electric's period-to-period earnings were affected by:





·
            higher
      delivery revenues attributable to normal load growth and a base rate
      increase effective January 1, 2008;·
            higher
      operating expenses primarily due to increased usage of contractors and
      other inflationary increases; and·
            lower
      other income primarily due to lower interest income in 2008 and lower
      gains on property sales.





Outlook





PPL
Electric projects higher earnings driven by higher revenues as a result of new
distribution rates that became effective January 1, 2008, partially offset
by higher operating expenses.





In May
2007, the PUC approved final regulations regarding the obligation of
Pennsylvania electric utilities to provide default electricity supply in 2011
and beyond.  The new regulations provide that default service
providers will acquire electricity supply at prevailing market prices pursuant
to procurement and implementation plans approved by the PUC.  The
regulations also address the utilities' recovery of market supply
costs.  The final regulations became effective in September
2007.





In May
2007, the PUC approved PPL Electric's plan to procure default electricity supply
in 2007-2009 for retail customers who do not choose an alternative competitive
supplier in 2010 after PPL Electric's PLR contract with an affiliate
expires.  Under the plan, PPL Electric was approved to issue a series
of competitive bids for such supply in 2007, 2008 and 2009.  Each
solicitation is for 850 MW of expected generation supply, or one-sixth of PPL
Electric's expected PLR supply requirement in 2010.  The average
generation supply prices (per MWh), including Pennsylvania gross receipts tax
and an adjustment for line losses, for the first three solicitations were as
follows:





Residential
            
            Small
      Commercial and Small IndustrialJuly
      2007
            
            $
            101.77
            
            
            $
            105.11October
      2007
            
            
            105.08
            
            
            
            105.75March
      2008
            
            
            108.80
            
            
            
            108.76





As a
result, PPL Electric has contracted for one-half of the electricity supply it
expects to need for 2010.  If the average prices paid for the supply
purchased so far were to be the same for the remaining three purchases, the
average residential customer's monthly bill in 2010 would increase about 34.4%
over 2009 levels, while small commercial and small industrial bills would
increase in the range of 23.8% to 42.8%.  The estimated increases
include Pennsylvania gross receipts tax, an adjustment for line losses, PPL
Electric's January 1, 2008 rate increase and a court-ordered rate adjustment in
2007.  Actual 2010 prices will not be known until all six supply
purchases have been made.  The fourth solicitation will be conducted
in September 2008.





In
addition, the Governor of Pennsylvania proposed an Energy Independence Strategy
(Strategy) in early 2007 which, among other things, contains initiatives to
address PLR issues.  For example, under the Strategy as originally
proposed, retail customers could elect to phase-in over three years any initial
generation rate increase approved by the PUC.  Also, PLR providers
would be required to obtain a "least cost portfolio" of supply by purchasing
power in the spot market and through contracts of varying lengths, and the
provider would be required to procure energy conservation resources before
acquiring additional power.  In addition, PLR providers could enter
into long-term contracts with large energy users and alternative energy
developers.  It is uncertain at this time whether the details of
implementing the Strategy, including the issues of deferral of costs and
recovery of interest for the customer rate phase-in program and the timing of
PUC approval for PLR supply portfolios, will be delegated to the
PUC.





Components
of the Strategy are included in various bills.  One such bill that
passed in the Pennsylvania House of Representatives in February 2008 contains
conservation and demand-side management targets and mandatory deployment of
smart metering technology.  The bill provides for full and current
cost recovery through an energy efficiency and demand-side management recovery
mechanism.





In
September 2007, the Pennsylvania General Assembly (General Assembly) convened a
special session to address the proposals in the Governor's
Strategy.  The Pennsylvania Senate has formed a special committee to
manage legislation for the special legislative session.  As an
alternative to the $850 million Energy Independence Fund that the Governor
initially proposed, the General Assembly passed, and the Governor signed, a bill
that would create a $650 million fund for clean energy projects, conservation
and energy efficiency initiatives and pollution control projects that would be
funded through revenue bonds and gross receipts tax revenue, which will increase
as rate caps expire.





Since
September 2007, PPL Electric has been working with Pennsylvania legislators,
regulators and other stakeholders to develop constructive measures to help
customers transition to market rates after 2009, including a variety of rate
mitigation, educational and energy conservation programs, consistent with
several initiatives being developed by the state administration and
legislature.  In this regard, in November 2007, PPL Electric requested
the PUC to approve a plan under which its residential and small commercial
customers could smooth the impact of price increases when generation rate caps
expire in 2010.  The proposed phase-in plan  provided that
customers could pay additional amounts on their electric bills beginning in
mid-2008 and continuing through 2009, and such additional amounts, plus accrued
interest, would be applied to their 2010 and 2011 electric bills, mitigating the
impact of the rate cap expiration.  PPL Electric requested expedited
consideration of the proposal by the PUC.  Ten parties filed responses
to PPL Electric's petition, primarily because the proposal offered the program
on an "opt-out" basis (i.e., customers would be enrolled automatically and
affirmatively have to "opt-out" if they choose not to
participate).  The parties negotiated a settlement
agreement  under which PPL Electric agreed to change the "opt-out"
approach to an "opt-in" approach (i.e., customers would have to affirmatively
enroll) and to make the program available to customers enrolled in budget
billing.  In March 2008, the Administrative Law Judge assigned to this
case recommended that the PUC approve the settlement agreement.  The
PUC has postponed taking action on the approval of the agreement.  In
May 2008, as a result of this postponement, PPL Electric announced that it must
delay the planned start date for the proposed phase-in option to allow adequate
time for PPL Electric to publicize the plan and for eligible customers to make
an informed choice about whether to enroll.  PPL Electric cannot
predict if and when the PUC will take further action in this
matter.





Certain
Pennsylvania legislators have introduced or are contemplating the introduction
of legislation to extend generation rate caps or otherwise limit cost recovery
through rates for Pennsylvania utilities beyond their transition periods, which
in PPL Electric's case would be December 31, 2009.  PPL Electric has
expressed strong concern regarding the severe potential consequences of such
legislation on customer service, system reliability, adequate future generation
supply and PPL Electric's financial viability.  If such legislation or
similar legislation is enacted, PPL Electric could experience substantial
operating losses, cash flow shortfalls and other adverse financial
impacts.  In addition, continuing uncertainty regarding PPL Electric's
ability to recover its market supply and other costs of operation after 2009
could adversely impact its credit quality, financing costs and availability of
credit facilities necessary to operate its business.  In addition, PPL
Electric believes that such an extension of rate caps, if enacted into law,
would violate federal law and the U.S. Constitution.  At this time,
PPL Electric cannot predict the final outcome or impact of this legislative and
regulatory process.





Statement
of Income Analysis --





Operating
Revenues





Retail
Electric





The
increases in revenues from retail electric operations were attributable
to:





June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedPLR
            
            $
            7
            
            
            $
            15Delivery
            
            
            1
            
            
            
            8Other
            
            
            1
            
            
            
            1$
            9
            
            
            $
            24





Higher
PLR and delivery revenues for both periods were attributable to normal load
growth.  A base rate increase effective January 1, 2008, also
contributed to higher delivery revenues.





Wholesale Electric to
Affiliate





PPL
Electric has a contract to sell to PPL EnergyPlus the electricity that PPL
Electric purchases under contracts with NUGs.  The decreases of $7
million and $16 million in wholesale electric to affiliate for the three and six
months ended June 30, 2008, compared with the same periods in 2007, were
primarily due to the expiration of a NUG contract at the end of 2007, partially
offset by higher prices and volume on certain NUG
contracts.  Substantially all of the remaining NUG contracts will
expire by 2010.





Energy
Purchases





The
decreases of $6 million and $16 million in energy purchases for the three and
six months ended June 30, 2008, compared with the same periods in 2007,
were primarily due to the expiration of a NUG contract at the end of 2007,
partially offset by higher prices and volume on certain NUG
contracts.  Substantially all of the remaining NUG contracts will
expire by 2010.





Energy
Purchases from Affiliate





The
increase in energy purchases from affiliate of $6 million for the three months
ended June 30, 2008, compared with the same period in 2007, was primarily
attributable to higher prices for energy purchased under the power supply
contracts with PPL EnergyPlus that were needed to support the PLR
load.





The
increase in energy purchases from affiliate of $14 million for the six months
ended June 30, 2008, compared with the same period in 2007, was primarily
attributable to increases in PLR load, and partially due to higher prices for
energy purchased under the power supply contracts with PPL EnergyPlus that were
needed to support the PLR load.





Other
Operation and Maintenance





The
increases in other operation and maintenance expenses were due to:





June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedUncollectible
      accounts
            
            $
            4
            
            
            $
            6Contractor
      expense
            
            
            2
            
            
            
            5Salary
      expense
            
            
            
            
            
            
            4PUC-reportable
      storm costs
            
            
            (3
            )
            
            
            2Regulatory
      asset amortization
            
            
            1
            
            
            
            2Customer
      service expense
            
            
            (4
            )
            
            
            (2
            )Allocation
      of certain corporate service costs (Note 11)
            
            
            2
            
            
            
            (2
            )Advertising
            
            
            (3
            )
            
            
            (2
            )Insurance
      recovery of storm costs
            
            
            
            
            
            
            (5
            )Other
            
            
            3
            
            
            
            5$
            2
            
            
            $
            13





Other
Income - net





See Note
12 to the Financial Statements for details of other income.





Financing
Costs





The
decreases in financing costs, which include "Interest Expense," "Interest
Expense with Affiliate" and "Dividends on Preferred Securities," were due
to:





June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedLong-term
      debt interest expense primarily due to the repayment of transition
      bonds
            
            $
            (5
            )
            
            $
            (10
            )Interest
      on PLR contract collateral (Note 11)
            
            
            (3
            )
            
            
            (4
            )Other
            
            
            (1
            )
            
            
            (2
            )$
            (9
            )
            
            $
            (16
            )





Income
Taxes





The
increases in income taxes were due to:





June
      30, 2008 vs. June 30, 2007Three
      Months Ended
            
            Six
      Months EndedHigher
      pre-tax book income
            
            $
            2
            
            
            $
            3Tax
      reserve adjustments (Note 5)
            
            
            1
            
            
            
            1$
            3
            
            
            $
            4





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





Financial
Condition





Liquidity
and Capital Resources





PPL
Electric had the following at:





June 30,2008
            
            December
      31, 2007Cash
      and cash equivalents
            
            $
            65
            
            
            $
            33Short-term
      debt
            
            
            41
            
            
            
            41





The $32
million increase in PPL Electric's cash and cash equivalents position was
primarily the net result of:





·
            $187
      million of cash provided by operating activities;·
            the
      net receipt of $202 million under a demand loan with an
      affiliate;·
            the
      retirement of $160 million of long-term debt;·
            $131
      million of capital expenditures;·
            the
      payment of $48 million of common stock dividends to PPL;
    and·
            a
      net increase of $11 million in restricted cash and cash
      equivalents.





Credit
Facilities





PPL
Electric currently does not expect to make any modifications in 2008, including
extending the expiration date, to its $200 million five-year credit facility
that expires in May 2012.





The
credit agreement related to PPL Electric's and a subsidiary's participation in
an asset-backed commercial paper program expired in July 2008.  PPL
Electric and the subsidiary expect to enter into a similar asset-backed
commercial paper program with a different financial institution and commercial
paper conduit in the third quarter of 2008.





Rating Agency
Decisions





Moody's,
S&P and Fitch periodically review the credit ratings on the debt and
preferred securities of PPL Electric and PPL Transition Bond
Company.  Based on their respective independent reviews, the rating
agencies may make certain ratings revisions or ratings
affirmations.





A credit
rating reflects an assessment by the rating agency of the creditworthiness
associated with an issuer and particular securities that it
issues.  The credit ratings of PPL Electric and PPL Transition Bond
Company are based on information provided by PPL Electric and other
sources.  The ratings of Moody's, S&P and Fitch are not a
recommendation to buy, sell or hold any securities of PPL Electric or PPL
Transition Bond Company.  Such ratings may be subject to revisions or
withdrawal by the agencies at any time and should be evaluated independently of
each other and any other rating that may be assigned to the
securities.  A downgrade in PPL Electric's or PPL Transition Bond
Company's credit ratings could result in higher borrowing costs and reduced
access to capital markets.





Moody's
and S&P did not take any actions related to PPL Electric or PPL Transition
Bond Company during the six months ended June 30, 2008.  In March
2008, Fitch completed a review of its credit ratings for PPL Electric and
affirmed all of the ratings for PPL Electric, with the exception that it lowered
the preferred stock rating to BBB from BBB+.  Fitch stated in the
related press release that the lower preferred stock rating reflects its junior
position in the capital structure and does not reflect any change in credit
quality.





Capital
Expenditures





PPL
Electric's estimate of capital expenditures for the years 2008 through 2012 was
not materially changed from that disclosed in the 2007 Form 10-K, except for an
increase in the estimated construction costs related to the PJM-approved
regional transmission line expansion project.  At June 30, 2008, PPL
Electric's estimated share of the project costs increased to $509 million from
$320 million.





For
additional information on PPL Electric's liquidity and capital resources, see
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations," in PPL Electric's 2007 Form 10-K.





Risk
Management





Market
Risk





Commodity
Price Risk - PLR Contracts through 2009





PPL
Electric and PPL EnergyPlus have power supply agreements under which PPL
EnergyPlus sells to PPL Electric (under a predetermined pricing arrangement)
energy and capacity to fulfill PPL Electric's PLR obligation through
2009.  As a result, PPL Electric has shifted any electric price risk
relating to its PLR obligation to PPL EnergyPlus through 2009.  See
Note 11 to the Financial Statements for information regarding credit risk
associated with the PLR contracts with PPL EnergyPlus.





Commodity
Price Risk - PLR Contracts subsequent to 2009





In order
to mitigate the risk that PPL Electric will not be able to obtain adequate
energy supply subsequent to 2009, when the full requirements energy supply
agreements with PPL EnergyPlus expire, PPL Electric has entered into power
purchase agreements that include fixed prices.  PPL Electric's future
financial performance will be affected by its ability to enter into other new
supply contracts, the duration and pricing of such contracts relative to
prevailing market conditions, and the regulatory treatment for such contracts
and the associated recovery of its supply costs.  Depending on these
factors, PPL Electric's financial results may be materially adversely
affected.  See "Results of Operations - Earnings - Outlook" for
information on the PUC-approved procurement plan and other ongoing Pennsylvania
regulatory and legislative activities.





Interest
Rate Risk





PPL
Electric has issued debt to finance its operations, which exposes it to interest
rate risk.  At June 30, 2008, PPL Electric's potential annual
exposure to increased interest expense, based on a 10% increase in interest
rates, was not significant.





PPL
Electric is also exposed to changes in the fair value of its debt
portfolio.  PPL Electric estimated that a 10% decrease in interest
rates at June 30, 2008, would increase the fair value of its debt portfolio
by $46 million.





Related
Party Transactions





PPL
Electric is not aware of any material ownership interests or operating
responsibility by senior management of PPL Electric in outside partnerships,
including leasing transactions with variable interest entities, or other
entities doing business with PPL Electric.





For
additional information on related party transactions, see Note 11 to the
Financial Statements.





Environmental
Matters





See Note
10 to the Financial Statements for a discussion of environmental
matters.





New Accounting
Standards





See Note
2 to the Financial Statements for a discussion of new accounting standards
adopted and Note 19 to the Financial Statements for a discussion of new
accounting standards pending adoption.








Application of Critical
Accounting Policies





PPL
Electric's financial condition and results of operations are impacted by the
methods, assumptions and estimates used in the application of critical
accounting policies.  The following accounting policies are
particularly important to the financial condition or results of operations of
PPL Electric, and require estimates or other judgments of matters inherently
uncertain: defined benefits, loss accruals, income tax uncertainties and
regulation.





See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations," in PPL Electric's 2007 Form 10-K for a discussion of each critical
accounting policy.  PPL's senior management has reviewed these
critical accounting policies, and the estimates and assumptions regarding them,
with its Audit Committee.  In addition, PPL's senior management
reviewed the Form 10-K disclosures regarding the application of these critical
accounting policies with the Audit Committee.





In 2006,
the FASB issued SFAS 157.  Among other things, SFAS 157 provides a
definition of fair value as well as a framework for measuring fair
value.  In February 2008, the FASB amended SFAS 157 through the
issuance of FSP FAS 157-1 and FSP FAS 157-2.  FSP FAS 157-1 amends
SFAS 157 to exclude from its scope, certain accounting pronouncements that
address fair value measurements associated with leases.  FSP FAS 157-2
delays the effective date of SFAS 157 to fiscal years beginning after November
15, 2008, for nonfinancial assets and nonfinancial liabilities that are not
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually).





As
permitted by this guidance, PPL Electric partially applied SFAS 157, as amended,
prospectively, effective January 1, 2008.  In the current year, the
partial application of this standard will affect fair value measurement concepts
embedded in PPL Electric's critical accounting policy related to "Defined
Benefits."  See Notes 2 and 13 to the Financial Statements for
additional information regarding SFAS 157, as amended.





PPL
CORPORATION


PPL
ENERGY SUPPLY, LLC


PPL
ELECTRIC UTILITIES CORPORATION





Item
3.  Quantitative and Qualitative Disclosures About Market
Risk





Reference
is made to "Risk Management - Energy Marketing & Trading and Other" for PPL
and PPL Energy Supply and "Risk Management" for PPL Electric in Management's
Discussion and Analysis of Financial Condition and Results of
Operations.





Item
4.  Controls and Procedures





PPL
      Corporation(a)
            
            Evaluation
      of disclosure controls and procedures.The
      registrant's principal executive officer and principal financial officer,
      based on their evaluation of the registrant's disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
      Exchange Act of 1934) have concluded that, as of June 30, 2008, the
      registrant's disclosure controls and procedures are effective to ensure
      that material information relating to the registrant and its consolidated
      subsidiaries is recorded, processed, summarized and reported within the
      time periods specified by the SEC's rules and forms, particularly during
      the period for which this quarterly report has been
      prepared.  The aforementioned principal officers have concluded
      that the disclosure controls and procedures are also effective to ensure
      that information required to be disclosed in reports filed under the
      Exchange Act is accumulated and communicated to management, including the
      principal executive and principal financial officer, to allow for timely
      decisions regarding required disclosure.(b)
            
            Change
      in internal controls over financial reporting.The
      registrant's principal executive officer and principal financial officer
      have concluded that there were no changes in the registrant's internal
      control over financial reporting during the registrant's second fiscal
      quarter that have materially affected, or are reasonably likely to
      materially affect, the registrant's internal control over financial
      reporting.





Item
4(T).  Controls and Procedures





PPL
      Energy Supply, LLC and PPL Electric Utilities
  Corporation(a)
            
            Evaluation
      of disclosure controls and procedures.The
      registrants' principal executive officers and principal financial
      officers, based on their evaluation of the registrants' disclosure
      controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of
      the Securities Exchange Act of 1934) have concluded that, as of
      June 30, 2008, the registrants' disclosure controls and procedures
      are effective to ensure that material information relating to the
      registrants and their consolidated subsidiaries is recorded, processed,
      summarized and reported within the time periods specified by the SEC's
      rules and forms, particularly during the period for which this quarterly
      report has been prepared.  The aforementioned principal officers
      have concluded that the disclosure controls and procedures are also
      effective to ensure that information required to be disclosed in reports
      filed under the Exchange Act is accumulated and communicated to
      management, including the principal executive and principal financial
      officers, to allow for timely decisions regarding required
      disclosure.(b)
            
            Change
      in internal controls over financial reporting.The
      registrants' principal executive officers and principal financial officers
      have concluded that there were no changes in the registrants' internal
      control over financial reporting during the registrants' second fiscal
      quarter that have materially affected, or are reasonably likely to
      materially affect, the registrants' internal control over financial
      reporting.





PART II.  OTHER
INFORMATION





Item
      1.  Legal ProceedingsFor
      additional information regarding various pending administrative and
      judicial proceedings involving regulatory, environmental and other
      matters, which information is incorporated by reference into this Part II,
      see:·
            
            "Item
      3. Legal Proceedings" in PPL's, PPL Energy Supply's and PPL Electric's
      2007 Form 10-K; and·
            
            Note
      10 of the registrants' "Combined Notes to Condensed Consolidated Financial
      Statements" in Part I of this
report.





Item
      1A.  Risk FactorsThere
      have been no material changes in PPL's, PPL Energy Supply's and PPL
      Electric's risk factors from those disclosed in "Item 1A. Risk Factors" of
      the 2007 Form 10-K.





Item
      4.  Submission of Matters to a Vote of Security
      HoldersAt
      PPL's Annual Meeting of Shareowners held on May 21, 2008, the
      shareowners:(1)
            
            Elected
      the three nominees for the office of director. The votes for individual
      nominees were:Number
      of VotesFor
            
            Withhold
      AuthorityFrederick
      M. Bernthal
            
            303,823,682
            
            8,735,687Louise
      K. Goeser
            
            304,493,281
            
            8,066,088Keith
      H. Williamson
            
            306,059,296
            
            6,500,073Directors
      whose terms of office continued were John W. Conway, E. Allen Deaver,
      Stuart Heydt, James H. Miller,
              Craig
      A. Rogerson, W. Keith Smith and Susan M.
  Stalnecker.(2)
            
            Approved
      an amendment and restatement of PPL's Articles of Incorporation to
      eliminate the supermajority voting requirements.  The vote was
      301,071,767 in favor and 6,694,895 against, with 4,792,707 abstaining and
      no broker non-votes.(3)
            
            Ratified
      the appointment of Ernst & Young LLP as independent registered public
      accounting firm for the year ending December 31, 2008.  The vote
      was 306,709,650 in favor and 2,451,543 against, with 3,398,176
      abstaining and no broker non-votes.At
      PPL Electric's Annual Meeting of Shareowners held on May 22, 2008, the
      shareowners:(1)
            
            Elected
      all six nominees for the office of director.  Dean A.
      Christiansen, David G. DeCampli, Paul A. Farr, Robert J. Grey, James H.
      Miller and William H. Spence were elected with 66,368,056 votes cast for
      each director, no votes cast against and no votes
    abstaining.





Item
      6.  Exhibits12(a)
            -
            PPL
      Corporation and Subsidiaries Computation of Ratio of Earnings to Combined
      Fixed Charges and Preferred Stock Dividends12(b)
            -
            PPL
      Energy Supply, LLC and Subsidiaries Computation of Ratio of Earnings to
      Fixed Charges12(c)
            -
            PPL
      Electric Utilities Corporation and Subsidiaries Computation of Ratio of
      Earnings to Combined Fixed Charges and Preferred Stock
      DividendsCertifications
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for the
      quarterly period ended June 30, 2008, filed by the following officers
      for the following companies:31(a)
            -
            James
      H. Miller for PPL Corporation31(b)
            -
            Paul
      A. Farr for PPL Corporation31(c)
            -
            James
      H. Miller for PPL Energy Supply, LLC31(d)
            -
            Paul
      A. Farr for PPL Energy Supply, LLC31(e)
            -
            David
      G. DeCampli for PPL Electric Utilities Corporation31(f)
            -
            J.
      Matt Simmons, Jr. for PPL Electric Utilities
CorporationCertifications
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for the
      quarterly period ended June 30, 2008, furnished by the following
      officers for the following companies:32(a)
            -
            James
      H. Miller for PPL Corporation32(b)
            -
            Paul
      A. Farr for PPL Corporation32(c)
            -
            James
      H. Miller for PPL Energy Supply, LLC32(d)
            -
            Paul
      A. Farr for PPL Energy Supply, LLC32(e)
            -
            David
      G. DeCampli for PPL Electric Utilities Corporation32(f)
            -
            J.
      Matt Simmons, Jr. for PPL Electric Utilities
  Corporation








SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrants have
duly caused this report to be signed on their behalf by the undersigned
thereunto duly authorized.  The signature for each undersigned company
shall be deemed to relate only to matters having reference to such company or
its subsidiaries.











PPL
      Corporation(Registrant)PPL Energy Supply,
      LLC(Registrant)PPL Electric Utilities
      Corporation(Registrant)Date:  August
      1, 2008
            /s/  J.
      Matt Simmons, Jr.J.
      Matt Simmons, Jr.Vice
      President and Controller(Principal
      Accounting Officer)