**UNITED
STATES**


**SECURITIES
AND EXCHANGE COMMISSION**


**Washington,
D.C. 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 endedSeptember
      30, 2005OR[
       ]
    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
    23-2758192333-74794
    **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
    YesX
    NoPPL
      Energy Supply, LLC
    YesX
    NoPPL
      Electric Utilities Corporation
    YesX
    No








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





PPL
      Corporation
    YesX
    NoPPL
      Energy Supply, LLC
    Yes
    NoXPPL
      Electric Utilities Corporation
    Yes
    NoX





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





PPL
      Corporation
    Yes
    NoXPPL
      Energy Supply, LLC
    Yes
    NoXPPL
      Electric Utilities Corporation
    Yes
    NoX





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, 380,138,936
      shares outstanding at October 31, 2005, excluding 62,113,042 shares
      held as treasury stockPPL
      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, 78,029,863 shares outstanding and all held by PPL
      Corporation at October 31, 2005, excluding 79,270,519 shares held as
      treasury stock











**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 SEPTEMBER 30, 2005





Table
of Contents


PageGLOSSARY
      OF TERMS AND ABBREVIATIONS
    iFORWARD-LOOKING
      INFORMATION
    1PART
      I. FINANCIAL INFORMATIONItem
      1. Financial Statements**PPL
      Corporation and Subsidiaries**CondensedConsolidatedStatement
      of Income
    2CondensedConsolidated
      Statement of Cash Flows
    3CondensedConsolidatedBalance
      Sheet
    4**PPL
      Energy Supply, LLC and Subsidiaries**CondensedConsolidated
      Statement of Income
    6Condensed
      Consolidated
      Statement of Cash Flows
    7Condensed
      Consolidated
      Balance Sheet
    8**PPL
      Electric Utilities Corporation and Subsidiaries**CondensedConsolidated
      Statement of Income
    10CondensedConsolidatedStatement
      of Cash Flows
    11CondensedConsolidated
      Balance Sheet
    12CombinedNotestoCondensedConsolidated
      Financial Statements
    14Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of OperationsPPLCorporationand
      Subsidiaries
    42PPL
      EnergySupply,
      LLC
      andSubsidiaries
    56PPL
      ElectricUtilitiesCorporationand
      Subsidiaries
    68Item
      3. QuantitativeandQualitativeDisclosuresAbout Market Risk
    72Item
      4. Controls
      andProcedures
    72PART
      II. OTHER INFORMATIONItem
      1.LegalProceedings
    72Item6.
      Exhibits
    73SIGNATURES
    74COMPUTATION
      OF RATIO OF EARNINGS TO FIXED CHARGESPPL
      CorporationandSubsidiaries
    75PPL
      Energy Supply, LLC and Subsidiaries
    76PPL
      Electric
      Utilities Corporation andSubsidiaries
    77CERTIFICATES
      OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO
      SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002PPL
      Corporation
    78PPL
      EnergySupply,
      LLC
    80PPL
      ElectricUtilities
      Corporation
    82CERTIFICATES
      OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO
      SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002PPL
      Corporation
    84PPL
      EnergySupply,
      LLC
    86PPL
      Electric
      UtilitiesCorporation
    88











**GLOSSARY
OF TERMS AND ABBREVIATIONS**


**£** -
British pounds sterling.





***2001
Senior Secured Bond Indenture*** - PPL
Electric's Indenture, dated as of August 1, 2001, to JPMorgan Chase Bank, as
trustee, as supplemented.





***2004
Form 10-K*** - Annual
Report to the SEC on Form 10-K for the year ended December 31,
2004.





***AFUDC*** (Allowance for Funds Used During Construction) - the cost of equity and debt
funds used to finance construction projects of regulated businesses, which is
capitalized as part of construction cost.





***ANEEL***  -
National Electric Energy Agency, Brazil's agency that regulates the transmission
and distribution of electricity.





***APA*** - Asset
Purchase Agreement.





***ARO*** - asset
retirement obligation.





***Bcf*** -
billion cubic feet.





***CEMAR*** -
Companhia Energética do Maranhão, a Brazilian electric distribution company in
which PPL Global had a majority ownership interest until the transfer of this
interest in April 2004.





***CGE*** **** - **** Compañia
General de Electricidad, S.A., a distributor of electricity and natural gas with
other industrial segments in Chile and Argentina, in which PPL Global had an
8.7% direct and indirect minority ownership interest until the sale of this
interest in March 2004.





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





***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.





***Derivative*** - a
financial instrument or other contract with all three of the following
characteristics:




a.  It has
(1) one or more underlyings and (2) one or more notional amounts or payment
provisions or both. Those terms determine the amount of the settlement or
settlements, and, in some cases, whether or not a settlement is
required.




b.  It
requires no initial net investment or an initial net investment that is smaller
than would be required for other types of contracts that would be expected to
have a similar response to changes in market factors.




c.  Its terms
require or permit net settlement, it can readily be settled net by a means
outside the contract, or it provides for delivery of an asset that puts the
recipient in a position not substantially different from net
settlement.




***DIG*** ****** -
Derivatives Implementation Group.





***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
interstate transmission and wholesale sales of electricity and related
matters.





***FIN*** - FASB
Interpretation.





***Fitch*** - Fitch
Ratings.





***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 remit payment for certain congestion-related
transmission charges that arise when the transmission grid is
congested.





***GAAP*** -
generally accepted accounting principles.





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





***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).





***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.





***MW*** -
megawatt, one thousand kilowatts.





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





***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.





***NPDES*** -
National Pollutant Discharge Elimination System.





***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.





***Ofgem***  - Office
of Gas and Electricity Markets, the British agency that regulates transmission,
distribution and wholesale sales of electricity and related
matters.





***PCB*** -
polychlorinated biphenyl, an additive to oil used in certain electrical
equipment up to the late-1970s. It is now classified as a hazardous
chemical.





***PEPS
Units*** (Premium
Equity Participating Security Units, or PEPS SM Units) -
securities issued by PPL and PPL Capital Funding Trust I that consisted of a
Preferred Security and a forward contract to purchase PPL common
stock.





***PEPS
Units, Series B*** **** (Premium
Equity Participating Security Units, or PEPS SM Units,
Series B) - securities issued by PPL and PPL Capital Funding that consisted of
an undivided interest in a debt security issued by PPL Capital Funding and
guaranteed by PPL, and a forward contract to purchase PPL common
stock.





***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 electricity 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.





***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
Capital Funding Trust I*** - a
Delaware statutory business trust created to issue the Preferred Security
component of the PEPS Units. This trust was terminated in June
2004.





***PPL
Development Company*** - PPL  Development
Company, LLC, a subsidiary of PPL Services that has responsibility for PPL's
acquisition, divestiture and development activities.





***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 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.





***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 owns and operates
international energy businesses that are focused on the regulated distribution
of electricity.





***PPL
Maine*** - PPL
Maine, LLC, a subsidiary of PPL Generation that owns generating operations in
Maine.





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





***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
Telcom*** - PPL
Telcom, LLC, an indirect subsidiary of PPL Energy Funding that delivers high
bandwidth telecommunication services in the Northeast corridor from Washington,
D.C., to New York City and to six metropolitan areas in central and eastern
Pennsylvania.





***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.





***Preferred
Securities*** -
company-obligated mandatorily redeemable preferred securities issued by PPL
Capital Funding Trust I, which solely held debentures of PPL Capital Funding,
and by SIUK Capital Trust I, which solely holds debentures of WPD
LLP.





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





***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.





***PURTA*** - the
Pennsylvania Public Utility Realty Tax Act.





***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.





***RTO*** -
Regional Transmission Organization.





***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.





***SIUK
Capital Trust I*** - a
business trust created to issue preferred securities and whose common securities
are held by WPD LLP.





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





***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 are 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.





***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.








**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. These
forward-looking statements involve a number of risks and uncertainties, and
actual results may differ materially from the results discussed in the
forward-looking statements. In addition to the specific factors discussed in
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations," 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 and fuel;·
    market
      prices for crude oil and the potential impact on synthetic fuel tax
      credits and synthetic fuel operations;·
    weather
      conditions affecting customer energy usage and operating costs;·
    competition
      in retail and wholesale power markets;·
    the
      effect of any business or industry restructuring;·
    the
      profitability and liquidity of PPL and its subsidiaries;·
    new
      accounting requirements or new interpretations or applications of existing
      requirements;·
    operation
      and availability of existing generation facilities and operating costs;·
    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 and emission
      allowance and other expenses;·
    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, including potential effects of
      threatened or actual terrorism or war or other hostilities;




·
    any
      impact of 2005's hurricanes 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;·
    impact
      of 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;·
    the
      market prices of equity securities and the impact on pension income 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;
  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
obligations to update the information contained in such statement to reflect
subsequent developments or information.





**Part
      I. FINANCIAL INFORMATION****Item
      1. Financial Statements****CONDENSED CONSOLIDATED STATEMENT OF
      INCOME****PPL
      Corporation and Subsidiaries**(Unaudited)*(Millions
      of Dollars, except per share data)***Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004****Operating
      Revenues**Utility
    
    **$**
    **1,068**
    
    
    $
    923
    
    
    **$**
    **3,234**
    
    
    $
    2,916Unregulated
      retail electric
    
    
    **25**
    
    
    
    27
    
    
    
    **73**
    
    
    
    87Wholesale
      energy marketing
    
    
    **358**
    
    
    
    363
    
    
    
    **899**
    
    
    
    927Net
      energy trading margins
    
    
    **20**
    
    
    
    6
    
    
    
    **35**
    
    
    
    18Energy
      related businesses
    
    
    **172**
    
    
    
    135
    
    
    
    **480**
    
    
    
    383Total
    
    
    **1,643**
    
    
    
    1,454
    
    
    
    **4,721**
    
    
    
    4,331**Operating
      Expenses**OperationFuel
    
    
    **284**
    
    
    
    191
    
    
    
    **697**
    
    
    
    577Energy
      purchases
    
    
    **221**
    
    
    
    218
    
    
    
    **732**
    
    
    
    690Other
      operation and maintenance
    
    
    **331**
    
    
    
    288
    
    
    
    **1,026**
    
    
    
    920Amortization
      of recoverable transition costs
    
    
    **71**
    
    
    
    64
    
    
    
    **199**
    
    
    
    192Depreciation
    
    
    **107**
    
    
    
    103
    
    
    
    **315**
    
    
    
    300Taxes,
      other than income
    
    
    **73**
    
    
    
    67
    
    
    
    **214**
    
    
    
    186Energy
      related businesses
    
    
    **170**
    
    
    
    140
    
    
    
    **486**
    
    
    
    409Total
    
    
    **1,257**
    
    
    
    1,071
    
    
    
    **3,669**
    
    
    
    3,274**Operating
      Income**
    
    
    **386**
    
    
    
    383
    
    
    
    **1,052**
    
    
    
    1,057Other
      Income - net
    
    
    **5**
    
    
    
    18
    
    
    
    **23**
    
    
    
    45Interest
      Expense
    
    
    **127**
    
    
    
    128
    
    
    
    **387**
    
    
    
    382**Income
      from Continuing Operations Before Income Taxes,**
      **Minority
      Interest and Dividends on Preferred Stock**
    
    
    **264**
    
    
    
    273
    
    
    
    **688**
    
    
    
    720Income
      Taxes
    
    
    **65**
    
    
    
    74
    
    
    
    **137**
    
    
    
    179Minority
      Interest
    
    
    **1**
    
    
    
    2
    
    
    
    **5**
    
    
    
    6Dividends
      on Preferred Stock
    
    
    **1**
    
    
    
    1
    
    
    
    **2**
    
    
    
    2**Income
      from Continuing Operations**
    
    
    **197**
    
    
    
    196
    
    
    
    **544**
    
    
    
    533Loss
      from Discontinued Operations (net of income taxes)
    
    
    
    
    
    
    
    
    
    
    **51**
    
    
    
    12**Net
      Income**
    
    **$**
    **197**
    
    
    $
    196
    
    
    **$**
    **493**
    
    
    $
    521**Earnings
      Per Share of Common Stock**(a)**:**Income
      from Continuing Operations:Basic
    
    **$**
    **0.52**
    
    
    $
    0.52
    
    
    **$**
    **1.43**
    
    
    $
    1.46Diluted
    
    
    **0.51**
    
    
    
    0.52
    
    
    
    **1.42**
    
    
    
    1.45Net
      Income:Basic
    
    **$**
    **0.52**
    
    
    $
    0.52
    
    
    **$**
    **1.30**
    
    
    $
    1.42Diluted
    
    
    **0.51**
    
    
    
    0.52
    
    
    
    **1.29**
    
    
    
    1.42**Dividends
      Declared per Share of Common Stock**(a)
    
    **$**
    **0.25**
    
    
    $
    0.205
    
    
    **$**
    **0.71**
    
    
    $
    0.615(a)
    Prior
      periods have been adjusted to reflect PPL's 2-for-1 common stock split
      completed in August 2005. See Note 2 to the Financial Statements for
      additional information.*The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial statements.*
 
 **CONDENSED CONSOLIDATED STATEMENT OF CASH
      FLOWS****PPL
      Corporation and Subsidiaries**(Unaudited)*(Millions
      of Dollars)***Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004****Cash
      Flows from Operating Activities**Net
      income
    
    **$**
    **493**
    
    
    $
    521Adjustments
      to reconcile net income to net cash provided by operating
      activitiesPre-tax
      loss from the sale of the Sundance plant
    
    
    **72**Depreciation
    
    
    **318**
    
    
    
    306Stock
      compensation expense
    
    
    **30**
    
    
    
    10Amortizations
      - recoverable transition costs and other
    
    
    **190**
    
    
    
    178Pension
      expense (income) - net
    
    
    **20**
    
    
    
    (18
    )Pension
      funding
    
    
    **(54**
    **)**
    
    
    (2
    )Deferred
      income taxes (benefits) and investment tax credits
    
    
    **(43**
    **)**
    
    
    90Accrual
      for PJM billing dispute
    
    
    **47**Accrual
      for remediation of ash basin leak
    
    
    **33**Unrealized
      gain on derivatives and other hedging activities
    
    
    **(26**
    **)**
    
    
    (12
    )Deferral
      of storm-related costs
    
    
    **(12**
    **)**Interest
      accretion on asset retirement obligation and other
    
    
    **18**
    
    
    
    17Other
    
    
    **29**
    
    
    
    19Change
      in current assets and current liabilitiesAccounts
      receivable
    
    
    **(85**
    **)**
    
    
    81Accounts
      payable
    
    
    **97**
    
    
    
    (48
    )Fuel,
      materials and supplies
    
    
    **33**
    
    
    
    (37
    )Other
    
    
    **(59**
    **)**
    
    
    11Other
      operating activitiesOther
      assets
    
    
    **(50**
    **)**
    
    
    (42
    )Other
      liabilities
    
    
    **(10**
    **)**
    
    
    (22
    )Net
      cash provided by operating activities
    
    
    **1,041**
    
    
    
    1,052**Cash
      Flows from Investing Activities**Expenditures
      for property, plant and equipment
    
    
    **(538**
    **)**
    
    
    (501
    )Investment
      in generating assets and electric energy projects
    
    
    
    
    
    
    (32
    )Proceeds
      from the sale of the Sundance plant
    
    
    **190**Proceeds
      from the sale of minority interest in CGE
    
    
    
    
    
    
    123Purchases
      of auction rate securities
    
    
    **(19**
    **)**
    
    
    (103
    )Proceeds
      from the sale of auction rate securities
    
    
    **83**
    
    
    
    69Net
      increase in restricted cash
    
    
    **(20**
    **)**
    
    
    (53
    )Other
      investing activities
    
    
    **(13**
    **)**
    
    
    (1
    )Net
      cash used in investing activities
    
    
    **(317**
    **)**
    
    
    (498
    )**Cash
      Flows from Financing Activities**Issuance
      of common stock
    
    
    **36**
    
    
    
    595Issuance
      of long-term debt
    
    
    **224**
    
    
    
    322Retirement
      of long-term debt
    
    
    **(1,177**
    **)**
    
    
    (1,008
    )Payment
      of common dividends
    
    
    **(252**
    **)**
    
    
    (218
    )Net
      increase in short-term debt
    
    
    **80**
    
    
    
    31Other
      financing activities
    
    
    **(20**
    **)**
    
    
    (12
    )Net
      cash used in financing activities
    
    
    **(1,109**
    **)**
    
    
    (290
    )**Effect
      of Exchange Rates on Cash and Cash Equivalents**
    
    
    **4**
    
    
    
    4**Net
      Increase (Decrease) in Cash and Cash Equivalents**
    
    
    **(381**
    **)**
    
    
    268Cash
      and Cash Equivalents at Beginning of Period
    
    
    **616**
    
    
    
    466Cash
      and Cash Equivalents at End of Period
    
    **$**
    **235**
    
    
    $
    734*The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.*





**CONDENSED
      CONSOLIDATED BALANCE SHEET****PPL
      Corporation and Subsidiaries**(Unaudited)*(Millions
      of Dollars)***September
      30,**
      **2005**
    
    **December
      31,**
      **2004****Assets****Current
      Assets**Cash
      and cash equivalents
    
    **$**
    **235**
    
    
    $
    616Restricted
      cash
    
    
    **86**
    
    
    
    50Accounts
      receivable (less reserve: 2005, $86; 2004, $88)
    
    
    **539**
    
    
    
    459Unbilled
      revenues
    
    
    **413**
    
    
    
    407Fuel,
      materials and supplies
    
    
    **275**
    
    
    
    309Prepayments
    
    
    **74**
    
    
    
    56Deferred
      income taxes
    
    
    **321**
    
    
    
    162Price
      risk management assets
    
    
    **657**
    
    
    
    115Other
    
    
    **93**
    
    
    
    130**2,693**
    
    
    
    2,304**Investments**Investment
      in unconsolidated affiliates - at equity
    
    
    **56**
    
    
    
    51Nuclear
      plant decommissioning trust fund
    
    
    **432**
    
    
    
    409Other
    
    
    **8**
    
    
    
    12**496**
    
    
    
    472**Property,
      Plant and Equipment**Electric
      plant in serviceTransmission
      and distribution
    
    
    **8,003**
    
    
    
    7,936Generation
    
    
    **8,698**
    
    
    
    8,946General
    
    
    **641**
    
    
    
    666**17,342**
    
    
    
    17,548Construction
      work in progress
    
    
    **249**
    
    
    
    148Nuclear
      fuel
    
    
    **289**
    
    
    
    314Electric
      plant
    
    
    **17,880**
    
    
    
    18,010Gas
      and oil plant
    
    
    **342**
    
    
    
    336Other
      property
    
    
    **286**
    
    
    
    285**18,508**
    
    
    
    18,631Less:
      accumulated depreciation
    
    
    **7,628**
    
    
    
    7,482**10,880**
    
    
    
    11,149**Regulatory
      and Other Noncurrent Assets**Recoverable
      transition costs
    
    
    **1,234**
    
    
    
    1,431Goodwill
    
    
    **1,090**
    
    
    
    1,127Other
      acquired intangibles
    
    
    **381**
    
    
    
    336Other
    
    
    **989**
    
    
    
    942**3,694**
    
    
    
    3,836**$**
    **17,763**
    
    
    $
    17,761*The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.*





**CONDENSED
      CONSOLIDATED BALANCE SHEET****PPL
      Corporation and Subsidiaries**(Unaudited)*(Millions
      of Dollars)***September
      30,**
      **2005**
    
    **December
      31,**
      **2004****Liabilities
      and Equity****Current
      Liabilities**Short-term
      debt
    
    **$**
    **112**
    
    
    $
    42Long-term
      debt
    
    
    **798**
    
    
    
    866Accounts
      payable
    
    
    **500**
    
    
    
    407Above
      market NUG contracts
    
    
    **71**
    
    
    
    73Taxes
    
    
    **194**
    
    
    
    164Interest
    
    
    **102**
    
    
    
    129Dividends
    
    
    **96**
    
    
    
    79Price
      risk management liabilities
    
    
    **716**
    
    
    
    167Other
    
    
    **485**
    
    
    
    368**3,074**
    
    
    
    2,295**Long-term
      Debt**
    
    
    **5,879**
    
    
    
    6,792**Long-term
      Debt with Affiliate Trust**
    
    
    **89**
    
    
    
    89**D****eferred
      Credits and Other Noncurrent Liabilities**Deferred
      income taxes and investment tax credits
    
    
    **2,376**
    
    
    
    2,426Accrued
      pension obligations
    
    
    **413**
    
    
    
    476Asset
      retirement obligations
    
    
    **276**
    
    
    
    257Above
      market NUG contracts
    
    
    **153**
    
    
    
    206Other
    
    
    **1,091**
    
    
    
    874**4,309**
    
    
    
    4,239**Commitments
      and Contingent Liabilities****Minority
      Interest**
    
    
    **56**
    
    
    
    56**Preferred
      Stock without Sinking Fund Requirements**
    
    
    **51**
    
    
    
    51**Shareowners'
      Common Equity**Common
      stock
    
    
    **4**
    
    
    
    2Capital
      in excess of par value
    
    
    **3,622**
    
    
    
    3,577Treasury
      stock
    
    
    **(838**
    **)**
    
    
    (838
    )Earnings
      reinvested
    
    
    **2,092**
    
    
    
    1,870Accumulated
      other comprehensive loss
    
    
    **(552**
    **)**
    
    
    (323
    )Capital
      stock expense and other
    
    
    **(23**
    **)**
    
    
    (49
    )**4,305**
    
    
    
    4,239**$**
    **17,763**
    
    
    $
    17,761*The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.*





**CONDENSED
      CONSOLIDATED STATEMENT OF INCOME****PPL
      Energy Supply, LLC and Subsidiaries**(Unaudited)*(Millions
      of Dollars)***Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004****Operating
      Revenues**Wholesale
      energy marketing
    
    **$**
    **358**
    
    
    $
    363
    
    
    **$**
    **899**
    
    
    $
    927Wholesale
      energy marketing to affiliate
    
    
    **415**
    
    
    
    373
    
    
    
    **1,194**
    
    
    
    1,129Utility
    
    
    **265**
    
    
    
    237
    
    
    
    **842**
    
    
    
    771Unregulated
      retail electric
    
    
    **25**
    
    
    
    27
    
    
    
    **73**
    
    
    
    87Net
      energy trading margins
    
    
    **20**
    
    
    
    6
    
    
    
    **35**
    
    
    
    18Energy
      related businesses
    
    
    **163**
    
    
    
    131
    
    
    
    **459**
    
    
    
    369Total
    
    
    **1,246**
    
    
    
    1,137
    
    
    
    **3,502**
    
    
    
    3,301**Operating
      Expenses**OperationFuel
    
    
    **273**
    
    
    
    184
    
    
    
    **611**
    
    
    
    506Energy
      purchases
    
    
    **156**
    
    
    
    160
    
    
    
    **525**
    
    
    
    523Energy
      purchases from affiliate
    
    
    **41**
    
    
    
    40
    
    
    
    **111**
    
    
    
    116Other
      operation and maintenance
    
    
    **255**
    
    
    
    200
    
    
    
    **759**
    
    
    
    664Depreciation
    
    
    **76**
    
    
    
    73
    
    
    
    **220**
    
    
    
    211Taxes,
      other than income
    
    
    **25**
    
    
    
    26
    
    
    
    **75**
    
    
    
    74Energy
      related businesses
    
    
    **162**
    
    
    
    133
    
    
    
    **463**
    
    
    
    388Total
    
    
    **988**
    
    
    
    816
    
    
    
    **2,764**
    
    
    
    2,482**Operating
      Income**
    
    
    **258**
    
    
    
    321
    
    
    
    **738**
    
    
    
    819Other
      Income - net
    
    
    **9**
    
    
    
    15
    
    
    
    **28**
    
    
    
    52Interest
      Expense
    
    
    **69**
    
    
    
    65
    
    
    
    **199**
    
    
    
    182Interest
      Expense with Affiliates
    
    
    **5**
    
    
    
    6
    
    
    
    **18**
    
    
    
    13**Income
      from Continuing Operations Before****Income****Taxes**
      **and
      Minority Interest**
    
    
    **193**
    
    
    
    265
    
    
    
    **549**
    
    
    
    676Income
      Taxes
    
    
    **33**
    
    
    
    71
    
    
    
    **75**
    
    
    
    163Minority
      Interest
    
    
    **1**
    
    
    
    2
    
    
    
    **5**
    
    
    
    6**Income
      from Continuing Operations**
    
    
    **159**
    
    
    
    192
    
    
    
    **469**
    
    
    
    507Loss
      from Discontinued Operations (net of income taxes)
    
    
    
    
    
    
    
    
    
    
    **51**
    
    
    
    12**Net
      Income**
    
    **$**
    **159**
    
    
    $
    192
    
    
    **$**
    **418**
    
    
    $
    495*The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.*





**CONDENSED
      CONSOLIDATED STATEMENT OF CASH FLOWS****PPL
      Energy Supply, LLC and Subsidiaries**(Unaudited)*(Millions
      of Dollars)***Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004****Cash
      Flows from Operating Activities**Net
      income
    
    **$**
    **418**
    
    
    $
    495Adjustments
      to reconcile net income to net cash provided by operating
      activitiesPre-tax
      loss from the sale of the Sundance plant
    
    
    **72**Depreciation
    
    
    **223**
    
    
    
    217Stock
      compensation expense
    
    
    **19**
    
    
    
    7Amortizations
      - energy commitments and other
    
    
    **(29**
    **)**
    
    
    (41
    )Pension
      expense (income) - net
    
    
    **12**
    
    
    
    (23
    )Pension
      funding
    
    
    **(43**
    **)**Deferred
      income taxes and investment tax credits
    
    
    **49**
    
    
    
    107Accrual
      for remediation of ash basin leak
    
    
    **33**Unrealized
      gain on derivatives and other hedging activities
    
    
    **(25**
    **)**
    
    
    (10
    )Interest
      accretion on asset retirement obligation and other
    
    
    **18**
    
    
    
    17Other
    
    
    **26**
    
    
    
    3Change
      in current assets and current liabilitiesAccounts
      receivable
    
    
    **(42**
    **)**
    
    
    (4
    )Accounts
      payable
    
    
    **95**
    
    
    
    (24
    )Collateral
      on PLR energy supply
    
    
    
    
    
    
    (302
    )Fuel,
      materials and supplies
    
    
    **31**
    
    
    
    (28
    )Other
    
    
    **(59**
    **)**
    
    
    35Other
      operating activitiesOther
      assets
    
    
    **(51**
    **)**
    
    
    (44
    )Other
      liabilities
    
    
    **(40**
    **)**
    
    
    21Net
      cash provided by operating activities
    
    
    **707**
    
    
    
    426**Cash
      Flows from Investing Activities**Expenditures
      for property, plant and equipment
    
    
    **(387**
    **)**
    
    
    (336
    )Investment
      in generating assets and electric energy projects
    
    
    
    
    
    
    (32
    )Proceeds
      from the sale of the Sundance plant
    
    
    **190**Proceeds
      from the sale of minority interest in CGE
    
    
    
    
    
    
    123Purchase
      of auction rate securities
    
    
    **(15**
    **)**
    
    
    (48
    )Proceeds
      from the sale of auction rate securities
    
    
    **66**
    
    
    
    14Net
      increase in restricted cash
    
    
    **(11**
    **)**
    
    
    (16
    )Other
      investing activities
    
    
    **(17**
    **)**
    
    
    (6
    )Net
      cash used in investing activities
    
    
    **(174**
    **)**
    
    
    (301
    )**Cash
      Flows from Financing Activities**Issuance
      of long-term debt
    
    
    
    
    
    
    322Retirement
      of long-term debt
    
    
    **(209**
    **)**
    
    
    (669
    )Distributions
      to Member
    
    
    **(206**
    **)**
    
    
    (169
    )Contributions
      from Member
    
    
    **50**
    
    
    
    358Net
      increase (decrease) in short-term debt
    
    
    **80**
    
    
    
    (57
    )Net
      increase (decrease) in note payable to affiliate
    
    
    **(495**
    **)**
    
    
    495Other
      financing activities
    
    
    **(4**
    **)**
    
    
    (1
    )Net
      cash provided by (used in) financing activities
    
    
    **(784**
    **)**
    
    
    279**Effect
      of Exchange Rates on Cash and Cash Equivalents**
    
    
    **4**
    
    
    
    4**Net
      Increase (Decrease) in Cash and Cash Equivalents**
    
    
    **(247**
    **)**
    
    
    408Cash
      and Cash Equivalents at Beginning of Period
    
    
    **357**
    
    
    
    222Cash
      and Cash Equivalents at End of Period
    
    **$**
    **110**
    
    
    $
    630*The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.*





**CONDENSED
      CONSOLIDATED BALANCE SHEET****PPL
      Energy Supply, LLC and Subsidiaries**(Unaudited)*(Millions
      of Dollars)***September
      30,**
      **2005**
    
    **December
      31,**
      **2004****Assets****Current
      Assets**Cash
      and cash equivalents
    
    **$**
    **110**
    
    
    $
    357Restricted
      cash
    
    
    **33**
    
    
    
    3Accounts
      receivable (less reserve: 2005, $65; 2004, $68)
    
    
    **316**
    
    
    
    259Unbilled
      revenues
    
    
    **268**
    
    
    
    250Accounts
      receivable from affiliates
    
    
    **117**
    
    
    
    152Collateral
      on PLR energy supply to affiliate
    
    
    **300**
    
    
    
    300Fuel,
      materials and supplies
    
    
    **224**
    
    
    
    256Prepayments
    
    
    **40**
    
    
    
    42Deferred
      income taxes
    
    
    **273**
    
    
    
    128Price
      risk management assets
    
    
    **648**
    
    
    
    113Other
    
    
    **71**
    
    
    
    97**2,400**
    
    
    
    1,957**Investments**Investment
      in unconsolidated affiliates - at equity
    
    
    **56**
    
    
    
    51Nuclear
      plant decommissioning trust fund
    
    
    **432**
    
    
    
    409Other
    
    
    **4**
    
    
    
    5**492**
    
    
    
    465**Property,
      Plant and Equipment**Electric
      plant in serviceTransmission
      and distribution
    
    
    **4,004**
    
    
    
    4,032Generation
    
    
    **8,698**
    
    
    
    8,946General
    
    
    **271**
    
    
    
    303**12,973**
    
    
    
    13,281Construction
      work in progress
    
    
    **198**
    
    
    
    115Nuclear
      fuel
    
    
    **289**
    
    
    
    314Electric
      plant
    
    
    **13,460**
    
    
    
    13,710Gas
      and oil plant
    
    
    **64**
    
    
    
    64Other
      property
    
    
    **203**
    
    
    
    210**13,727**
    
    
    
    13,984Less:
      accumulated depreciation
    
    
    **5,820**
    
    
    
    5,755**7,907**
    
    
    
    8,229**Other
      Noncurrent Assets**Goodwill
    
    
    **1,034**
    
    
    
    1,072Other
      acquired intangibles
    
    
    **250**
    
    
    
    202Other
    
    
    **588**
    
    
    
    559**1,872**
    
    
    
    1,833**$**
    **12,671**
    
    
    $
    12,484*The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.*





**CONDENSED
      CONSOLIDATED BALANCE SHEET****PPL
      Energy Supply, LLC and Subsidiaries**(Unaudited)*(Millions
      of Dollars)***September
      30,**
      **2005**
    
    **December
      31,**
      **2004****Liabilities
      and Equity****Current
      Liabilities**Short-term
      debt
    
    **$**
    **70**Long-term
      debt
    
    
    **103**
    
    
    $
    181Accounts
      payable
    
    
    **434**
    
    
    
    338Accounts
      payable to affiliates
    
    
    **47**
    
    
    
    52Above
      market NUG contracts
    
    
    **71**
    
    
    
    73Taxes
    
    
    **97**
    
    
    
    101Interest
    
    
    **80**
    
    
    
    87Deferred
      revenue on PLR energy supply to affiliate
    
    
    **12**
    
    
    
    12Price
      risk management liabilities
    
    
    **706**
    
    
    
    163Other
    
    
    **325**
    
    
    
    262**1,945**
    
    
    
    1,269**Long-term
      Debt**
    
    
    **3,555**
    
    
    
    3,694**Note
      Payable to Affiliate**
    
    
    
    
    
    
    495**Long-term
      Debt with Affiliate Trust**
    
    
    **89**
    
    
    
    89**Deferred
      Credits and Other Noncurrent Liabilities**Deferred
      income taxes and investment tax credits
    
    
    **1,281**
    
    
    
    1,261Accrued
      pension obligations
    
    
    **276**
    
    
    
    341Asset
      retirement obligations
    
    
    **276**
    
    
    
    257Above
      market NUG contracts
    
    
    **153**
    
    
    
    206Deferred
      revenue on PLR energy supply to affiliate
    
    
    **38**
    
    
    
    46Other
    
    
    **927**
    
    
    
    720**2,951**
    
    
    
    2,831**Commitments
      and Contingent Liabilities****Minority
      Interest**
    
    
    **56**
    
    
    
    56**Member's
      Equity**
    
    
    **4,075**
    
    
    
    4,050**$**
    **12,671**
    
    
    $
    12,484*The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.*





**CONDENSED
      CONSOLIDATED STATEMENT OF INCOME****PPL
      Electric Utilities Corporation and
Subsidiaries**(Unaudited)*(Millions
      of Dollars)***Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004****Operating
      Revenues**Retail
      electric
    
    **$**
    **782**
    
    
    $
    663
    
    
    **$**
    **2,258**
    
    
    $
    2,017Wholesale
      electric
    
    
    **1**
    
    
    
    1
    
    
    
    **3**
    
    
    
    5Wholesale
      electric to affiliate
    
    
    **41**
    
    
    
    40
    
    
    
    **111**
    
    
    
    116Total
    
    
    **824**
    
    
    
    704
    
    
    
    **2,372**
    
    
    
    2,138**Operating
      Expenses**OperationEnergy
      purchases
    
    
    **65**
    
    
    
    54
    
    
    
    **208**
    
    
    
    164Energy
      purchases from affiliate
    
    
    **415**
    
    
    
    373
    
    
    
    **1,194**
    
    
    
    1,129Other
      operation and maintenance
    
    
    **75**
    
    
    
    87
    
    
    
    **261**
    
    
    
    252Amortization
      of recoverable transition costs
    
    
    **71**
    
    
    
    64
    
    
    
    **199**
    
    
    
    192Depreciation
    
    
    **28**
    
    
    
    27
    
    
    
    **83**
    
    
    
    80Taxes,
      other than income
    
    
    **48**
    
    
    
    41
    
    
    
    **138**
    
    
    
    110Total
    
    
    **702**
    
    
    
    646
    
    
    
    **2,083**
    
    
    
    1,927**Operating
      Income**
    
    
    **122**
    
    
    
    58
    
    
    
    **289**
    
    
    
    211Other
      Income - net
    
    
    **5**
    
    
    
    11
    
    
    
    **15**
    
    
    
    12Interest
      Expense
    
    
    **39**
    
    
    
    46
    
    
    
    **132**
    
    
    
    142Interest
      Expense with Affiliate
    
    
    **3**
    
    
    
    1
    
    
    
    **8**
    
    
    
    1**Income
      Before Income Taxes**
    
    
    **85**
    
    
    
    22
    
    
    
    **164**
    
    
    
    80Income
      Taxes
    
    
    **32**
    
    
    
    6
    
    
    
    **59**
    
    
    
    27**Income
      Before Dividends on Preferred Stock**
    
    
    **53**
    
    
    
    16
    
    
    
    **105**
    
    
    
    53Dividends
      on Preferred Stock
    
    
    **1**
    
    
    
    1
    
    
    
    **2**
    
    
    
    2**Income
      Available to PPL Corporation**
    
    **$**
    **52**
    
    
    $
    15
    
    
    **$**
    **103**
    
    
    $
    51*The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.*





**CONDENSED
      CONSOLIDATED STATEMENT OF CASH FLOWS****PPL
      Electric Utilities Corporation and
Subsidiaries**(Unaudited)*(Millions
      of Dollars)***Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004****Cash
      Flows from Operating Activities**Net
      income
    
    **$**
    **103**
    
    
    $
    51Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
    
    
    **83**
    
    
    
    80Stock
      compensation expense
    
    
    **7**
    
    
    
    2Accrual
      for PJM billing dispute
    
    
    **47**Amortizations
      - recoverable transition costs and other
    
    
    **216**
    
    
    
    208Deferred
      income taxes (benefits) and investment tax credits
    
    
    **(5**
    **)**
    
    
    48Deferral
      of storm-related costs
    
    
    **(12**
    **)**Change
      in current assets and current liabilitiesAccounts
      receivable
    
    
    **(16**
    **)**
    
    
    9Accounts
      payable
    
    
    **(39**
    **)**
    
    
    37Collateral
      on PLR energy supply
    
    
    
    
    
    
    302Other
    
    
    **(38**
    **)**
    
    
    (60
    )Other
      operating activitiesOther
      assets
    
    
    **(3**
    **)**
    
    
    (3
    )Other
      liabilities
    
    
    **18**
    
    
    
    (24
    )Net
      cash provided by operating activities
    
    
    **361**
    
    
    
    650**Cash
      Flows from Investing Activities**Expenditures
      for property, plant and equipment
    
    
    **(125**
    **)**
    
    
    (140
    )Purchases
      of auction rate securities
    
    
    
    
    
    
    (50
    )Proceeds
      from the sale of auction rate securities
    
    
    **10**
    
    
    
    50Net
      increase in note receivable from affiliate
    
    
    
    
    
    
    (300
    )Net
      increase in restricted cash
    
    
    **(3**
    **)**
    
    
    (35
    )Other
      investing activities
    
    
    **2**
    
    
    
    1Net
      cash used in investing activities
    
    
    **(116**
    **)**
    
    
    (474
    )**Cash
      Flows from Financing Activities**Issuance
      of long-term debt
    
    
    **224**Retirement
      of long-term debt
    
    
    **(497**
    **)**
    
    
    (333
    )Payment
      of common dividends to PPL Corporation
    
    
    **(59**
    **)**
    
    
    (23
    )Net
      increase in short-term debt
    
    
    
    
    
    
    88Other
      financing activities
    
    
    **(11**
    **)**
    
    
    (10
    )Net
      cash used in financing activities
    
    
    **(343**
    **)**
    
    
    (278
    )**Net
      Decrease in Cash and Cash Equivalents**
    
    
    **(98**
    **)**
    
    
    (102
    )Cash
      and Cash Equivalents at Beginning of Period
    
    
    **151**
    
    
    
    162Cash
      and Cash Equivalents at End of Period
    
    **$**
    **53**
    
    
    $
    60*The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.*





**CONDENSED
      CONSOLIDATED BALANCE SHEET****PPL
      Electric Utilities Corporation and
Subsidiaries**(Unaudited)*(Millions
      of Dollars)***September
      30,**
      **2005**
    
    **December
      31,**
      **2004****Assets****Current
      Assets**Cash
      and cash equivalents
    
    **$**
    **53**
    
    
    $
    151Restricted
      cash
    
    
    **42**
    
    
    
    42Accounts
      receivable (less reserve: 2005, $19; 2004, $18)
    
    
    **204**
    
    
    
    179Unbilled
      revenues
    
    
    **141**
    
    
    
    148Accounts
      receivable from affiliates
    
    
    **8**
    
    
    
    17Note
      receivable from affiliate
    
    
    **300**
    
    
    
    300Prepayments
    
    
    **27**
    
    
    
    6Prepayment
      on PLR energy supply from affiliate
    
    
    **12**
    
    
    
    12Other
    
    
    **81**
    
    
    
    66**868**
    
    
    
    921**Property,
      Plant and Equipment**Electric
      plant in serviceTransmission
      and distribution
    
    
    **3,999**
    
    
    
    3,904General
    
    
    **357**
    
    
    
    352**4,356**
    
    
    
    4,256Construction
      work in progress
    
    
    **41**
    
    
    
    29Electric
      plant
    
    
    **4,397**
    
    
    
    4,285Other
      property
    
    
    **5**
    
    
    
    4**4,402**
    
    
    
    4,289Less:
      accumulated depreciation
    
    
    **1,703**
    
    
    
    1,632**2,699**
    
    
    
    2,657**Regulatory
      and Other Noncurrent Assets**Recoverable
      transition costs
    
    
    **1,234**
    
    
    
    1,431Intangibles
    
    
    **114**
    
    
    
    117Prepayment
      on PLR energy supply from affiliate
    
    
    **38**
    
    
    
    46Other
    
    
    **373**
    
    
    
    354**1,759**
    
    
    
    1,948**$**
    **5,326**
    
    
    $
    5,526*The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.*





**CONDENSED
      CONSOLIDATED BALANCE SHEET****PPL
      Electric Utilities Corporation and
Subsidiaries**(Unaudited)*(Millions
      of Dollars)***September
      30,**
      **2005**
    
    **December
      31,**
      **2004****Liabilities
      and Equity****Current
      Liabilities**Short-term
      debt
    
    **$**
    **42**
    
    
    $
    42Long-term
      debt
    
    
    **427**
    
    
    
    336Accounts
      payable
    
    
    **39**
    
    
    
    39Accounts
      payable to affiliates
    
    
    **136**
    
    
    
    168Taxes
    
    
    **65**
    
    
    
    46Collateral
      on PLR energy supply from affiliate
    
    
    **300**
    
    
    
    300Other
    
    
    **125**
    
    
    
    98**1,134**
    
    
    
    1,029**Long-term
      Debt**
    
    
    **1,846**
    
    
    
    2,208**Deferred
      Credits and Other Noncurrent Liabilities**Deferred
      income taxes and investment tax credits
    
    
    **791**
    
    
    
    776Other
    
    
    **187**
    
    
    
    190**978**
    
    
    
    966**Commitments
      and Contingent Liabilities****Preferred
      Stock without Sinking Fund Requirements**
    
    
    **51**
    
    
    
    51**Shareowner's
      Common Equity**Common
      stock
    
    
    **1,476**
    
    
    
    1,476Additional
      paid-in capital
    
    
    **361**
    
    
    
    361Treasury
      stock
    
    
    **(912**
    **)**
    
    
    (912
    )Earnings
      reinvested
    
    
    **399**
    
    
    
    354Capital
      stock expense and other
    
    
    **(7**
    **)**
    
    
    (7
    )**1,317**
    
    
    
    1,272**$**
    **5,326**
    
    
    $
    5,526*The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.*








**Combined
Notes to Condensed Consolidated Financial
Statements**




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 (including normal, recurring accruals) 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. The
Balance Sheet as of December 31, 2004, is derived from each
Registrant ' s 2004
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 2004
Form 10-K. The results of operations for the three and nine months ended
September 30, 2005, are not necessarily indicative of the results to be expected
for the full year ending December 31, 2005, or other future periods,
because results for interim periods can be disproportionately influenced by
various factors and developments and seasonal variations.





Certain
amounts in the September 30, 2004 and December 31, 2004, financial statements
have been reclassified to conform to the presentation in the September 30, 2005,
financial statements. On the Statement of Income, components of operating losses
of the Sundance plant were reclassified from certain line items to "Loss from
Discontinued Operations." See Note 8 for further discussion.





**2.**  **Summary
of Significant Accounting Policies**





The
following accounting policy disclosures represent updates to the "Summary of
Significant Accounting Policies" Note in each Registrant's 2004 Form
10-K.





**Depreciation** ** *(PPL
and PPL Energy Supply)*





PPL
subsidiaries periodically review the useful lives of their fixed assets. In
light of significant planned environmental capital expenditures, PPL Generation
conducted studies of the useful lives of Montour Units 1 and 2 and Brunner
Island Unit 3 during the first quarter of 2005. Based on these studies, the
useful lives of these units were extended from 2025 to 2035, effective January
1, 2005. In the second quarter of 2005, PPL Generation conducted additional
studies of the useful lives of certain Eastern fossil-fuel and hydroelectric
generation plants. The most significant change related to the useful lives of
Brunner Island Units 1 and 2 and Martins Creek Units 3 and 4, which were
extended from 2025 to 2035, effective July 1, 2005. The effect of these changes
in useful lives for the three and nine months ended September 30, 2005, was
to increase net income, as a result of lower depreciation, by approximately $2
million and $4 million.





As a
result of the final regulatory outcome published by Ofgem of the most recent
price control review and an assessment of the economic life of meters, WPD
reduced the remaining depreciable lives of its existing meter stock to
approximately nine years. The lives of new meters were reduced from 40 years to
19 years. The effect for the three and nine months ended September 30,
2005, was to decrease net income, as a result of higher depreciation, by
approximately $3 million.





**Goodwill** ** *(PPL
and PPL Energy Supply)*





The
change in the carrying amount of "Goodwill," as shown on the Balance Sheet, was
due to the effect of foreign currency exchange rates.





**Regulation** *(PPL
and PPL Electric)*





Included
in "Regulatory and Other Noncurrent Assets - Other" on the Balance Sheet are
approximately $12 million of costs associated with severe ice storms in PPL
Electric's service territory in January 2005. These costs have been deferred
based on an assessment of an order issued by the PUC on August 26, 2005. The
ratemaking treatment of these costs will be addressed in PPL Electric's next
distribution base rate case. PPL and PPL Electric believe there is a reasonable
basis for recovery of all regulatory assets.





**2-for-1
Stock Split** ** *(PPL)*





In August
2005, PPL completed a 2-for-1 stock split of its common stock. The record date
for the stock split was August 17, 2005, and the distribution date was
August 24, 2005. As a result of the stock split, approximately 190 million
shares were issued to shareholders and approximately 31 million shares were
issued as treasury shares as of the record date. The par value of the stock
remains at $0.01 per share and, accordingly, $2 million was transferred from
"Capital in excess of par value" to "Common stock" on the Balance Sheet. The
number of shares, the market price, and earnings and dividends per share
amounts, as well as PPL's stock-based compensation awards, the conversion rate
and market price trigger of PPL Energy Supply's 2-5/8% Convertible Senior Notes
due 2023 and the threshold appreciation price and shares issued under the PEPS
Units transaction, included in these financial statements have been adjusted for
all periods presented to reflect the stock split.





**Stock-Based
Compensation** *(PPL,
PPL Energy Supply and PPL Electric)*





Effective
January 1, 2003, PPL and its subsidiaries prospectively adopted the fair value
method of accounting for stock-based compensation. If the fair value method had
been used to account for all outstanding stock-based compensation awards in both
periods, there would not have been a material impact on reported net income and
EPS.





In SFAS
123 (revised 2004), "Share-Based Payment," the FASB provided additional guidance
on the requirement to accelerate expense recognition for employees who are at or
near retirement age and who are under a plan that allows for accelerated vesting
upon an employee's retirement. Such guidance is relevant to prior accounting for
stock-based compensation under other accounting guidance. PPL's stock-based
compensation plans allow for accelerated vesting upon an employee's retirement.
Thus, for employees who are retirement eligible when stock-based awards are
granted, PPL will recognize the expense immediately. For employees who are not
retirement eligible when stock-based awards are granted, PPL will amortize the
awards over the shorter of the vesting period or the period up to the employee's
attainment of retirement age. Retirement eligible has been defined by PPL as the
early retirement age of 55. See Note 16 for a discussion of SFAS 123 (revised
2004).





*(PPL)*





In the
first quarter of 2005, PPL recorded a charge of approximately $10 million after
tax, or $0.03 per share, to accelerate stock-based compensation expense for
retirement-eligible employees. Approximately $5 million of the after-tax total,
or $0.01 per share, was related to periods prior to 2005. The prior period
amounts were not material to previously issued financial
statements.





*(PPL
Energy Supply)*





In the
first quarter of 2005, PPL Energy Supply recorded a charge of approximately $7
million after tax to accelerate stock-based compensation expense for
retirement-eligible employees. Approximately $3 million of the after-tax total
was related to periods prior to 2005. The prior period amounts were not material
to previously issued financial statements.





*(PPL
Electric)*





In the
first quarter of 2005, PPL Electric recorded a charge of approximately $3
million after tax to accelerate stock-based compensation expense for
retirement-eligible employees. Approximately $2 million of the after-tax total
was related to periods prior to 2005. The prior period amounts were not material
to previously issued financial statements.





**New
Accounting Standards**  *(PPL,
PPL Energy Supply and PPL Electric)*





See Note
16 for information on 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 2004 Form 10-K for a
discussion of reportable segments. As of September 30, 2005, there were no
changes to the reportable segments except that the segments were renamed to more
specifically describe their businesses. The reportable segments are now Supply,
International Delivery (formerly International) and Pennsylvania Delivery
(formerly Delivery).





Financial
data for the segments are as follows:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****PPL**
    
    **2005**
    
    **2004**
    
    **2005**
    
    **2004****Income
      Statement Data**Revenues
      from external customersSupply
    
    $
    557
    
    
    $
    514
    
    
    $
    1,431
    
    
    $
    1,364International
      Delivery
    
    
    283
    
    
    
    253
    
    
    
    897
    
    
    
    821Pennsylvania
      Delivery
    
    
    803
    
    
    
    687
    
    
    
    2,393
    
    
    
    2,1461,643
    
    
    
    1,454
    
    
    
    4,721
    
    
    
    4,331Intersegment
      revenuesSupply
    
    
    415
    
    
    
    373
    
    
    
    1,194
    
    
    
    1,129Pennsylvania
      Delivery
    
    
    42
    
    
    
    40
    
    
    
    113
    
    
    
    118Net
      IncomeSupply
      (a)
    
    
    112
    
    
    
    145
    
    
    
    238
    
    
    
    314International
      Delivery (b)
    
    
    36
    
    
    
    38
    
    
    
    152
    
    
    
    152Pennsylvania
      Delivery
    
    
    49
    
    
    
    13
    
    
    
    103
    
    
    
    55$
    197
    
    
    $
    196
    
    
    $
    493
    
    
    $
    521








**PPL**
    
    **September
      30,**
      **2005**
    
    **December
      31,**
      **2004****Balance
      Sheet Data**Total
      assetsSupply
    
    $
    7,073
    
    
    $
    6,673International
      Delivery
    
    
    5,171
    
    
    
    5,390Pennsylvania
      Delivery
    
    
    5,519
    
    
    
    5,698$
    17,763
    
    
    $
    17,761








**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****PPL
      Energy Supply**
    
    **2005**
    
    **2004**
    
    **2005**
    
    **2004****Income
      Statement Data**Revenues
      from external customersSupply
    
    $
    963
    
    
    $
    884
    
    
    $
    2,605
    
    
    $
    2,480International
      Delivery
    
    
    283
    
    
    
    253
    
    
    
    897
    
    
    
    8211,246
    
    
    
    1,137
    
    
    
    3,502
    
    
    
    3,301Net
      IncomeSupply
      (a)
    
    
    123
    
    
    
    154
    
    
    
    266
    
    
    
    343International
      Delivery (b)
    
    
    36
    
    
    
    38
    
    
    
    152
    
    
    
    152$
    159
    
    
    $
    192
    
    
    $
    418
    
    
    $
    495





**PPL
      Energy Supply**
    
    **September
      30,**
      **2005**
    
    **December
      31,**
      **2004****Balance
      Sheet Data**Total
      assetsSupply
    
    $
    7,500
    
    
    $
    7,094International
      Delivery
    
    
    5,171
    
    
    
    5,390$
    12,671
    
    
    $
    12,484





(a)
    
    The
      nine months ended September 30, 2005, and the three and nine months ended
      September 30, 2004, include the operating results of the Sundance plant
      that are recorded in "Loss from Discontinued Operations." The nine months
      ended September 30, 2005, also includes the loss on the sale of the
      Sundance plant that is recorded in "Loss from Discontinued Operations."
      See Note 8 for additional information.(b)
    
    The
      nine months ended September 30, 2004, includes the operating results of a
      Latin American telecommunications company, as well as an insignificant
      write-down of its net assets, that are recorded in "Loss from 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 weighted-average shares
outstanding that are increased for additional shares that would be outstanding
if potentially dilutive securities were converted to common stock. 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;·
    common
      stock purchase contracts that were a component of the PEPS Units and PEPS
      Units, Series B; and·
    convertible
      senior notes.





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





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004****Income
      (Numerator)**Income
      from continuing operations
    
    $
    197
    
    
    $
    196
    
    
    $
    544
    
    
    $
    533Loss
      from discontinued operations (net of income taxes)
    
    
    
    
    
    
    
    
    
    
    51
    
    
    
    12Net
      Income
    
    $
    197
    
    
    $
    196
    
    
    $
    493
    
    
    $
    521**Shares
      (Denominator)**Shares
      for Basic EPS
    
    
    379,660
    
    
    
    377,172
    
    
    
    378,955
    
    
    
    365,778Add
      incremental shares:Convertible
      Senior Notes
    
    
    3,326
    
    
    
    
    
    
    
    2,106Stock
      options and other share-based awards
    
    
    2,523
    
    
    
    1,485
    
    
    
    2,288
    
    
    
    1,275Shares
      for Diluted EPS
    
    
    385,509
    
    
    
    378,657
    
    
    
    383,349
    
    
    
    367,053**Basic
      EPS**Income
      from continuing operations
    
    $
    0.52
    
    
    $
    0.52
    
    
    $
    1.43
    
    
    $
    1.46Loss
      from discontinued operations (net of income taxes)
    
    
    
    
    
    
    
    
    
    
    0.13
    
    
    
    0.04Net
      Income
    
    $
    0.52
    
    
    $
    0.52
    
    
    $
    1.30
    
    
    $
    1.42**Diluted
      EPS**Income
      from continuing operations
    
    $
    0.51
    
    
    $
    0.52
    
    
    $
    1.42
    
    
    $
    1.45Loss
      from discontinued operations (net of income taxes)
    
    
    
    
    
    
    
    
    
    
    0.13
    
    
    
    0.03Net
      Income
    
    $
    0.51
    
    
    $
    0.52
    
    
    $
    1.29
    
    
    $
    1.42





In May
2001, PPL and PPL Capital Funding Trust I issued 23 million PEPS Units that
contained a purchase contract component for PPL's common stock. The purchase
contracts were only dilutive if the average price of PPL's common stock exceeded
a threshold appreciation price, which was adjusted for cash distributions on PPL
common stock. The threshold appreciation price was initially set at $32.52 and
was adjusted to $31.69 as of April 1, 2004, based on dividends paid on PPL's
common stock since issuance. The purchase contracts were settled in May 2004.
Since the average price did not exceed the threshold appreciation price, the
purchase contracts were excluded from the diluted EPS calculation for the nine
months ended September 30, 2004.





In
January 2004, PPL completed an exchange offer resulting in the exchange of
approximately four million PEPS Units for PEPS Units, Series B. The primary
difference in the units related to the debt component. The purchase contract
components of both units, which were potentially dilutive, were identical. The
threshold appreciation price for the purchase contract component of the PEPS
Units, Series B was adjusted in the same manner as that of the PEPS Units and
was $31.69 as a result of the adjustment as of April 1, 2004. These purchase
contracts were settled in May 2004. Since the average price did not exceed the
threshold appreciation price, the purchase contracts were excluded from the
diluted EPS calculation for the nine months ended September 30, 2004.





In May
2003, PPL Energy Supply issued $400 million of 2-5/8% Convertible Senior Notes
due 2023. Based on the terms at the time of issuance, the Convertible Senior
Notes could be settled entirely in cash or shares of PPL common stock. The notes
were modified in November 2004 to require cash settlement of the principal
amount, permit settlement of any conversion premium in cash or stock and
eliminate a provision that required settlement in stock in the event of default.
These modifications were made in response to the FASB's ratification in October
2004 of EITF Issue 04-8, "The Effect of Contingently Convertible Instruments on
Diluted Earnings per Share," as well as other anticipated rules relating to EPS.
EITF Issue 04-8 requires contingently convertible instruments to be included in
diluted EPS. It also requires restatement of prior-period diluted EPS, in
certain circumstances, based upon the terms of the contingently convertible
instruments as of the date of adoption, which was December 31, 2004, for
PPL.





Based
upon the current conversion rate of
40.2212 shares per $1,000 principal of notes, the
Convertible Senior Notes have a dilutive impact when the average market price of
PPL common stock exceeds the conversion price of $24.87. The Convertible Senior
Notes did not have a dilutive impact on EPS for the three and nine months ended
September 30, 2004.





The
maximum number of shares that could potentially be issued to settle the
conversion premium, based upon the current conversion rate, is 16,088,480
shares. Based on PPL's common stock price at September 30, 2005, the conversion
premium equated to 3,716,070 shares, or approximately $120 million.





See Note
7 for discussion of attainment of the market price trigger related to the
Convertible Senior Notes in the third quarter of 2005.





The
following number of stock options to purchase PPL common shares were excluded in
the periods' computations of diluted EPS because the effect would have been
antidilutive.





**Three
      Months Ended**
      **September
      30,**
    
    
    
    **Nine
      Months Ended**
      **September
      30,***(Thousands
      of Shares)*
    
    **2005**
    
    
    
    **2004**
    
    
    
    **2005**
    
    
    
    **2004**Antidilutive
      stock options
    
    
    
    
    
    1,494
    
    
    
    
    
    
    
    2,532





**5.**  **Income
Taxes**





*(PPL,
PPL Energy Supply and PPL Electric)*





Reconciliations
of effective income tax rates are as follows:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****PPL**
    
    **2005**
    
    **2004**
    
    **2005**
    
    **2004****Reconciliation
      of**
      **Income
      Tax Expense**Indicated
      federal income tax on Income from Continuing Operations Before Income
      Taxes, Minority Interest and Dividends on Preferred Stock at statutory tax
      rate - 35%
    
    $
    93
    
    
    $
    96
    
    
    $
    241
    
    
    $
    252Increase
      (decrease) due to:State
      income taxes
    
    
    8
    
    
    
    9
    
    
    
    10
    
    
    
    11Amortization
      of investment tax credit
    
    
    (3
    )
    
    
    (3
    )
    
    
    (8
    )
    
    
    (8
    )Difference
      related to income recognition of foreign affiliates (net of foreign income
      taxes)
    
    
    (5
    )
    
    
    (8
    )
    
    
    (25
    )
    
    
    (26
    )Federal
      income tax credits
    
    
    (27
    )
    
    
    (21
    )
    
    
    (81
    )
    
    
    (50
    )Other
    
    
    (1
    )
    
    
    1(28
    )
    
    
    (22
    )
    
    
    (104
    )
    
    
    (73
    )**Total
      income tax expense**
    
    $
    65
    
    
    $
    74
    
    
    $
    137
    
    
    $
    179**Effective
      income tax rate**
    
    
    24.6%
    
    
    
    27.1%
    
    
    
    19.9%
    
    
    
    24.9%





**PPL
      Energy Supply****Reconciliation
      of**
      **Income
      Tax Expense**Indicated
      federal income tax on Income from Continuing Operations Before Income
      Taxes and Minority Interest at statutory tax rate - 35%
    
    $
    67
    
    
    $
    93
    
    
    $
    192
    
    
    $
    237Increase
      (decrease) due to:State
      income taxes
    
    
    1
    
    
    
    9
    
    
    
    (3
    )
    
    
    9Amortization
      of investment tax credit
    
    
    (2
    )
    
    
    (2
    )
    
    
    (6
    )
    
    
    (6
    )Difference
      related to income recognition of foreign affiliates (net of foreign income
      taxes)
    
    
    (5
    )
    
    
    (8
    )
    
    
    (25
    )
    
    
    (26
    )Federal
      income tax credits
    
    
    (27
    )
    
    
    (21
    )
    
    
    (81
    )
    
    
    (50
    )Other
    
    
    (1
    )
    
    
    
    
    
    
    (2
    )
    
    
    (1
    )(34
    )
    
    
    (22
    )
    
    
    (117
    )
    
    
    (74
    )**Total
      income tax expense**
    
    $
    33
    
    
    $
    71
    
    
    $
    75
    
    
    $
    163**Effective
      income tax rate**
    
    
    17.1%
    
    
    
    26.8%
    
    
    
    13.7%
    
    
    
    24.1%








**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****PPL
      Electric**
    
    **2005**
    
    **2004**
    
    **2005**
    
    **2004****Reconciliation
      of**
      **Income
      Tax Expense**Indicated
      federal income tax on Income Before Income Taxes at statutory tax rate -
      35%
    
    $
    30
    
    
    $
    8
    
    
    $
    58
    
    
    $
    28Increase
      (decrease) due to:State
      income taxes
    
    
    3
    
    
    
    (1
    )
    
    
    3
    
    
    
    1Amortization
      of investment tax credit
    
    
    (1
    )
    
    
    (1
    )
    
    
    (2
    )
    
    
    (2
    )Change
      in tax reserves
    
    
    
    
    
    
    
    
    
    
    (1
    )Other
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    (2
    )
    
    
    1
    
    
    
    (1
    )**Total
      income tax expense**
    
    $
    32
    
    
    $
    6
    
    
    $
    59
    
    
    $
    27**Effective
      income tax rate**
    
    
    37.6%
    
    
    
    27.3%
    
    
    
    36.0%
    
    
    
    33.8%





*(PPL
and PPL Energy Supply)*





In
October 2004, President Bush signed the American Jobs Creation Act of 2004 (the
Act). The Act creates a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing an 85% dividends received
deduction for certain dividends from controlled foreign corporations. PPL does
not anticipate repatriating foreign earned income subject to the
Act.





The Act
also provides, beginning in 2005, a tax deduction from income for certain
qualified domestic production activities. FSP FAS 109-1, "Application of FASB
Statement No. 109, 'Accounting for Income Taxes', to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004," specifies that this tax deduction will be treated as a special deduction
and not as a tax rate reduction. During the first quarter of 2005, the Treasury
Department and the IRS issued interim guidance related to the tax deduction.
Based on the interim guidance, PPL and PPL Energy Supply estimate an annual tax
benefit for the year 2005 of approximately $3 million.





**6.**  **Comprehensive
Income**





*(PPL
and PPL Energy Supply)*





The
after-tax components of comprehensive income are:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****PPL**
    
    **2005**
    
    **2004**
    
    **2005**
    
    **2004**Net
      Income
    
    $
    197
    
    
    $
    196
    
    
    $
    493
    
    
    $
    521Other
      comprehensive income (loss):Foreign
      currency translation adjustments
    
    
    9
    
    
    
    (11
    )
    
    
    (30
    )
    
    
    39Sale
      of CEMAR - currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Sale
      of CGE - currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Unrealized
      gain (loss) on available-for-sale securities
    
    
    5
    
    
    
    1
    
    
    
    5
    
    
    
    (3
    )Unrealized
      loss on qualifying derivatives
    
    
    (124
    )
    
    
    (8
    )
    
    
    (204
    )
    
    
    (37
    )Total
      other comprehensive income (loss)
    
    
    (110
    )
    
    
    (18
    )
    
    
    (229
    )
    
    
    5Comprehensive
      Income
    
    $
    87
    
    
    $
    178
    
    
    $
    264
    
    
    $
    526**PPL
      Energy Supply**Net
      Income
    
    $
    159
    
    
    $
    192
    
    
    $
    418
    
    
    $
    495Other
      comprehensive income (loss):Foreign
      currency translation adjustments
    
    
    9
    
    
    
    (11
    )
    
    
    (30
    )
    
    
    39Sale
      of CEMAR - currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Sale
      of CGE - currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Unrealized
      gain (loss) on available-for-sale securities
    
    
    6
    
    
    
    (2
    )
    
    
    5
    
    
    
    (6
    )Unrealized
      loss on qualifying derivatives
    
    
    (134
    )
    
    
    (2
    )
    
    
    (213
    )
    
    
    (39
    )Total
      other comprehensive loss
    
    
    (119
    )
    
    
    (15
    )
    
    
    (238
    )Comprehensive
      Income
    
    $
    40
    
    
    $
    177
    
    
    $
    180
    
    
    $
    495





*(PPL
Electric)*





PPL
Electric's comprehensive income approximates net income.





**7.**  **Credit
Arrangements and Financing Activities**





**Credit
Arrangements**





*(PPL
and PPL Electric)*





PPL
Electric maintains credit facilities in order to enhance liquidity and provide
credit support, and as a credit back-stop to its commercial paper program. In
June 2005, PPL Electric extended to June 2010 its $200 million five-year
facility originally set to expire in 2009. PPL Electric also maintains a $100
million three-year credit facility maturing in June 2006. At September 30,
2005, no cash borrowings were outstanding under any PPL Electric credit
facilities. PPL Electric has the ability to cause the lenders under its
facilities to issue letters of credit. At September 30, 2005, PPL Electric
had less than $1 million of letters of credit outstanding under its credit
facilities.





*(PPL
and PPL Energy Supply)*





PPL
Energy Supply maintains credit facilities in order to enhance liquidity and
provide credit support, and as a credit back-stop to its commercial paper
program. In June 2005, PPL Energy Supply extended to June 2010 its $800 million
five-year facility originally set to expire in 2009 and entered into a new $600
million five-year credit facility expiring in June 2010, which replaced its $300
million three-year facility due to expire in 2006. At September 30, 2005, no
cash borrowings were outstanding under any PPL Energy Supply credit facilities.
PPL Energy Supply has the ability to cause the lenders under its facilities to
issue letters of credit. At September 30, 2005, PPL Energy Supply had $583
million of letters of credit outstanding under these credit
facilities.





In March
2005, PPL Energy Supply entered into a 364-day reimbursement agreement with a
bank for the purpose of issuing letters of credit. Under the agreement, PPL
Energy Supply can cause the bank to issue up to $200 million of letters of
credit. As of September 30, 2005, there were $199 million letters of credit
outstanding under this agreement.





WPD
(South West) maintains three committed credit facilities: a £100 million 364-day
facility, a £150 million three-year facility and a £150 million five-year
facility. In October 2005, WPD (South West) extended the £100 million 364-day
facility until October 2006 and the £150 million three-year facility until
October 2008. The £150 million five-year facility expires in October 2009. At
September 30, 2005, WPD (South West) also had uncommitted credit facilities of
£35 million, which were increased to £65 million in October 2005. The balance
outstanding under the WPD (South West) credit facilities at September 30,
2005, was £39 million (approximately $70 million at current exchange
rates).





*(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 April
2005, PPL Capital Funding retired all $320 million of its 7-3/4% Medium-term
Notes due April 2005 upon maturity. The funds for the retirement were primarily
obtained from PPL Energy Supply's August 2004 issuance of $300 million of 5.40%
Senior Notes maturing in August 2014.





In July
2005, PPL Capital Funding retired $142 million of its 7.29% Subordinated Notes
due May 2006 at a market value of $145 million. PPL recorded a loss of $3
million related to this transaction in the third quarter of 2005.





In
September 2005, PPL Capital Funding retired all $10 million of its 6.17%
Medium-term Notes due September 2005 upon maturity.





*(PPL
and PPL Energy Supply)*





In
December 2004, WPD borrowed £108 million (approximately $208 million at December
2004 exchange rates) under its credit facilities to retire $178 million of 6.75%
Unsecured Bonds due December 2004 and settle the related $30 million
cross-currency swap. The total amount is included on the Statement of Cash Flows
as "Retirement of long-term debt." This bond retirement was recorded in January
2005, due to the one-month reporting lag.





At
September 30, 2005, PPL Energy Supply had no commercial paper outstanding under
its commercial paper program.





During
the nine months ended September 30, 2005, PPL Energy Supply distributed
$206 million to its parent company and received capital contributions of $50
million.





The terms
of PPL Energy Supply's 2-5/8% Convertible Senior Notes due 2023 include a market
price trigger that permits holders to convert the notes during any fiscal
quarter if the closing sale price of PPL's common stock exceeds $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. This market price trigger was met
in the third quarter of 2005. Therefore, holders of the Convertible Senior Notes
are entitled to convert their notes at any time during the fourth quarter of
2005. As discussed in Note 4, if holders elect to convert the Convertible Senior
Notes, PPL Energy Supply would be required to settle the principal amount in
cash and any conversion premium in cash or PPL common stock. As a result of the
market price trigger being met, PPL Energy Supply wrote-off $6 million of
unamortized debt issuance costs during the third quarter of 2005, which is
included in "Interest Expense" on the Statement of Income.





On
October 26, 2005, PPL Energy Supply issued $300 million aggregate principal
amount of 5.70% REset Put Securities due 2035 (REPS SM ). The
REPS bear interest at a rate of 5.70% per annum to, but excluding, October 15,
2015 (Remarketing Date). The REPS are required to be put by existing holders on
the Remarketing Date either for (a) purchase and remarketing by a designated
remarketing dealer, or (b) repurchase by PPL Energy Supply. If the remarketing
dealer elects to purchase the REPS for remarketing, it will purchase the REPS at
100% of the principal amount, and the REPS will bear interest on and after the
Remarketing Date at a new fixed rate per annum determined in the remarketing.
PPL Energy Supply has the right to terminate the remarketing process. If the
remarketing is terminated at the option of PPL Energy Supply, or under certain
other circumstances, including the occurrence of an event of default by PPL
Energy Supply under the related indenture or a failed remarketing for certain
specified reasons, PPL Energy Supply will be required to pay the remarketing
dealer a settlement amount. The settlement amount will be the present value of
an annuity equal to the positive difference, if any, between (a) a stream of
interest payments that would have been due on the REPS after the Remarketing
Date, assuming the REPS were to bear interest at a rate based on the 20-year
swap rate in effect on October 20, 2005, and (b) a stream of interest payments
that would have been due on the REPS after the Remarketing Date, assuming the
REPS were to bear interest at a rate based on the 20-year swap rate in effect on
the date of calculation of the settlement amount. Also, if the remarketing is
terminated for any reason, PPL Energy Supply must repurchase the entire
principal amount of the REPS on the Remarketing Date at 100% of the principal
amount. PPL Energy Supply received net proceeds of approximately $311 million
from the issuance of the REPS, which includes a premium associated with the
remarketing feature. These proceeds will be used by PPL Energy Supply’s
affiliates to repay indebtedness and by PPL Energy Supply for capital
expenditures and/or general corporate purposes.





*(PPL
and PPL Electric)*





At
September 30, 2005, $117 million of accounts receivable and $117 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 $42 million
of short-term debt outstanding under the credit agreement at an interest rate of
3.8%, all of which was being used to cash collateralize letters of credit issued
on PPL Electric's behalf. At September 30, 2005, based on the accounts
receivable and unbilled revenue pledged, an additional $100 million was
available for borrowing. PPL Electric's sale to its subsidiary of the pledged
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.





In
February 2005, the Lehigh County Industrial Development Authority (LCIDA) issued
$116 million of 4.70% Pollution Control Revenue Refunding Bonds due 2029 on
behalf of PPL Electric. The proceeds of the LCIDA bonds were used in March 2005
to refund the LCIDA's $116 million of 6.40% Pollution Control Revenue Refunding
Bonds due 2029, previously issued on behalf of PPL Electric. A $2 million
premium was paid to redeem these bonds.





In May
2005, the LCIDA issued $108 million of 4.75% Pollution Control Revenue Refunding
Bonds due 2027 on behalf of PPL Electric. The proceeds of these LCIDA bonds were
used in June 2005 to refund the LCIDA's $53 million of 5.50% Pollution Control
Revenue Refunding Bonds due 2027 and in August 2005 to refund the LCIDA's $55
million of 6.15% Pollution Control Revenue Refunding Bonds due 2029, previously
issued on behalf of PPL Electric. A $1 million premium was paid as part of each
bond redemption.





In
connection with the issuance of each of these new series of LCIDA bonds, PPL
Electric entered
into a loan agreement with the LCIDA pursuant to which the LCIDA has loaned to
PPL Electric the proceeds of the LCIDA bonds on payment terms that correspond to
the LCIDA bonds. The scheduled principal and interest payments on the
LCIDA bonds are insured. In order to secure its obligations to the insurance
provider, PPL Electric issued $224 million aggregate principal amount of its
Senior Secured Bonds (under its 2001 Senior Secured Bond Indenture), which also
have payment terms that correspond to the LCIDA bonds.





In April
2005, PPL Electric retired all $69 million of its 6-1/2% First Mortgage Bonds
due April 2005 upon maturity.





During
the nine months ended September 30, 2005, PPL Transition Bond Company made
principal payments on transition bonds of $204 million.





At
September 30, 2005, PPL Electric had no commercial paper outstanding under its
commercial paper program.





During
the nine months ended September 30, 2005, PPL Electric paid common
dividends of $59 million to PPL.





In July
2005, PPL Electric executed a bond purchase agreement with certain institutional
buyers in the private placement market to sell $200 million of Senior Secured
Bonds. Subject to customary closing conditions, the bonds will be issued on or
about December 20, 2005, in two tranches: $100 million of bonds maturing in
December 2015 with a coupon of 4.95%, and $100 million of bonds maturing in
December 2020 with a coupon of 5.15%. PPL Electric intends to use the proceeds
from the bonds to refund existing Senior Secured Bonds and/or First Mortgage
Bonds and/or for general corporate purposes.





**Dividends** *(PPL)*





There
have been two common stock dividend increases in 2005. In February 2005, PPL
announced an increase to its quarterly common stock dividend to 23 cents
per share (equivalent to $0.92 per annum) and in August 2005, PPL announced an
increase, payable October 1, 2005, to 25 cents per share (equivalent
to $1.00 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.





**8.**  **Acquisitions,
Development and Divestitures**





**Domestic
Generation Projects** *(PPL
and PPL Energy Supply)*





In 2003,
PPL Maine entered into an agreement in principle with a coalition of government
agencies and private groups to sell three of its nine hydroelectric dams in
Maine. The parties reached a final agreement in 2004 and submitted it to the
FERC for approval. Under the agreement, a non-profit organization designated by
the coalition would have a five-year option to purchase the dams for
approximately $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. The
agreement requires several approvals by the FERC, and PPL cannot predict whether
or when all of these regulatory approvals will be obtained.





**International
Energy Projects**  *(PPL
and PPL Energy Supply)*





Sale
of CEMAR





In 2001,
PPL Global estimated that the long-term viability of its CEMAR investment was
jeopardized and that there was minimal probability of positive future cash
flows. At that time, PPL Global recorded an impairment loss in the carrying
value of its net assets in CEMAR. In March 2002, PPL Global recorded a further
impairment loss. In June 2002, PPL made a decision to exit the investment. At
that time, PPL Global's remaining portion of its CEMAR investment was
written-off.





In August
2002, ANEEL authorized an administrative intervention in CEMAR and fully assumed
operational and financial control of the company. The intervenor appointed by
ANEEL initiated efforts to transfer the ownership interest in CEMAR to a new
owner. Since PPL Global no longer controlled or managed CEMAR, it deconsolidated
the assets and liabilities of CEMAR from its financial statements and stopped
recording CEMAR's operating results at that time. Due to the inability to
discharge their obligations under the continuing intervention, PPL-related
officers and directors of CEMAR resigned from their respective positions in
February 2003.





In April
2004, PPL Global transferred its interest in CEMAR to two companies controlled
by a private equity fund managed by GP Investimentos, a Brazilian private equity
firm. The sale resulted in a credit of approximately $23 million as a result of
the reversal of the negative carrying value and the associated cumulative
translation adjustment, which is included in "Other Income - net" on the
Statement of Income.





Sale
of CGE





In March
2004, PPL Global completed the sale of its minority interest in shares of CGE
for approximately $123 million. The sale resulted in a charge of approximately
$15 million pre-tax, which is included in operating expenses, as "Energy related
businesses," on the Statement of Income. This charge was due to the write-off of
the associated cumulative translation adjustment, primarily as a result of the
devaluation of the Chilean peso since the original acquisition in
2000.





**Discontinued
Operations** *(PPL
and PPL Energy Supply)*





Sale
of Sundance Plant





In May
2005, a subsidiary of PPL Generation completed the sale of its 450 MW Sundance
power plant located in Pinal County, Arizona, to Arizona Public Service Company
for approximately $190 million in cash. Proceeds from the sale were used to
reduce PPL's and PPL Energy Supply's outstanding debt and improve liquidity. The
book value of the plant was approximately $260 million on the sale date. PPL and
PPL Energy Supply recorded a loss on the sale in May 2005 of approximately $47
million, or $0.12 per share for PPL, net of a tax benefit of $26 million. The
loss on the sale is reflected as "Loss from Discontinued Operations," along with
operating losses of the Sundance plant of $4 million for the nine months ended
September 30, 2005, and $10 million for the nine months ended September 30,
2004. At December 31, 2004, the Sundance plant had a book value of $263 million,
which was recorded in "Electric plant in service - Generation" on the Balance
Sheet. The plant had been included in the total assets of the Supply segment
prior to the sale.





Sale
of Latin American Telecommunications Company





In
December 2003, PPL Global's Board of Managers authorized PPL Global to sell its
investment in a Latin American telecommunications company, and approved a plan
of sale. It was determined that this non-strategic business was not economically
viable. PPL Global sold this investment to local management for a nominal amount
in June 2004. The operating results of the Latin American telecommunications
company, which were a loss of approximately $2 million for the nine months ended
September 30, 2004, as well as an insignificant write-down of its net assets,
are reflected as "Loss from Discontinued Operations" on the Statement of
Income.





**Other** *(PPL)*





In June
2004, a PPL subsidiary evaluated its investment in a technology supplier for
impairment. As a result of the evaluation, the subsidiary recorded an impairment
charge of approximately $10 million pre-tax, which is included in "Other Income
- net" on the Statement of Income.





**9.**  **Commitments
and Contingent Liabilities**





**Energy
Purchases, Energy Sales and Other Commitments**





Energy
Purchase Commitments  *(PPL,
PPL Energy Supply and PPL Electric)*





PPL and
PPL Energy Supply enter into long-term purchase contracts to supply the fuel
requirements for generation facilities. These include contracts to purchase
coal, natural gas, oil and uranium. These contracts extend for terms through
2019. PPL and PPL Energy Supply also enter into long-term contracts for the
storage and transport of natural gas. These contracts extend through 2014 and
2032, respectively. Additionally, PPL Energy Supply enters into long-term
contracts to purchase power to meet load requirements and emissions allowances
for its generation facilities. These contracts extend for terms through April
2010.





PPL
Energy Supply entered into long-term power purchase agreements with two wind
project developers to purchase the full output of their facilities when they
begin commercial operation. One of the power purchase agreements is for 100 MW
and extends for a term of 15 years, and the project is expected to be in service
during 2006. The other agreement is for 20 MW and extends for a term of 20
years, and the project is expected to be in service by the end of
2005.





As part
of the purchase of generation assets from Montana Power, PPL Montana assumed a
power purchase agreement, which was still in effect at September 30, 2005.
In accordance with purchase accounting guidelines, PPL Montana recorded a
liability of $58 million as the estimated fair value of the agreement at the
acquisition date. The liability is being reduced over the term of the agreement,
through 2010, as an adjustment to "Energy purchases" on the Statement of Income.
The unamortized balance of the liability related to the agreement at
September 30, 2005, was $51 million and is included in "Deferred Credits
and Other Noncurrent Liabilities - Other" on the Balance Sheet.





*Liability
for Above Market NUG Contracts* ******





In 1998,
PPL Electric recorded a loss accrual for above market contracts with NUGs of
$854 million, due to its generation business being deregulated. Effective
January 1999, PPL Electric began reducing this liability as an offset to "Energy
purchases" on the Statement of Income. This reduction is based on the estimated
timing of the purchases from the NUGs and projected market prices for this
generation. The final existing NUG contract expires in 2014. In connection with
the corporate realignment in 2000, the remaining balance of this liability was
transferred to PPL EnergyPlus. At September 30, 2005, the remaining liability
associated with the above market NUG contracts was $224 million.





Energy
Sales Commitments  *(PPL
and PPL Energy Supply)*





PPL
Energy Supply enters into long-term power sales contracts in connection with its
load-serving activities or associated with certain of its power plants. These
power sales contracts extend for terms through 2017. All long-term contracts
were executed at pricing that approximated market rates, including profit
margin, at the time of execution.





As part
of the purchase of generation assets from Montana Power, PPL Montana assumed a
power sales agreement, which was still in effect at September 30, 2005. In
accordance with purchase accounting guidelines, PPL Montana recorded a liability
of $7 million as the estimated fair value of the agreement at the acquisition
date. The agreement was re-evaluated under DIG Issue C20, "Scope Exceptions:
Interpretation of the Meaning of Not Clearly and Closely Related in Paragraph
10(b) Regarding Contracts with a Price Adjustment Feature," which changed its
fair value and reclassified it as a derivative instrument. The current liability
balance was $5 million as of September 30, 2005.





On July
1, 2002, PPL EnergyPlus began to sell to NorthWestern an aggregate of 450 MW of
energy supplied by PPL Montana. Under two five-year agreements, PPL EnergyPlus
is supplying 300 MW of around-the-clock electricity and 150 MW of
unit-contingent on-peak electricity. PPL Montana also makes short-term energy
sales to NorthWestern.





As a
result of New Jersey's Electric Discount and Energy Competition Act, the New
Jersey Board of Public Utilities authorized and made available to power
suppliers, on a competitive basis, the opportunity to provide Basic Generation
Service (BGS) to all non-shopping New Jersey customers. In February 2003, PPL
EnergyPlus was awarded a 34-month fixed-price BGS contract for a fixed
percentage of customer load (approximately 1,000 MW) for Atlantic City Electric
Company, Jersey Central Power & Light Company and Public Service Electric
& Gas Company. This contract commenced in August 2003. In February 2004, PPL
EnergyPlus was awarded a 12-month hourly energy price supply BGS contract for a
fixed percentage of customer load (approximately 450 MW) for Atlantic City
Electric Company, Jersey Central Power & Light Company and Public Service
Electric & Gas Company. These contracts commenced in June 2004 and expired
in May 2005. In the first quarter of 2005, PPL EnergyPlus was awarded a portion
of the Commercial Industrial Energy Pricing tranche, which will amount to
approximately 85 MW after expected shopping. These contracts commenced in June
2005.





In
January 2004, PPL EnergyPlus began supplying 12.5% of Connecticut Light &
Power Company's Transitional Standard Offer load under a three-year fixed-price
contract. During peak hours, PPL EnergyPlus' obligation to supply the
Transitional Standard Offer load may reach 625 MW.





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 that expire
in 2035 and 2040. 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 APA.





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 approximately $19
million between 2005 and 2015, at which point the tribes have the option to
purchase, hold and operate the project.





PPL
Montana entered into two Memorandums 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 possibilities for matching
funds from relevant federal agencies. Under this arrangement, PPL Montana has a
remaining commitment to spend approximately $36 million between 2005 and
2040.





**Legal
Matters**





*(PPL,
PPL Energy Supply and PPL Electric)*





PPL and
its subsidiaries are involved in numerous 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. Although most of the claims in the complaint are against
Montana Power, its board of directors, and its consultants and advisors, two
claims are asserted against PPL Montana. In the first claim, plaintiffs seek a
declaration that because Montana Power shareholders did not vote on the 1999
sale of generating assets to PPL Montana, that sale "was null and void ab
initio." The second claim alleges that PPL Montana was privy to and participated
in a strategy whereby Montana Power would sell its generation assets to PPL
Montana without first obtaining Montana Power shareholder approval, and that PPL
Montana has made net profits in excess of $100 million as the result of this
alleged illegal sale. In the second claim, plaintiffs request that the court
impose a "resulting and/or constructive trust" on both the generation assets
themselves and all profits, plus interest on the amounts subject to the trust.
This lawsuit is currently pending in the U.S. District Court of Montana, Butte
Division. In July 2004, the plaintiffs notified the District Court that the
parties had reached an oral partial settlement of the case that would result in
the dismissal of PPL Montana as a defendant, and in January 2005 a global
settlement agreement was filed with the District Court along with a motion to
approve the agreement. Under the terms of the global settlement agreement, the
plaintiffs' claims against PPL Montana would be dismissed and PPL Montana would
not have to pay any amounts to the plaintiffs. In April 2005, the District Court
provided the parties to the global settlement agreement additional time to
engage in further discussions and file with the court a more comprehensive form
of agreement. These additional discussions have not yet resulted in a more
comprehensive agreement, and it is possible that the District Court may order a
resumption of the litigation schedule for this matter if a more comprehensive
agreement is not reached. Any agreement reached by the parties must be approved
by the District Court. PPL and PPL Energy Supply cannot predict the outcome of
this matter.





NorthWestern
Corporation Litigation **** *(PPL
and PPL Energy Supply)*





In
connection with the acquisition of the Montana generation assets, the Montana
Power APA, which was previously assigned to PPL Montana by PPL Global, includes
a provision concerning the proposed purchase by PPL Montana of a portion of
NorthWestern's interest in the 500-kilovolt Colstrip Transmission System (CTS)
for $97 million. During 2002, PPL Montana had been in discussions with
NorthWestern regarding the proposed purchase of the CTS and the claims that PPL
Montana believed it had against NorthWestern arising from the Montana Power APA
and related agreements. Notwithstanding such discussions, in September 2002,
NorthWestern filed a lawsuit against PPL Montana in Montana state court seeking
specific performance of PPL Montana's purchase of the CTS or, alternatively,
damages for breach of contract. Pursuant to PPL Montana's application, the
matter was removed to the U.S. District Court of Montana, Butte Division.
Following removal, NorthWestern asserted additional claims for damages against
PPL Montana, including a claim for punitive damages. PPL Montana filed defenses
denying liability for NorthWestern's claims as well as counterclaims against
NorthWestern seeking damages PPL Montana believed it had suffered under the
Montana Power APA and related agreements.





In May
2005, PPL Montana and NorthWestern reached an agreement in principle to settle
the litigation, and PPL and PPL Energy Supply recorded a charge of $9 million
($6 million after tax, or $0.02 per share for PPL) in the first quarter of 2005
related to the agreement in principle. In September 2005, the parties reached a
final agreement that was approved by the U.S. Bankruptcy Court for the District
of Delaware overseeing NorthWestern's bankruptcy case. Pursuant to this final
agreement, all claims of the parties in the litigation have been dismissed with
prejudice, NorthWestern will retain its interest in the CTS and PPL Montana has
paid NorthWestern $9 million in October 2005.





Montana
Hydroelectric Litigation  *(PPL
and PPL Energy Supply)*





In
October 2003, a lawsuit was filed against PPL Montana, PPL Services, Avista
Corporation, PacifiCorp and nine John Doe defendants in the U.S. District Court
of Montana, Missoula Division, by two residents allegedly acting in a
representative capacity on behalf of the State of Montana. In January 2004, the
complaint was amended to, among other things, include the Great Falls school
districts as additional plaintiffs. In May 2004, the Montana Attorney General
filed a motion to allow the State of Montana to intervene as an additional
plaintiff in the litigation. This motion was granted without objection. The
individual plaintiffs, the school districts and the State sought declaratory
judgment, compensatory damages and attorneys fees and costs for use of state
and/or "school trust" lands by hydropower facilities and to require the
defendants to adequately compensate the State and/or the State School Trust fund
for full market value of lands occupied. Generally, the suit is founded on
allegations that the bed of navigable rivers became state-owned property upon
Montana's admission to statehood, and that the use thereof for placement of dam
structures, affiliated structures and reservoirs should, under an existing
regulatory scheme, trigger lease payments for use of land underneath. The
plaintiffs also sought relief on theories of unjust enrichment, trespass and
negligence. No specific amount of damages or future rental value has been
claimed by the plaintiffs. The defendants filed separate motions to dismiss the
individual plaintiffs' and school district's complaint, as well as the complaint
of the State of Montana. In September 2004, the federal court granted the
motions to dismiss the individual plaintiffs' and school districts' complaint
but denied the similar motions as to the State of Montana's complaint. Following
the federal court's September decision, PPL Montana and the other defendants
filed a motion to dismiss the State of Montana's complaint for lack of diversity
jurisdiction and also filed a motion to vacate certain portions of the decision.
The federal court granted both of these motions in September 2005.





In
November 2004, PPL Montana, Avista Corporation 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 the hydropower
facilities' use and occupancy of streambeds can be collected by the State of
Montana. The State subsequently filed counterclaims and a motion for summary
judgment. In February 2005, the individual plaintiffs and school districts who
were dismissed from the federal court proceeding, along with a state teachers'
union, filed a motion to intervene as additional defendants in this state court
proceeding, and also filed a proposed answer and counterclaims to be used if
their motion to intervene is granted. The state court denied this motion to
intervene, but has not yet ruled on any of the other above-described motions.
PPL and PPL Energy Supply cannot predict the outcome of the state court
proceeding.





**Regulatory
Issues**





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





Through
its subsidiaries, PPL made approximately $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 presently faced by the California electric utilities and the California
ISO, PPL cannot predict whether or when it will receive payment. As of
September 30, 2005, PPL has fully reserved for possible 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, and initiated an evidentiary
hearing concerning refund amounts. In April 2003, the FERC changed the manner in
which this refund liability is to be computed and ordered further proceedings to
determine the exact amounts that the sellers, including PPL Montana, would be
required to refund. In September 2004, 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 June
2003, the FERC took several actions as a result of a number of related
investigations. The FERC terminated proceedings pursuant to which it had been
considering 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. The FERC explained that the totality of the
circumstances made refunds unfeasible and inequitable, and that it had provided
adequate relief by adopting a price cap throughout the western U.S. The FERC
also denied pending complaints against long-term contracts in the western U.S.
In these complaints, various power buyers had challenged selected long-term
contracts that they entered into during 2000 and 2001, complaining that the
power prices were too high and reflected manipulation of those energy markets.
The FERC found that the complainants had not met their burden of showing that
changing or canceling the contracts was "in the public interest" and that the
dysfunction in the California markets did not justify changing these long-term
contracts. These orders have been appealed to the U.S. Court of Appeals for the
Ninth Circuit. In two separate orders, the FERC also ordered 65 different
companies, agencies or municipalities to show cause why they should not be
ordered to disgorge profits for "gaming" or anomalous market behavior during
2000 and 2001. These orders to show cause address both unilateral and joint
conduct identified as the "Enron trading strategies." Neither PPL EnergyPlus nor
PPL Montana was included in these orders to show cause, and they previously have
explained in responses to data requests from the FERC that they have not engaged
in such trading strategies. Finally, the FERC issued a new investigation order
directing its staff to investigate any bids made into the California markets in
excess of $250/MWh during the period from May 2000 to October 2000, a period of
time prior to the period examined in connection with most of the proceedings
described above. To their knowledge, neither PPL EnergyPlus nor PPL Montana is
being investigated by the FERC under this new order.





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, PPL Montana was named
by a defendant in its cross-complaint in a consolidated court proceeding, which
combined into one master proceeding several of the lawsuits alleging antitrust
violations and unfair trade practices. This generator denies that any unlawful,
unfair or fraudulent conduct occurred but asserts 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
February 2004, the Montana Public Service Commission 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, as well as other entities that may possess relevant information.
Through its subsidiaries, PPL is a licensed electricity supplier in Montana and
a wholesale supplier in the western U.S. 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. As with the other investigations taking place as a
result of the issues arising out of the electricity supply situation in
California and other western states, PPL and its subsidiaries believe that they
have not engaged in any improper trading or marketing practices affecting the
Montana retail electricity market.





While PPL
and its subsidiaries believe that they have not engaged in any improper trading
practices, they cannot predict whether, or the extent to which, any PPL
subsidiaries will be the target of any additional governmental investigations or
named in other lawsuits or refund proceedings, the outcome of any such lawsuits
or proceedings or whether the ultimate impact on them of the electricity supply
situation in California and other western states will be material.





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 a group of 14 Pennsylvania boroughs that apparently alleges,
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. These boroughs were wholesale customers of PPL Electric. The
claims of the boroughs are similar to those previously alleged by a single
borough in litigation brought in the same court that is still pending. In
addition, in November 2003, PPL and PPL EnergyPlus were served with a complaint
which was filed in the same court by Joseph Martorano, III (d/b/a ENERCO), that
also alleges violations of the federal antitrust laws in early 2001. The
complaint indicates that ENERCO provides consulting and energy procurement
services to clients in Pennsylvania and New Jersey. In September 2004, this
complaint was dismissed by the District Court, and in June 2005, the U.S. Court
of Appeals for the Third Circuit denied the plaintiff's appeal.





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 find any reason to take
action against PPL.





Although
PPL, PPL Energy Supply and PPL Electric believe the claims in these complaints
are without merit, they cannot predict the outcome of these
matters.





New
England Investigation  *(PPL
and PPL Energy Supply)*





In
January 2004, PPL became aware of an investigation by the Connecticut Attorney
General and the FERC's Office of Market Oversight and Investigation (OMOI)
regarding allegations that natural gas-fired generators located in New England
illegally sold natural gas instead of generating electricity during the week of
January 12, 2004. Subsequently, PPL and other generators were served with a data
request by OMOI. The data request indicated that PPL was not under suspicion of
a regulatory violation, but that OMOI was conducting an initial investigation.
PPL has responded to this data request. PPL also has responded to data requests
of ISO - New England and data requests served by subpoena from the Connecticut
Attorney General. Both OMOI and ISO - New England have issued preliminary
reports finding no regulatory or other violations concerning these matters.
While PPL does not believe that it committed any regulatory or other violations
concerning the subject matter of these investigations, PPL cannot predict the
outcome of these investigations.





PJM
Billing  *(PPL,
PPL Energy Supply and PPL Electric)*





In
December 2004, Exelon Corporation, on behalf of its subsidiary, PECO Energy,
Inc. (PECO), filed a complaint against PJM and PPL Electric with the FERC
alleging that PJM had overcharged PECO from April 1998 through May 2003 as a
result of an error by PJM in the State Estimator Model used in connection with
billing all PJM customers for certain transmission, spot market energy and
ancillary services charges. Specifically, the complaint alleges that PJM
mistakenly identified PPL Electric's Elroy substation transformer as belonging
to PECO and that, as a consequence, during times of congestion, PECO's bills for
transmission congestion from PJM erroneously reflected energy that PPL Electric
took from the Elroy substation and used to serve PPL Electric's load. The
complaint requests the FERC, among other things, to direct PPL Electric to
refund to PJM $39 million, plus interest of approximately $8 million, and for
PJM to refund these same amounts to PECO. In February 2005, PPL Electric filed
its response with the FERC stating that neither PPL Electric nor any of its
affiliates should be held financially responsible or liable to PJM or PECO as a
result of PJM's error.





In April
2005, the FERC issued an Order Establishing Hearing and Settlement Judge
Proceedings (the Order). In the Order, the FERC determined that PECO is entitled
to reimbursement for the transmission congestion charges that PECO asserts PJM
erroneously billed to it at the Elroy substation. The FERC set for additional
proceedings before a judge the determination of the amount of the overcharge to
PECO and which PJM market participants were undercharged and therefore are
responsible for reimbursement to PECO. The FERC also ordered procedures before a
judge to attempt to reach a settlement of the dispute.





PPL and
PPL Electric recognized an after-tax charge of approximately $27 million (or
$0.07 per share for PPL) in the first quarter of 2005 for a loss contingency
related to this matter. The pre-tax accrual was approximately $47 million, with
$39 million included in "Energy purchases" on the Statement of Income, and $8
million in "Interest Expense."





In
September 2005, PPL Electric and Exelon Corporation filed a proposed settlement
agreement regarding this matter with the FERC. Under the settlement agreement,
PPL Electric would pay $33 million plus interest over a four-year period to PJM
through a new transmission charge that, under applicable law, is recoverable
from PPL Electric's retail customers. Also, all PJM market participants would
pay approximately $8 million plus interest over a four-year period to PJM
through a new market adjustment charge. PJM would forward amounts collected
under the two new charges to PECO. PJM filed comments with the FERC neither
supporting nor opposing the settlement agreement, and the FERC Trial Staff filed
comments with the FERC supporting the settlement agreement. Numerous other
parties, including PJM market participants, filed comments with the FERC
opposing the settlement agreement. The FERC has not yet acted on the proposed
settlement agreement.





PPL, PPL
Electric and PPL Energy Supply cannot be certain of the outcome of this matter
or the impact on PPL and its subsidiaries. Some or all of the first quarter 2005
charges for this matter may be reversed in a future period depending on the
outcome of this matter, the potential for recovery of any amounts paid as a
result of the additional FERC proceedings, the application of the relevant
provisions of the energy supply agreements between PPL Electric and PPL
EnergyPlus and other factors. Depending on these factors, PPL Energy Supply, the
parent company of PPL EnergyPlus, may incur some or all of the costs associated
with this matter in a future period.





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.
PPL EnergyPlus filed its initial updated market analysis in December 2001.
Several parties thereafter filed interventions and protests requesting that PPL
EnergyPlus be required to provide additional information demonstrating that it
has met the FERC's market power tests necessary for PPL EnergyPlus to continue
its market-based rate authority. PPL EnergyPlus has responded that the FERC does
not require the economic test suggested by the intervenors and that, in any
event, it would meet such economic test if required by the FERC.





In June
2004, FERC approved certain changes to its standards for granting market-based
rate authority. As a result of the schedule adopted by the FERC, PPL EnergyPlus,
PPL Electric, PPL Montana and most of PPL Generation's subsidiaries were
required to file in November 2004 updated analyses demonstrating that they
should continue to maintain market-based rate authority under the new standards.
PPL made two filings, 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. The FERC expressly rejected the concerns raised by
various consumer advocates and industrial customers regarding generation market
power of PPL's and PPL Energy Supply's generation subsidiaries in the PJM
region. The FERC's order required the subsidiaries to make a compliance filing
providing further support that they cannot erect other non-transmission barriers
to entry into the generation market, and the PPL subsidiaries made this
compliance filing in October 2005.





Also in
September 2005, in an order on PPL's Western market-based rate filing, the FERC
found that PPL Montana did not pass one of the FERC's initial screening tests
for market power in the Northwestern Energy Control Area, namely the wholesale
market share screen. As a result, PPL Montana was required to make a more
detailed filing with the FERC demonstrating that it meets the market power
tests. Also, the FERC has established a refund effective date of November 8,
2005 (for sales made in the Northwestern Energy Control Area after that date),
in the event that PPL Montana does not pass the FERC's market power tests. The
FERC's order is not a definitive determination that PPL Montana has market power
but rather the FERC's mechanism for analyzing market-based rate authority
applications that require further scrutiny. In October 2005, PPL Montana made
the more detailed filing with the FERC, which PPL Montana believes demonstrates
that it cannot exercise generation market power in the Northwestern Energy
Control Area and should be granted market-based rate authority in that area.
While PPL Montana continues to believe that it does not have market power in the
Northwestern Energy Control Area, it cannot predict the outcome of this
proceeding.





FERC
Proposed Rules  *(PPL,
PPL Energy Supply and PPL Electric)*





In July
2002, the FERC issued a Notice of Proposed Rulemaking entitled "Remedying Undue
Discrimination through Open Access Transmission Service and Standard Electricity
Market Design." The proposed rule contained a proposed implementation date of
July 31, 2003. This far-reaching proposed rule purported to establish uniform
transmission rules and a standard market design by, among other
things:





·
    enacting
      standard transmission tariffs and uniform market mechanisms,·
    monitoring
      and mitigating "market power,"·
    managing
      transmission congestion through pricing and tradable financial
      rights,·
    requiring
      independent operational control over transmission facilities,·
    forming
      state advisory committees on regional transmission organizations and
      resource adequacy, and·
    exercising
      FERC jurisdiction over all transmission
service.





In April
2003, the FERC issued a white paper describing certain modifications to the
proposed rule. The FERC requested comments and held numerous public comment
sessions concerning the white paper. In July 2005, the FERC terminated the
proposed rule based on its conclusion that the objectives of the proposed rule
had been overtaken by other events in the industry, such as the continuing
development of voluntary ISOs and RTOs.





In
November 2003, the FERC adopted a proposed rule to require all existing and new
electric market-based tariffs and authorizations to include provisions
prohibiting the seller from engaging in anticompetitive behavior or the exercise
of market power. The FERC order adopts a list of market behavior rules that
apply to all electric market-based rate tariffs and authorizations, including
those of PPL EnergyPlus and any other PPL subsidiaries that hold market-based
rate authority. PPL does not expect this rule to have a significant impact on
its subsidiaries.





Wallingford
Cost-Based Rates ( *PPL
and PPL Energy Supply)*





In
January 2003, PPL negotiated an agreement with ISO - New England that would
declare that four of the five units at PPL's Wallingford, Connecticut facility
are "reliability must run" units and put those units under cost-based rates.
This agreement and the cost-based rates are subject to the FERC's approval, and
PPL filed a request with the FERC for such approval. PPL requested authority for
cost-based rates because the current and anticipated wholesale prices in New
England are insufficient to cover the costs of keeping these units available for
operation. In March 2003, PPL filed an application with the New England Power
Pool to temporarily deactivate these four units. In May 2003, the FERC denied
PPL's request for cost-based rates in light of the FERC's changes to the market
and bid mitigation rules of ISO - New England made in a similar case involving
generating units owned by NRG Energy, Inc. PPL subsequently has explained to the
FERC that its changes to the market and bid mitigation rules of ISO - New
England will not provide sufficient revenues to PPL, and PPL continues to seek
approval of its cost-based rates. However, PPL has informed the New England
Power Pool that it will not pursue its request to temporarily deactivate certain
Wallingford units. In August 2005, the U.S. Court of Appeals for the District of
Columbia Circuit reversed the FERC's denial of PPL's request for cost-based
rates and remanded the case to the FERC for further consideration. PPL cannot
predict the outcome of this matter.





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 receives tax credits pursuant to Section 29 of
the Internal Revenue Code based on the sale of synthetic fuel from these
facilities to unaffiliated **** third-party
purchasers. Section 29 of the Internal Revenue Code provides tax credits for the
production and sale of solid synthetic fuels produced from coal. Section 29 tax
credits are currently scheduled to expire at the end of 2007.





To
qualify for the Section 29 tax credits, the synthetic fuel must meet three
primary conditions: (i) there must be a significant chemical change in the coal
feedstock, (ii) the product must be sold to an unaffiliated entity, and (iii)
the production facility must have been placed in service before July 1,
1998.





In
addition, Section 29 provides 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), falls within a designated range and to be
eliminated when the DFPP exceeds the range. The phase-out range is adjusted
annually for inflation. The DFPP is published by the IRS annually in April for
the prior year and is calculated based on the annual average wellhead price per
barrel for all unregulated domestic crude oil. The DFPP for crude oil in 2004
was $36.75 per barrel, significantly below the phase-out level. Accordingly, the
tax credit phase-out did not impact results in 2004. Accounting for inflation,
PPL estimates that the 2005 tax credit phase-out would start at a DFPP for the
year of about $52 per barrel and the tax credit would be totally eliminated at
about $65 per barrel. PPL currently does not expect any significant phase-out of
the synthetic fuel tax credit for 2005. However, based on current market
conditions and given the recent increases in and volatility of crude oil prices,
PPL cannot predict the final DFPP for crude oil for each of the years 2005
through 2007 or inflation for those years that affects the determination of the
phase-out range of the tax credit.





PPL has
entered into economic hedge transactions that serve to mitigate some of the
earnings and cash flow impact of increases in crude oil prices for the years
2005 through 2007, with the mark-to-market value of these hedges reflected in
"Energy related businesses" revenues on the Statement of Income.
 Nonetheless, a significant increase in the price for crude oil beyond
current price levels could significantly reduce PPL's expected synthetic fuel
tax credits for the year 2005, and if the price of crude oil remains at, or
increases above, current price levels in 2006 or 2007, PPL's expected synthetic
fuel tax credits for either or both of those years could be significantly
reduced.  Based on forecasted oil prices and other market factors for 2006
and 2007, PPL will evaluate its synthetic fuel production levels and
operations.





A PPL
subsidiary owns and operates the Somerset facility. In November 2001, PPL
received a private letter ruling from the IRS pursuant to which, among other
things, the IRS concluded that the synthetic fuel produced at the Somerset
facility qualifies for Section 29 tax credits. The Somerset facility uses the
Covol technology to produce synthetic fuel, and the IRS issued the private
letter ruling after its review and approval of that technology. In reliance on
this private letter ruling, PPL has sold synthetic fuel produced at the Somerset
facility resulting in an aggregate of approximately $251 million of tax
credits as of September 30, 2005.





PPL owns
a limited partnership interest in the entity that owns and operates the Tyrone
facility. In April 2004, this entity received a private letter ruling from the
IRS. Similar to its conclusions relating to the Somerset facility, the IRS
concluded that the synthetic fuel to be produced at the Tyrone facility
qualifies for Section 29 tax credits. In reliance on this private letter ruling,
this entity has sold synthetic fuel produced at the Tyrone facility resulting in
an aggregate of approximately $48 million of tax credits as of September 30,
2005. The Tyrone facility began commercial operation in the third quarter of
2004, after being relocated to Kentucky from Pennsylvania.





PPL also
purchases synthetic fuel from unaffiliated third parties, at prices below the
market price of coal, for use at its coal-fired power plants.





In
October 2003, it was reported that the U.S. Senate Permanent Subcommittee on
Investigations, of the Committee on Governmental Affairs, had begun an
investigation of the synthetic fuel industry and its producers. That
investigation is ongoing. PPL cannot predict when the investigation will be
completed or the potential results of the investigation.





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 will
substantially affect the regulation of energy companies. The Act
amends federal energy laws and provides the FERC with new oversight
responsibilities. Among the
important changes to be implemented as a result of this legislation are the
following:





·
    The
      Public Utility Holding Company Act of 1935, or PUHCA, will be repealed
      effective six months after the 2005 Energy Act is enacted. PUHCA
      significantly restricted mergers and acquisitions in the electric utility
      sector.·
    The
      FERC will appoint and oversee an electric reliability organization to
      establish and enforce mandatory reliability rules regarding the interstate
      electric transmission system.·
    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 AndersonAmendments
      Act of 1988,
      which provides the framework for nuclear liability protection, will be
      extended by twenty years 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 by the FERC and the Department of Energy, as
well as other federal agencies. PPL cannot predict when these proceedings and
regulations will commence or be finalized.





PPL is
still studying the legislation and its effects and cannot predict with certainty
the impact 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, 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 acid rain, attainment of federal ambient ozone
standards, fine particulate matter standards and toxic air emissions and
visibility in the U.S. PPL's subsidiaries are in substantial compliance with the
Clean Air Act. Amendments to the Clean Air Act continue to be considered in the
U.S. Congress that could require significant further reductions in emissions of
nitrogen oxide and sulfur dioxide and reductions in emissions of
mercury.





Citing
its authority under the Clean Air Act, the EPA has 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 has promulgated the Clean Air Interstate Rule (CAIR) for 28
midwestern and eastern states, including Pennsylvania, to reduce national sulfur
dioxide emissions by about 50% by 2010 and to extend the current seasonal
program for nitrogen oxide emission reductions to a year-round program starting
in 2009. CAIR requires further reductions, starting in 2015, in sulfur dioxide
and nitrogen oxide of 30% and 20%, respectively, from 2010 levels. CAIR allows
these reductions to be achieved through cap-and-trade programs, and is
consistent with the Bush administration's proposed amendments to the Clean Air
Act, except that it applies to only the 28 states. Pennsylvania and Montana have
not challenged CAIR, but the rule has been challenged by several states and
environmental groups as not being sufficiently strict, and by industry
petitioners as being too strict. In addition, several Canadian environmental
groups have petitioned the EPA under the Clean Air Act to revise CAIR to require
deeper reductions in sulfur dioxide and mercury.





In order
to continue meeting existing sulfur dioxide reduction requirements of the Clean
Air Act, PPL will need to use its banked sulfur dioxide allowances and to
purchase additional allowances. Currently, PPL has enough allowances to cover
expected consumption through 2006, but will experience shortfalls in some years
after 2006. As a result and based on projected allowance prices, PPL plans to
install sulfur dioxide scrubbers at its Montour Units 1 and 2 and Brunner Island
Unit 3 by 2008. PPL also plans to install a scrubber at Brunner Island Units 1
and 2 during 2009. PPL's current installation plan for the scrubbers and other
pollution control equipment from 2005 to 2010 reflects a cost of approximately
$1.5 billion.





Also
citing its authority under the Clean Air Act, the EPA has finalized mercury
regulations that affect coal-fired plants. These regulations establish an
emission trading program to take effect beginning January 2010, with a second
phase to take effect in 2018. At the same time that it finalized these mercury
regulations, the EPA determined that it currently does not need to regulate
nickel emissions from oil-fired units. PPL is still assessing what measures it
will need to take to comply with the mercury regulations. PPL expects that the
scrubbers to be installed at Montour and Brunner Island will provide mercury
removal co-benefits. However, PPL believes that it may need to take additional
measures to comply with the 2010 requirements of the EPA's mercury regulations,
and that it will need to take additional measures to comply with the 2018
requirements. The capital costs to PPL of complying with these new mercury
regulations are not now determinable, but could be significant. Based on
preliminary industry estimates, the costs are expected to exceed $150
million.





Pennsylvania
and ten other states have challenged the new EPA mercury regulations in the D.C.
Circuit Court of Appeals as not being sufficiently strict. The Pennsylvania
Environmental Quality Board (PaEQB) has accepted a petition filed by PennFuture,
an environmental organization, requesting the PaEQB to develop mercury rules
that would require by 2008 a level of mercury reduction that would be more
stringent than the level required by 2018 under the EPA's mercury regulations.
In addition, the Ozone Transport Commission (consisting of Pennsylvania and 11
other states and the District of Columbia) has passed a resolution calling for
reductions in sulfur dioxide, nitrogen oxide and mercury emissions that are more
stringent than those under CAIR and the EPA's mercury regulations. The
Pennsylvania DEP (which works with the PaEQB to develop Pennsylvania
environmental regulations) has stated that it intends to develop mercury
regulations that are more stringent than the EPA's regulations but different
from those requested by PennFuture, and it also has indicated support for
developing more stringent regulations for reductions in sulfur dioxide and
nitrogen oxide.





In
September 2005, a petition to initiate state-specific rulemaking for mercury
emissions was filed by a coalition of environmental and other public interest
groups with the Montana Board of Environmental Review (BER). The petition
proposed an administrative rule that would have required coal burning power
plants in Montana to achieve a 90% reduction in mercury emissions by July 1,
2011, with certain exceptions. On September 30, 2005, a public hearing was held
before the Montana BER to determine whether to accept the petition for
rulemaking or deny the same. Upon the recommendation of the director of the
Montana Department of Environmental Quality (DEQ), the Montana BER voted to deny
the petition at that time but instructed the Montana DEQ to meet with all
stakeholders and attempt to come up with an alternate form of rule and present
it to the Montana BER no later than February 2006. PPL Montana intends to
actively participate in the stakeholder process.





PPL and
other energy companies and industry groups oppose state-specific regulations.
PPL cannot predict whether more stringent regulations will ultimately be adopted
in Pennsylvania or Montana. The additional costs to comply with any such
regulations are not now determinable, but could be significant.





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 requirements for electric generating units, including
presumptive limits for sulfur dioxide and nitrogen oxide controls for large
units. The EPA has stated that this rule will not require reductions in sulfur
dioxide or nitrogen oxide beyond those required by CAIR. However, in states like
Montana that are not within the CAIR region, the need for and costs of
additional controls as a result of this new rule are not now determinable, but
could be significant.





In 1999,
the EPA initiated enforcement actions against several utilities, asserting that
older, coal-fired power plants operated by those utilities have, over the years,
been modified in ways that subject 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 utilities. In 2003,
the EPA issued changes to its regulations that clarified what projects are
exempt from "New Source" requirements as routine maintenance and repair. Under
these clarifications, any project to replace existing equipment with
functionally equivalent equipment would be considered routine maintenance and
excluded from "New Source" review if the cost of the replaced equipment does not
exceed 20% of the replacement cost of the entire process unit, the basic design
is not changed and no permit limit is exceeded. These clarifications would have
substantially reduced the uncertainties under the prior "New Source"
regulations; however, they have been stayed by the U.S. Court of Appeals for the
District of Columbia Circuit. 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 new tests will be adopted. In addition to announcing these
proposed new tests, the EPA also announced in October 2005 that it will not
bring new enforcement actions with respect to projects that would satisfy the
proposed tests or the EPA's 2003 clarifications referenced above. Accordingly,
PPL believes that it is unlikely that the EPA will follow up on the information
requests that had been issued to PPL Montana's Corette and Colstrip plants by
EPA Region VIII in 2000 and 2003, respectively, and to PPL Generation's Martins
Creek plant by EPA Region III in 2002. However, states and environmental groups
have also been bringing 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 its
affiliates' plants.





The New
Jersey DEP and some New Jersey residents raised environmental concerns with
respect to the Martins Creek plant, particularly with respect to sulfur dioxide
emissions and the opacity of the plant's plume. These issues were raised in the
context of an appeal by the New Jersey DEP of the Air Quality Plan Approval
issued by the Pennsylvania DEP to PPL's Lower Mt. Bethel generating plant. In
October 2003, PPL finalized an agreement with the New Jersey DEP and the
Pennsylvania DEP pursuant to which PPL will reduce sulfur dioxide emissions from
its Martins Creek power plant. Under the agreement, PPL Martins Creek will shut
down the plant's two coal-fired generating units by September 2007 and may
repower them any time after shutting them down so long as it follows all
applicable state and federal requirements, including installing the best
available pollution control technology. Pursuant to the agreement, PPL Martins
Creek began reducing the fuel sulfur content for the coal units as well as the
plant's two oil-fired units in June 2004. The agreement also calls for PPL to
donate to a non-profit organization 70% of the excess emission allowances and
emission reduction credits that result from shutting down or repowering the coal
units. Some of these donations have already been made to the Pennsylvania
Environmental Council. As a result of the agreement, the New Jersey DEP withdrew
its challenge to the Air Quality Plan Approval for the Lower Mt. Bethel
facility. The agreement will not result in material costs to PPL. The agreement
does not address the issues raised by the New Jersey DEP regarding the visible
opacity of emissions from the oil-fired units at the Martins Creek plant. 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
addition to the opacity concerns raised by the New Jersey DEP, PPL and the
Pennsylvania DEP are litigating issues relating to the opacity of emissions from
the Montour plant and negotiating issues relating to the opacity of emissions
from the Martins Creek plant. PPL believes that it is in compliance with state
emission regulations and is continuing to discuss these matters with the
Pennsylvania DEP. If it is determined that actions must be taken to address the
Pennsylvania DEP's concerns, such actions could result in costs that are not now
determinable, but could be significant.





In
December 2003, PPL Montana, as operator of the Colstrip facility, received an
Administrative Compliance Order (ACO) from the EPA pursuant to the Clean Air
Act. The ACO alleges that Units 3 and 4 of the facility have been in violation
of the Clean Air Act permit at Colstrip since 1980. The permit required Colstrip
to submit for review and approval by the EPA an analysis and proposal for
reducing emissions of nitrogen oxide to address visibility concerns upon the
occurrence of certain triggering events. The EPA is asserting that regulations
it promulgated in 1980 triggered this requirement. PPL believes that the ACO is
unfounded. PPL is engaged in settlement negotiations on these matters with the
EPA, the Montana DEQ and the Northern Cheyenne Tribe.





In
addition to the requirements related to emissions of sulfur dioxide, nitrogen
oxide and mercury noted above, there is a growing concern nationally and
internationally about carbon dioxide emissions. In June 2005, the U.S. Senate
adopted a resolution declaring that mandatory reductions in carbon dioxide are
needed. Various legislative proposals are being considered in Congress, and
several states have already passed legislation capping carbon dioxide emissions.
The Bush administration is promoting a voluntary carbon dioxide reduction
program, called the Climate VISION program. In support of this program, the
electric power industry has committed to reducing its greenhouse gas emission
intensity levels (measured as tons of carbon dioxide equivalent against electric
power production in MWh) by 3% to 5% by the 2010 to 2012 period. Furthermore, an
initiative is underway in nine Northeast states to propose a cap-and-trade
program for carbon dioxide emissions from fossil fuel-fired power plants, the
details of which are expected to be released in 2005. Increased pressure for
carbon dioxide emissions reduction is also coming from investor organizations
and the international community. Pennsylvania and Montana have not, at this
time, established any formal programs to address carbon dioxide and other
greenhouse gases.





As a
result of the national and international concerns, PPL has conducted an
inventory of its carbon dioxide emissions and is continuing to evaluate various
options for reducing, avoiding, off-setting or sequestering its emissions. If
the above-described initiatives or other legislative or regulatory initiatives
result in mandatory reductions being imposed, the cost of such reductions could
be significant.





In June
2005, PPL Montour, along with 20 other companies with coal-fired generating
plants, was named as a defendant in a toxic-tort, purported class-action lawsuit
filed in the Ontario Superior Court of Justice. PPL Montour has not yet been
served with this lawsuit. On behalf of a purported class comprised of all
persons resident in Ontario within the past six years (and/or their family
members or heirs), the named plaintiffs allege, in essence, that the defendant
power companies negligently failed to prevent their plants from emitting air
pollutants in such a manner as to cause death and multiple adverse health
effects, as well as economic damages, to the plaintiff class. PPL Montour is
alleged to be among those responsible for the plaintiffs' injuries because of
its ownership of the Montour plant, as well as its ownership interests in the
Keystone and Conemaugh plants. The plaintiffs seek damages in the approximate
amount of Canadian $49 billion (approximately $42 billion at current exchange
rates), along with continuing damages in the amount of Canadian $4.1 billion
(approximately $3.5 billion at current exchange rates) per year and punitive
damages of Canadian $1 billion (approximately $861 million at current exchange
rates), along with such other relief as the court deems just. PPL and PPL Energy
Supply cannot predict the outcome of this matter.





Water/Waste *(PPL
and PPL Energy Supply)*





In August
2005, a leak from a disposal basin containing fly ash and water used in
connection with the operation of the two 150-MW coal-fired generating units at
the Martins Creek generating facility caused the discharge of approximately 100
million gallons of water containing ash from the basin onto adjacent roadways
and fields and into the Delaware River. The leak has been stopped, and PPL has
determined that the problem was caused by a failure in the disposal basin's
discharge structure. PPL currently is working with the Pennsylvania DEP and
other appropriate agencies and consultants to assess the extent of the
environmental damage caused by the ash in the discharged water and to remediate
the damage. The company has shut down the two coal-fired generating units and
intends to place the units back in service and begin using the disposal basin
again after completing the repairs and upgrades to the basin and obtaining the
Pennsylvania DEP's approval.





At this
time, PPL has no reason to believe that the Martins Creek leak has caused any
danger to human health or any adverse biological impact on the river aquatic
life. However, PPL currently expects that as a result of the leak it will be
subject to an enforcement action by the Pennsylvania DEP and that claims may be
brought against it by certain federal and other state agencies and private
litigants. PPL and PPL Energy Supply recognized a $33 million charge in the
third quarter of 2005 (or $22 million after tax, which is $0.06 per share for
PPL) in connection with the current expected on-site and off-site costs relating
to the leak. Approximately $29 million of the charge, or $19 million after tax,
relates to the off-site costs, and the balance of the charge, $4 million, or $3
million after tax, relates to the on-site costs. PPL and PPL Energy Supply
cannot predict the final cost of assessment and remediation of the leak, the
exact nature of any 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, the extent of the fines or damages that may be sought in connection
with any such actions, when the coal-fired generating units may be placed back
in service or the ultimate financial impact on PPL or PPL Energy Supply.





Seepages
have been detected at one of the wastewater basins at the Montour generating
facility, and PPL is working with the Pennsylvania DEP to assess and abate the
seepage. PPL is assessing groundwater impacted by seepages from two closed
wastewater basins at the Brunner Island station to determine what abatement
actions may be needed. PPL plans to comprehensively address issues related to
wastewater basins at all of its Pennsylvania plants, as part of the process to
renew the residual waste permits for these basins which expire within the next
three years. The cost of addressing seepages at PPL's Pennsylvania plants is not
now determinable, but could be significant.




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. 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 offering to
extend city water to certain residents who live near the plant, some of whom are
plaintiffs in the litigation. Beyond estimated costs of approximately $1 million
(PPL Montana's share of the estimated costs, for which PPL has recorded a
contingency reserve) for a proposed settlement of the property damage claims
raised in the litigation, for extending city water and for a portion of the
remedial investigation costs, PPL Montana may incur further costs based on its
additional groundwater investigations and any related remedial measures, which
costs are not now determinable, but could be significant.


Brunner
Island's NPDES permit contains a provision requiring further studies on the
thermal impact of the cooling water discharge from the plant. These studies are
underway and are expected to be completed in 2006. The Pennsylvania DEP has
stated that it believes the studies to date show that the temperature of the
discharge must be lowered. The Pennsylvania DEP has also stated that it believes
the plant is in violation of a permit condition prohibiting the discharge from
changing the river temperature by more than two degrees per hour. PPL is
discussing these matters with the agency. Depending on the outcome of these
discussions, the plant could be subject to additional capital and operating
costs that are not now determinable, but could be significant.





The EPA
has significantly tightened the water quality standard for arsenic. The revised
standard becomes effective in 2006. The revised standard may result in action by
individual states that could require several PPL subsidiaries to either 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 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 new rule that was finalized in 2004
addresses existing structures. PPL does not believe that either of these rules
will impose material costs on PPL subsidiaries. However, six northeastern states
have challenged the new rules for existing structures as being inadequate. If
this challenge is successful, it could result in the EPA establishing stricter
standards for existing structures that could impose significant costs on PPL
subsidiaries.





Superfund
and Other Remediation





*(PPL,
PPL Energy Supply and PPL Electric)*





In 1995,
PPL Electric and PPL Generation and, in 1996, PPL Gas Utilities entered into
consent orders with the Pennsylvania DEP to address a number of sites that were
not being addressed under another regulatory program such as Superfund, but for
which PPL Electric, PPL Generation or PPL Gas Utilities may be liable for
remediation. This may include potential PCB contamination at certain PPL
Electric substations and pole sites; potential contamination at a number of coal
gas manufacturing facilities formerly owned or operated by PPL Electric; oil or
other contamination which may exist at some of PPL Electric's former generating
facilities; and potential contamination at abandoned power plant sites owned by
PPL Generation. This may also include former coal gas manufacturing facilities
and potential mercury contamination from gas meters and regulators at PPL Gas
Utilities' sites.





Since the
PPL Electric Consent Order expired on January 31, 2005, and since only four
sites remained, PPL has negotiated a new consent order and agreement (COA) with
the Pennsylvania DEP that combines both PPL Electric's and PPL Gas Utilities'
consent orders into one single agreement. As of September 30, 2005, PPL
Electric and PPL Gas Utilities have 178 sites to address under the new combined
COA. Additional sites formerly owned or operated by PPL Electric, PPL Generation
or PPL Gas Utilities are added to the consent orders on a case-by-case
basis.





At
September 30, 2005, PPL Electric and PPL Gas Utilities had accrued approximately
$3 million and $7 million, respectively, representing the estimated amounts each
will have to spend for site remediation, including those sites covered by each
company's consent orders mentioned above. 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
clean-up. 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 and treating mine water
at two mine sites. Another PPL Generation subsidiary is installing passive
wetlands treatment at a third site, and the Pennsylvania DEP has suggested that
it may require that PPL Generation subsidiary to pump and treat the mine water
at that third site. At September 30, 2005, a PPL Energy Supply subsidiary had
accrued $28 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.





In 1999,
the Montana Supreme Court held in favor of several citizens' groups that the
right to a clean and healthful environment is a fundamental right guaranteed by
the Montana Constitution. The court's ruling could result in significantly more
stringent environmental laws and regulations, as well as an increase in
citizens' suits under Montana's environmental laws. The effect on PPL Montana of
any such changes in laws or regulations or any such increase in legal actions is
not currently determinable, but could be significant.





*(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.





Asbestos  *(PPL
and PPL Energy Supply)*





There
have been increasing litigation claims throughout the U.S. based on exposure to
asbestos against companies that manufacture or distribute asbestos products or
that have these products on their premises. Certain of PPL's generation
subsidiaries and certain of its energy services subsidiaries, such as those that
have supplied, may have supplied or installed asbestos material in connection
with the repair or installation of process piping and heating, ventilating and
air conditioning systems, have been named as defendants in asbestos-related
lawsuits. PPL cannot predict the outcome of these lawsuits or whether additional
claims may be asserted against its subsidiaries in the future. PPL does not
expect that the resolution of the current lawsuits will have a material adverse
effect on its results of operations.





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 electric and/or magnetic fields (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 of EMFs causing adverse effects. The
agency further noted that there is some epidemiological evidence of an
association with childhood leukemia, but that this evidence is difficult to
interpret without supporting laboratory evidence. The U.K. National Radiological
Protection Board 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. 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
abroad, and the associated cost, or what, if any, liabilities they might incur
related to the EMF issue.





Lower
Mt. Bethel  *(PPL
and PPL Energy Supply)*





In August
2002, the Northampton County Court of Common Pleas issued a decision setting the
permissible noise levels for operation of the Lower Mt. Bethel facility. PPL
appealed the court's decision to the Commonwealth Court, and an intervenor in
the lawsuit cross-appealed the court's decision. In May 2003, the Commonwealth
Court remanded the case to the Court of Common Pleas for further findings of
fact concerning the zoning application relating to the construction of the
facility. In September 2003, the Court of Common Pleas ruled in PPL's favor
while also reaffirming its decision on the noise levels, and the intervenor
appealed this ruling to the Commonwealth Court. In April 2004, the Commonwealth
Court affirmed the decision of the Court of Common Pleas, and the Supreme Court
of Pennsylvania has denied the intervenor's Petition for Allowance of Appeal.
Accordingly, the September 2003 ruling by the Court of Common Pleas is
final.





The
certificate of occupancy for the Lower Mt. Bethel facility was issued by the
local township zoning officer in April 2004, and the facility was placed in
service in May 2004. In May 2004, the intervenor in the legal proceedings
regarding the facility's permissible noise levels filed an appeal with the
township zoning board regarding the issuance of the certificate of occupancy.
The hearing on the appeal was held in December 2004, and the intervenor's appeal
was denied. The intervenor appealed the zoning board's decision to the
Northampton County Court of Common Pleas in February 2005, and the Court of
Common Pleas denied this appeal in August 2005. The intervenor did not further
appeal this matter. Accordingly, the zoning board's decision is
final.





**Environmental
Matters - International** *(PPL
and PPL Energy Supply)*





U.K.





WPD's
distribution businesses are subject to numerous regulatory and statutory
requirements with respect to environmental matters. 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.





Latin
America





Certain
of PPL's affiliates have electric distribution operations in Latin America. PPL
believes that these affiliates have taken and continue 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 PPL's affiliates in Latin America with respect to environmental
matters.





**Other**





Nuclear
Insurance **** *(PPL
and PPL Energy Supply)*





PPL
Susquehanna is a member of certain insurance programs which 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 which 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 September 30, 2005, 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 Amendments
Act of 1988. 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
Amendments Act of
1988, PPL Susquehanna could be assessed up to $201 million per incident, payable
at $30 million per year.





Guarantees
and Other Assurances





*(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, "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," and are specifically disclosed in Note 14 to the Financial Statements
contained in each Registrant's 2004 Form 10-K.




**Recorded
      Liability at**
    
    **Exposure
      at****September
      30, 2005**
    
    **December
      31, 2004**
    
    **September
      30, 2005 (a)**
    
    **Expiration
      Date****PPL**Residual
      value guarantees of leased equipment
    
    
    
    
    
    
    
    $
    10
    
    
    2006
    (b)**PPL
      Energy Supply**(c)WPD
      LLP guarantee of obligations under SIUK Capital Trust I preferred
      securities
    
    
    
    
    
    
    
    
    82
    (d)
    2027Letters
      of credit issued on behalf of affiliates
    
    
    
    
    
    
    
    
    5
    (e)
    2007Support
      agreements to guarantee partnerships' obligations for the sale of
      coal
    
    
    
    
    
    
    
    
    9
    
    
    2007Retroactive
      premiums under nuclear insurance programs
    
    
    
    
    
    
    
    
    38Nuclear
      claims under The Price Anderson Amendments Act of 1988
    
    
    
    
    
    
    
    
    201
    (f)Contingent
      purchase price payments to former owners of synfuel
    projects
    
    
    
    
    $
    11
    
    
    33
    
    2007Residual
      value guarantees of leased equipment
    
    
    
    
    
    
    
    
    3
    
    2006
    (b)WPD
      guarantee of pension and other obligations of unconsolidated
      entities(g)
    
    $
    4
    
    
    
    
    
    43
    
    2017Indemnifications
      for entities in liquidation
    
    
    
    
    
    
    
    
    270
    
    2008
      to 2012WPD
      guarantee of an unconsolidated entity's lease obligations
    
    
    
    
    
    
    
    
    1
    
    2008Indemnifications
      related to the sale of the Sundance plant
    
    
    1
    
    
    
    
    
    
    (h)
    
    (h)Tax
      indemnification related to unconsolidated WPD affiliates
    
    
    
    
    
    
    
    
    9
    
    2012Obligation
      to purchase commodities under option contracts
    
    
    2
    
    
    
    
    
    50
    
    2007
  **Recorded
      Liability at**
    
    **Exposure
      at****September
      30, 2005**
    
    **December
      31, 2004**
    
    **September
      30, 2005 (a)**
    
    **Expiration
      Date****PPL
      Electric**(c)Guarantee
      of a portion of an unconsolidated entity's debt
    
    
    
    
    
    
    
    
    7
    (d)
    2008Residual
      value guarantees of leased equipment
    
    
    
    
    
    1
    
    
    75
    
    
    2006
    (b)







(a)
    
    Represents
      the estimated maximum potential amount of future payments that could be
      required to be made under the guarantee.(b)
    
    Although
      the expiration date noted is 2006, equipment of similar value is generally
      leased and guaranteed on an on-going basis.(c)
    
    Other
      than the exceptions noted in (e) below, all guarantees of PPL Energy
      Supply and PPL Electric also apply to PPL on a consolidated
      basis.(d)
    
    Reflects
      principal payments only.(e)
    
    Represents
      letters of credit issued at the direction of PPL Energy Supply for the
      benefit of third parties for assurance against nonperformance by PPL and
      PPL Gas Utilities. This is not a guarantee by PPL on a consolidated
      basis.(f)
    
    Amount
      is per incident.(g)
    
    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 September 30, 2005, WPD has recorded an
      estimated discounted liability based on its current allocated percentage
      of the total expected costs. Neither the expiration date nor the maximum
      amount of potential payments for certain obligations is explicitly stated
      in the related agreements and, therefore, have been estimated based on the
      types of obligations.(h)
    
    In
      connection with the sale of the Sundance plant, PPL Energy Supply has
      provided indemnifications to the purchaser 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. PPL Energy Supply's maximum exposure
      with respect to these 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. Certain of the indemnifications are
      triggered only if the purchaser's losses reach $1 million in the
      aggregate, are capped at 50% of the purchase price (or approximately $95
      million), and survive for a period of only 24 months after the May 13,
      2005, transaction closing. The indemnification provision for unknown
      environmental and tort liabilities related to periods prior to PPL Energy
      Supply's ownership of the real property on which the facility is located
      are capped at approximately $4 million in the aggregate and survive for a
      maximum period of five years after the transaction
  closing.




**10.**  **Related
Party Transactions**





**Affiliate
Trust** *(PPL
and PPL Energy Supply)*





At both
September 30, 2005, and December 31, 2004, PPL and PPL Energy Supply's Balance
Sheets reflect $89 million of "Long-term Debt with Affiliate Trust." This debt
represents obligations of PPL Energy Supply under 8.23% subordinated debentures
maturing in February 2027 that are held by SIUK Capital Trust I, which is a
variable interest entity whose common securities are owned by PPL Energy Supply
but which is not consolidated by PPL Energy Supply. Interest expense on this
obligation was $3 million for the three months ended September 30, 2005 and
2004, and $9 million for the nine months ended September 30, 2005 and 2004. This
interest is 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 2004 Form 10-K for additional information.





**PLR
Contracts** *(PPL
Energy Supply and PPL Electric)*





PPL
Electric has power sales agreements with PPL EnergyPlus, effective July 2000 and
January 2002, to supply all of PPL Electric's PLR load through 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 September 30, 2005 and 2004, these purchases totaled $415
million and $373 million. For the nine months ended September 30, 2005 and 2004,
these purchases totaled $1.2 billion and $1.1 billion. These purchases include
nuclear decommissioning recovery and amortization of an up-front contract
payment, and are included in the Statement of Income as "Energy purchases from
affiliate" by PPL Electric, and as "Wholesale energy marketing to affiliate" by
PPL Energy Supply.





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
September 30, 2005, the market price of electricity would exceed the
contract price by approximately $3.7 billion. Accordingly, at September 30,
2005, 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 September 30,
2005, and December 31, 2004. This deposit is shown on the Balance Sheet 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 Statement of Income. PPL
Energy Supply records this as interest income, which is included in "Other
Income - net" on the Statement of Income.





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 $50 million at September 30, 2005,
and $58 million at December 31, 2004. The current and noncurrent balances
are reported on the Balance Sheet as "Prepayment on PLR energy supply from
affiliate" by PPL Electric, and as "Deferred revenue on PLR energy supply to
affiliate" by PPL Energy Supply.





**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 September 30, 2005 and 2004,
these NUG purchases totaled $41 million and $40 million. For the nine months
ended September 30, 2005 and 2004, these NUG purchases totaled $111 million
and $116 million. These amounts are included in the Statement 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 bills 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 of the subsidiaries based on an average of the subsidiaries' relative
invested capital, operation and maintenance expenses, and number of employees.
PPL Services allocated the following charges to PPL Energy Supply and PPL
Electric:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004****Direct
      expenses**PPL
      Energy Supply
    
    $
    26
    
    $
    25
    
    $
    77
    
    $
    73PPL
      Electric
    
    
    17
    
    
    15
    
    
    45
    
    
    43**Overhead
      costs**PPL
      Energy Supply
    
    
    17
    
    
    15
    
    
    56
    
    
    47PPL
      Electric
    
    
    6
    
    
    6
    
    
    25
    
    
    19





**Intercompany
Borrowings**





*(PPL
Energy Supply)*





PPL
Energy Supply had no notes receivable from affiliates at September 30, 2005
and December 31, 2004. Interest earned on cash collateral and loans to
affiliates, included in "Other Income - net" on the Statement of Income, was $5
million and $1 million for the three months ended September 30, 2005 and 2004,
and $10 million and $2 million for the nine months ended September 30, 2005 and
2004.





In May
2004, PPL Energy Supply issued a $495 million note payable to an affiliate.
There was no balance at September 30, 2005, and a balance of $495 million
at December 31, 2004, which is shown on the Balance Sheet as "Note Payable to
Affiliate." PPL Energy Supply can borrow under the note until May 2010. Interest
is payable monthly in arrears at LIBOR plus 1%. Interest expense on this note
was $2 million and $3 million for the three months ended September 30, 2005
and 2004, and $9 million and $4 million for the nine months ended
September 30, 2005 and 2004. This interest is reflected in "Interest
Expense with Affiliates" on the Statement of Income.





( *PPL
Electric)*





In August
2004, a PPL Electric subsidiary made a $300 million demand loan to an affiliate,
with interest due quarterly at a rate equal to the 3-month LIBOR plus 1.25%.
This loan is shown on the Balance Sheet as "Note receivable from affiliate."
Interest earned on loans to affiliates, included in "Other Income - net" on the
Statement of Income, was $4 million and $10 million for the three and nine
months ended September 30, 2005, and $1 million for each of the same
periods in 2004.





**Trademark
Royalties** *(PPL
Energy Supply)*





A PPL
subsidiary owns PPL trademarks and bills certain affiliates for their use. PPL
Energy Supply was allocated $9 million of this license fee for each of the three
months ended September 30, 2005 and 2004, and $24 million and $25 million
for the nine months ended September 30, 2005 and 2004. The allocation of
this license fee is primarily included in "Other operation and maintenance" on
the Statement of Income.





**11.**  **Other
Income - Net**





*(PPL,
PPL Energy Supply and PPL Electric* )





The
breakdown of "Other Income - net" was as follows:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****PPL**
    
    **2005**
    
    **2004**
    
    **2005**
    
    **2004****Other
      Income**Interest
      income - IRS settlement
    
    
    
    
    
    $
    23
    
    
    
    
    
    
    $
    23Other
      interest income
    
    $
    5
    
    
    
    5
    
    
    $
    17
    
    
    
    11Equity
      earnings
    
    
    
    
    
    
    1
    
    
    
    2
    
    
    
    3Realized
      earnings on nuclear decommissioning trust
    
    
    
    
    
    
    2
    
    
    
    3
    
    
    
    6Sale
      of CEMAR (Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Miscellaneous
      - International
    
    
    3
    
    
    
    
    
    
    
    6
    
    
    
    3Miscellaneous
      - Domestic
    
    
    2
    
    
    
    
    
    
    
    6
    
    
    
    7Total
    
    
    10
    
    
    
    31
    
    
    
    34
    
    
    
    76**Other
      Deductions**Impairment
      of investment in technology supplier (Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Realized
      loss on available-for-sale investment
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    6Taxes,
      other than income
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1Charitable
      contributions
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    3Miscellaneous
      - International
    
    
    1
    
    
    
    4
    
    
    
    2
    
    
    
    6Miscellaneous
      - Domestic
    
    
    3
    
    
    
    2
    
    
    
    5
    
    
    
    5**Other
      Income - net**
    
    $
    5
    
    
    $
    18
    
    
    $
    23
    
    
    $
    45**PPL
      Energy Supply****Other
      Income**Affiliated
      interest income
    
    $
    5
    
    
    $
    1
    
    
    $
    10
    
    
    $
    2Interest
      income - IRS settlement
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    15Other
      interest income
    
    
    3
    
    
    
    3
    
    
    
    11
    
    
    
    7Equity
      earnings
    
    
    1
    
    
    
    1
    
    
    
    3
    
    
    
    3Realized
      earnings on nuclear decommissioning trust
    
    
    
    
    
    
    2
    
    
    
    3
    
    
    
    6Sale
      of CEMAR (Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Miscellaneous
      - International
    
    
    3
    
    
    
    
    
    
    
    6
    
    
    
    3Miscellaneous
      - Domestic
    
    
    1
    
    
    
    
    
    
    
    3
    
    
    
    3Total
    
    
    13
    
    
    
    22
    
    
    
    36
    
    
    
    62**Other
      Deductions**Taxes,
      other than income
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    1Miscellaneous
      - International
    
    
    1
    
    
    
    4
    
    
    
    2
    
    
    
    6Miscellaneous
      - Domestic
    
    
    2
    
    
    
    3
    
    
    
    5
    
    
    
    3**Other
      Income - net**
    
    $
    9
    
    
    $
    15
    
    
    $
    28
    
    
    $
    52**PPL
      Electric****Other
      Income**Affiliated
      interest income
    
    $
    4
    
    
    $
    1
    
    
    $
    10
    
    
    $
    1Interest
      income - IRS settlement
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    8Other
      interest income
    
    
    2
    
    
    
    2
    
    
    
    5
    
    
    
    3Miscellaneous
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    1Total
    
    
    6
    
    
    
    11
    
    
    
    17
    
    
    
    13**Other
      Deductions**
    
    
    1
    
    
    
    
    
    
    
    2
    
    
    
    1**Other
      Income - net**
    
    $
    5
    
    
    $
    11
    
    
    $
    15
    
    
    $
    12




**12.**  **Derivative
Instruments and Hedging Activities**





*(PPL
and PPL Energy Supply)*





**Fair
Value Hedges**





PPL and
PPL Energy Supply enter into financial or physical contracts to hedge a portion
of the fair value of firm commitments of forward electricity sales and emission
allowance positions. These contracts range in maturity through 2007.
Additionally, PPL and PPL Energy Supply enter into financial contracts to hedge
fluctuations in the market value of existing debt issuances. These contracts
range in maturity through 2013 . 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. These forward contracts range in maturity through 2008.





PPL and
PPL Energy Supply did not recognize significant gains or losses resulting from
hedges of firm commitments that no longer qualified as fair value hedges for the
three and nine months ended September 30, 2005 or 2004.





PPL and
PPL Energy Supply did not recognize any gains or losses resulting from the
ineffective portion of fair value hedges for the three and nine months ended
September 30, 2005 or 2004.





**Cash
Flow Hedges**





PPL and
PPL Energy Supply enter into financial and physical contracts, including
forwards, futures and swaps, to hedge the price risk associated with electric,
gas and oil commodities. These contracts range in maturity through 2010.
Additionally, PPL and PPL Energy Supply enter into financial interest rate swap
contracts to hedge interest expense associated with both existing and
anticipated debt issuances. These interest rate swap contracts range in maturity
through 2016. PPL and PPL Energy Supply also enter into foreign currency forward
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 of foreign operations. These forward contracts
range in maturity through 2028.





Net
investment hedge activity is reported in the foreign currency translation
adjustments component of other comprehensive income. PPL recorded insignificant
net investment hedge amounts for the three and nine months ended September 30,
2005 and 2004.





During
the third quarter of 2005, PPL's and PPL Energy Supply's derivative liability
with a bank counterparty was replaced with another derivative liability on
substantially the same terms with another bank counterparty.  The
value of the swap with the new counterparty at inception was $7
million.





Cash flow
hedges may be discontinued if it is probable that the original forecasted
transaction will not occur by the end of the originally specified time period.
PPL and PPL Energy Supply did not discontinue any cash flow hedges for that
reason during the three and nine months ended September 30, 2005. Due to
the extinguishment of a consolidated trust's debt related to the Sundance and
University Park generating facilities in September 2004, interest rate swaps
that hedged the interest payments on the debt were terminated. Therefore, PPL
and PPL Energy Supply reclassified a $3 million pre-tax loss from other
comprehensive income to "Interest Expense" on the Statement of Income. PPL and
PPL Energy Supply did not discontinue any other cash flow hedges during the
three and nine months ended September 30, 2004.





Due to
hedge ineffectiveness, PPL and PPL Energy Supply reclassified a loss of $1
million, after tax, and an insignificant amount from other comprehensive income
into earnings (reported in "Wholesale energy marketing" and "Energy purchases"
on the Statement of Income) for the three and nine months ended September 30,
2005. PPL and PPL Energy Supply reclassified an insignificant amount into
earnings for the three and nine months ended September 30, 2004.





As of
September 30, 2005, the deferred net loss, after tax, on derivative instruments
in accumulated other comprehensive income expected to be reclassified into
earnings during the next 12 months was $95 million for PPL and $89 million for
PPL Energy Supply.





The
following table shows the change in accumulated unrealized gains or losses on
derivatives, after tax, in accumulated other comprehensive income for the
following periods:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****PPL**
    **2005**
    
    **2004**
    
    **2005**
    
    **2004**Beginning
      accumulated derivative gain (loss)
    $
    (143
    )
    
    $
    12
    
    
    $
    (63
    )
    
    $
    41Net
      change associated with current period hedging activities and
      other
    
    (131
    )
    
    
    (3
    )
    
    
    (179
    )
    
    
    (83
    )Net
      change from reclassification into earnings
    
    7
    
    
    
    (5
    )
    
    
    (25
    )
    
    
    46Ending
      accumulated derivative gain (loss)
    $
    (267
    )
    
    $
    4
    
    
    $
    (267
    )
    
    $
    4**PPL
      Energy Supply**Beginning
      accumulated derivative gain (loss)
    $
    (124
    )
    
    $
    23
    
    
    $
    (45
    )
    
    $
    60Net
      change associated with current period hedging activities and
      other
    
    (140
    )
    
    
    5
    
    
    
    (184
    )
    
    
    (80
    )Net
      change from reclassification into earnings
    
    6
    
    
    
    (7
    )
    
    
    (29
    )
    
    
    41Ending
      accumulated derivative gain (loss)
    $
    (258
    )
    
    $
    21
    
    
    $
    (258
    )
    
    $
    21





**Related
Implementation Issue**





During
the second quarter of 2005, industry participants and external auditors
recognized disparities in the accounting for FTRs. As FTR markets have evolved
within RTOs, some companies began to account for them as derivatives under SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." PPL began
to apply derivative accounting rules to FTRs effective July 1, 2005. PPL has
commitments to purchase FTRs from RTOs that total $9 million through May 2006.
Valuing FTRs requires significant judgment because market prices are generally
only observable when RTOs conduct monthly auctions for the next month;
therefore, the September 30, 2005, value reflects a significant modeling and
liquidity reserve.





**Credit
Concentration**





*(PPL
and PPL Energy Supply)*





PPL and
PPL Energy Supply 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 mark-to-market value of these contracts is not
reflected in the financial statements. However, the mark-to-market value of
these contracts is considered when committing to new business from a credit
perspective.





PPL and
PPL Energy Supply have credit exposures to energy trading partners. The majority
of these exposures are the mark-to-market value of multi-year contracts for
energy sales and purchases. Therefore, if these counterparties fail to perform
their obligations under such contracts, PPL and PPL Energy Supply 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.





At
September 30, 2005, PPL had a credit exposure of $650 million to energy trading
partners. Ten counterparties accounted for 71% of this exposure. No other
individual counterparty accounted for more than 3% of the exposure. All ten of
the major counterparties had an investment grade credit rating from S&P.





At
September 30, 2005, PPL Energy Supply had a credit exposure of $630 million to
energy trading partners. Ten counterparties accounted for 73% of this exposure.
No other individual counterparty accounted for more than 3% of the exposure. All
ten of the major counterparties had an investment grade credit rating from
S&P.





PPL and
PPL Energy Supply generally have the right to request collateral from their
counterparties in the event that the counterparties' credit ratings fall below
investment grade. It is also the policy of PPL and PPL Energy Supply to enter
into netting agreements with all of their counterparties to minimize credit
exposure.





*(PPL
Electric)*





Prior to
2004, PPL Energy Supply had an exposure to PPL Electric under the long-term
contract for PPL EnergyPlus to provide PPL Electric's PLR load. However,
beginning in 2004, increases in electricity prices reversed this position. PPL
Electric estimated that at September 30, 2005, the market price of electricity
would exceed the contract price by approximately $3.7 billion. In accordance
with the terms of one of the PLR contracts, PPL Energy Supply provided PPL
Electric with cash collateral in the amount of $300 million, the maximum amount
required under the contract. This is the only credit exposure for PPL Electric
that has a mark-to-market element. No other
counterparty accounts for more than 1% of PPL Electric's total
exposure.




**13.**  **Pension
and Other Postretirement Benefits**





*(PPL
and PPL Energy Supply)*





The
components of net pension and other postretirement benefits cost (credit) were
as follows:





**Pension
      Benefits****Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****Domestic**
    
    **International**
    
    **Domestic**
    
    **International****2005**
    
    **2004**
    
    **2005**
    
    **2004**
    
    **2005**
    
    **2004**
    
    **2005**
    
    **2004****PPL**Service
      cost
    
    $
    14
    
    
    $
    12
    
    
    $
    4
    
    
    $
    4
    
    
    $
    42
    
    
    $
    36
    
    
    $
    13
    
    
    $
    11Interest
      cost
    
    
    29
    
    
    
    28
    
    
    
    37
    
    
    
    35
    
    
    
    86
    
    
    
    84
    
    
    
    113
    
    
    
    107Expected
      return on plan assets
    
    
    (40
    )
    
    
    (38
    )
    
    
    (49
    )
    
    
    (53
    )
    
    
    (119
    )
    
    
    (113
    )
    
    
    (153
    )
    
    
    (158
    )Amortization
      of transition obligation
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )Amortization
      of prior service cost
    
    
    4
    
    
    
    4
    
    
    
    2
    
    
    
    2
    
    
    
    11
    
    
    
    11
    
    
    
    4
    
    
    
    4Amortization
      of (gain) loss
    
    
    
    
    
    
    (2
    )
    
    
    7
    
    
    
    2
    
    
    
    2
    
    
    
    (5
    )
    
    
    21
    
    
    
    5Net
      periodic pension cost (credit) prior to termination
    benefits
    
    
    6
    
    
    
    3
    
    
    
    1
    
    
    
    (10
    )
    
    
    19
    
    
    
    10
    
    
    
    (2
    )
    
    
    (31
    )Termination
      benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6Net
      periodic pension cost (credit)
    
    $
    6
    
    
    $
    3
    
    
    $
    1
    
    
    $
    (10
    )
    
    $
    19
    
    
    $
    10
    
    
    $
    4
    
    
    $
    (31
    )**PPL
      Energy Supply**Service
      cost
    
    $
    1
    
    
    $
    1
    
    
    $
    4
    
    
    $
    4
    
    
    $
    3
    
    
    $
    3
    
    
    $
    13
    
    
    $
    11Interest
      cost
    
    
    1
    
    
    
    1
    
    
    
    37
    
    
    
    35
    
    
    
    3
    
    
    
    3
    
    
    
    113
    
    
    
    107Expected
      return on plan assets
    
    
    (1
    )
    
    
    (2
    )
    
    
    (49
    )
    
    
    (53
    )
    
    
    (4
    )
    
    
    (4
    )
    
    
    (153
    )
    
    
    (158
    )Amortization
      of prior service cost
    
    
    
    
    
    
    1
    
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    1
    
    
    
    4
    
    
    
    4Amortization
      of loss
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    5Net
      periodic pension cost (credit) prior to termination
    benefits
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    (10
    )
    
    
    2
    
    
    
    3
    
    
    
    (2
    )
    
    
    (31
    )Termination
      benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6Net
      periodic pension cost (credit)
    
    $
    1
    
    
    $
    1
    
    
    $
    1
    
    
    $
    (10
    )
    
    $
    2
    
    
    $
    3
    
    
    $
    4
    
    
    $
    (31
    )





**Other
      Postretirement Benefits****Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September****30,****PPL**
    
    **2005**
    
    **2004**
    
    **2005**
    
    **2004**Service
      cost
    
    $
    1
    
    
    $
    2
    
    
    $
    5
    
    
    $
    5Interest
      cost
    
    
    6
    
    
    
    7
    
    
    
    19
    
    
    
    21Expected
      return on plan assets
    
    
    (5
    )
    
    
    (4
    )
    
    
    (15
    )
    
    
    (13
    )Amortization
      of transition obligation
    
    
    2
    
    
    
    3
    
    
    
    7
    
    
    
    7Amortization
      of prior service cost
    
    
    1
    
    
    
    
    
    
    
    3
    
    
    
    2Amortization
      of loss
    
    
    
    
    
    
    1
    
    
    
    4
    
    
    
    5Net
      other postretirement benefits cost
    
    $
    5
    
    
    $
    9
    
    
    $
    23
    
    
    $
    27





**Expected
Cash Flows - Domestic Pension and Other Postretirement Benefit Plans** *(PPL)*





In the
nine months ended September 30, 2005, PPL contributed $25 million to its
domestic pension plans. No further contributions are expected for 2005. At
December 31, 2004, PPL had expected to contribute approximately $10 million to
these plans in 2005.





In the
nine months ended September 30, 2005, PPL contributed $24 million to its other
postretirement benefit plans and expects to contribute an additional $5 million
during the fourth quarter of 2005. Total contributions for 2005 are expected to
be $29 million. At December 31, 2004, PPL had expected to contribute
approximately $36 million to these plans in 2005.





**14.**  **Restricted
Cash**





*(PPL,
PPL Energy Supply and PPL Electric)*





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





**September
      30, 2005****PPL**
    
    **PPL
      Energy Supply**
    
    **PPL
      Electric****Current:**Collateral
      for letters of credit (a)
    
    $
    42
    
    
    
    
    
    
    $
    42Deposits
      for trading purposes with NYMEX broker
    
    
    17
    
    
    $
    17Counterparty
      collateral
    
    
    12
    
    
    
    12Client
      deposits
    
    
    11Miscellaneous
    
    
    4
    
    
    
    4Restricted
      cash - current
    
    
    86
    
    
    
    33
    
    
    
    42**Noncurrent:**Required
      deposit of WPD's insurance subsidiary
    
    
    17
    
    
    
    17PPL
      Transition Bond Company Indenture reserves (b)
    
    
    25
    
    
    
    
    
    
    
    25Restricted
      cash - noncurrent
    
    
    42
    
    
    
    17
    
    
    
    25Total
      restricted cash
    
    $
    128
    
    
    $
    50
    
    
    $
    67





**December
      31, 2004****PPL**
    
    **PPL
      Energy Supply**
    
    **PPL
      Electric****Current:**Collateral
      for letters of credit (a)
    
    $
    42
    
    
    
    
    
    
    $
    42Client
      deposits
    
    
    5Miscellaneous
    
    
    3
    
    
    $
    3Restricted
      cash - current
    
    
    50
    
    
    
    3
    
    
    
    42**Noncurrent:**Required
      deposit of WPD's insurance subsidiary
    
    
    37
    
    
    
    37PPL
      Transition Bond Company Indenture reserves (b)
    
    
    22
    
    
    
    
    
    
    
    22Restricted
      cash - noncurrent
    
    
    59
    
    
    
    37
    
    
    
    22Total
      restricted cash
    
    $
    109
    
    
    $
    40
    
    
    $
    64





(a)
    
    A
      deposit with a financial institution of funds from the asset-backed
      commercial paper program to fully collateralize $42 million of letters of
      credit. See Note 7 for further discussion on the asset-backed commercial
      paper program.(b)
    
    Credit
      enhancement for PPL Transition Bond Company's $2.4 billion Series 1999-1
      Bonds to protect against losses or delays in scheduled
      payments.





**15.**  **Asset
Retirement Obligations**





*(PPL
and PPL Energy Supply)*





The
change in the carrying amounts of the AROs was as follows:





AROs
      at December 31, 2004
    
    $
    257Add:
      Accretion expense
    
    
    16Add:
      Additional liabilities
    
    
    3AROs
      at September 30, 2005
    
    $
    276





PPL and
PPL Energy Supply identified and recorded $3 million of other AROs related to
interim retirements of certain equipment at the Susquehanna station during
2005.





Funds in
the nuclear decommissioning trust are legally restricted for purposes of
settling PPL's and PPL Energy Supply's ARO related to the decommissioning of the
Susquehanna 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 $432 million as of September 30,
2005, and $409 million as of December 31, 2004.





See Note
16 for a discussion of FIN 47, "Accounting for Conditional Asset Retirement
Obligations, an Interpretation of FASB Statement No. 143," and its potential
impact on PPL and its subsidiaries.





**16.**  **New
Accounting Standards**





*(PPL,
PPL Energy Supply and PPL Electric)*





**SFAS
123(R)**





In
December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based Payment,"
which is known as SFAS 123(R) and replaces SFAS 123, "Accounting for Stock-Based
Compensation," as amended by SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." Among other things, SFAS 123(R)
eliminates the alternative to use the intrinsic value method of accounting for
stock-based compensation. SFAS 123(R) requires public entities to recognize
compensation expense for awards of equity instruments to employees based on the
grant-date fair value of the awards. For public entities that do not file as
small business issuers, SFAS 123(R) was originally effective as of the beginning
of the first interim or annual reporting period that begins after June 15,
2005. However, in April 2005, the SEC issued a rule that amended Regulation S-X
to change this effective date to the beginning of an entity's fiscal year that
begins on or after June 15, 2005.





SFAS
123(R) requires public entities to apply the modified prospective application
transition method of adoption.  Under this application, entities must
recognize compensation expense based on the grant-date fair value for new awards
granted or modified after the effective date and for unvested awards outstanding
on the effective date.  Additionally, public entities may choose to apply
modified retrospective application to periods before the effective date of SFAS
123(R).  This application may be applied either to all prior years for
which SFAS 123 was effective or only to prior interim periods in the year of
initial adoption of SFAS 123(R).  Under modified retrospective application,
prior periods would be adjusted to recognize compensation expense as though
stock-based awards granted, modified or settled in cash in fiscal years
beginning after December 15, 1994, had been accounted for under SFAS
123.





PPL and
its subsidiaries must adopt SFAS 123(R) no later than January 1, 2006.  PPL
and its subsidiaries do not plan to apply modified retrospective application to
any periods prior to the date of adoption.  In addition, PPL and its
subsidiaries adopted the fair-value method of accounting for stock-based
compensation under SFAS 123 effective January 1, 2003.  Therefore, the
adoption of SFAS 123(R) is not expected to have a material impact on PPL and its
subsidiaries.





**FIN
47**





In March
2005, the FASB issued Interpretation No. 47, "Accounting for Conditional Asset
Retirement Obligations, an Interpretation of FASB Statement No. 143."  FIN
47 clarifies that an entity is required to recognize a liability for the fair
value of a conditional asset retirement obligation when incurred if the
liability's fair value can be reasonably estimated.  FIN 47 also clarifies
when an entity would be expected to have sufficient information to reasonably
estimate the fair value of an asset retirement obligation.  FIN 47 is
effective for fiscal years ending after December 15, 2005.  The impact of
initially applying FIN 47 is required to be recognized as a cumulative effect of
a change in accounting principle.  Retrospective application of interim
financial information is permitted but not required.





PPL and
its subsidiaries are currently in the process of reviewing (i) certain
obligations to perform asset retirement activities that are conditional upon a
future event occurring and (ii) certain legal retirement obligations that were
identified but are not measurable at this time due to indeterminable dates of
retirement.  The potential impact of applying the guidance in FIN 47 to
these items is not yet determinable, but could be material.








**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, PA. In PPL's
2004 Form 10-K, descriptions of its domestic and international businesses are
found in "Item 1. Business - Background" and the current corporate
organizational structure is shown in Exhibit 99. 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, the U.K. and Latin America. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
PPL's 2004 Form 10-K for an overview of PPL's strategy and the risks and the
challenges that it faces in its business.





PPL's
reportable segments are Supply, International Delivery and Pennsylvania
Delivery. See Note 3 to the Financial Statements for further segment
information.





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





Data
included in these financial statements have been adjusted for all periods
presented to reflect PPL's 2-for-1 common stock split completed in August 2005.
See Note 2 to the Financial Statements for details.





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 review of PPL's earnings and a description of
key factors by segment that management expects may impact future earnings.
"Results of Operations" continues with a summary of results by reportable
segment and ends with explanations of significant changes in principal items on
PPL's Statement of Income, comparing the three and nine months ended September
30, 2005, to the comparable periods in 2004.





WPD's
results, as consolidated in PPL's Statement of Income, are impacted by changes
in foreign currency exchange rates. WPD's portion of revenue and expense line
items decreased by about 2% for the three months ended September 30, 2005,
and increased by about 2% for the nine months ended September 30, 2005,
compared with the same periods in 2004, due to changes in foreign currency
exchange rates.





PPL's
results in 2005 and 2004 were impacted by the reclassification of the operating
losses of the Sundance plant prior to its sale in the second quarter of 2005.
See Note 1 to the Financial Statements for further discussion.





The
Statement of Income reflects the results of past operations and is not intended
as any indication of future operating results. Future operating results will
necessarily be affected by various and diverse factors and developments.
Furthermore, because results for interim periods can be disproportionately
influenced by various factors and developments and by seasonal variations, the
results of operations for interim periods do not necessarily indicate results or
trends for the year.





**Earnings**





Net
income and the related EPS were as follows:





**Three
      Months Ended**
      **September
      30,**
    
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    
    **2004**
    
    
    **2005**
    
    
    **2004**Net
      income
    
    $
    197
    
    
    $
    196
    
    
    $
    493
    
    
    $
    521EPS
      - basic
    
    $
    0.52
    
    
    $
    0.52
    
    
    $
    1.30
    
    
    $
    1.42EPS
      - diluted
    
    $
    0.51
    
    
    $
    0.52
    
    
    $
    1.29
    
    
    $
    1.42





The
after-tax changes in net income were due to:





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended****Domestic:**Eastern
      U.S. non-trading margins
    
    $
    (23
    )
    
    $
    (12
    )Northwestern
      U.S. non-trading margins
    
    
    2
    
    
    
    (4
    )Southwestern
      U.S. non-trading margins
    
    
    (1
    )
    
    
    (4
    )Net
      energy trading margins
    
    
    8
    
    
    
    10Delivery
      revenues (net of CTC/ITC amortization, interest expense on transition
      bonds and ancillary charges)
    
    
    34
    
    
    
    92Operation
      and maintenance expenses
    
    
    
    
    
    
    (21
    )Depreciation
    
    
    1
    
    
    
    (2
    )Taxes,
      other than income (excluding gross receipts tax)
    
    
    1
    
    
    
    (7
    )Interest
      expense
    
    
    (1
    )
    
    
    2Interest
      income on 2004 IRS tax settlement
    
    
    (14
    )
    
    
    (14
    )Reversal
      of certain state income tax credits in 2004
    
    
    6Realized
      loss in 2004 on available-for-sale investment
    
    
    3
    
    
    
    3Earnings
      from synfuel projects
    
    
    10
    
    
    
    29Other
    
    
    (4
    )
    
    
    (2
    )Total
      Domestic
    
    
    22
    
    
    
    70








**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended****International:**U.K.Delivery
      margins
    
    
    10
    
    
    
    12Operation
      and maintenance expenses
    
    
    (9
    )
    
    
    (20
    )Interest
      expense
    
    
    2
    
    
    
    5Impact
      of changes in foreign currency exchange rates
    
    
    (1
    )
    
    
    4U.K.
      income taxes
    
    
    (7
    )
    
    
    (3
    )Latin
      America
    
    
    (1
    )U.S.
      income taxes
    
    
    4
    
    
    
    14Other
    
    
    
    
    
    
    2Total
      International
    
    
    (2
    )
    
    
    14Unusual
      items
    
    
    (19
    )
    
    
    (112
    )$
    1
    
    
    $
    (28
    )





The
changes in net income from period to period were, in part, attributable to
several items that management considers unusual and that had significant
earnings impacts. The after-tax impacts of these items were as
follows:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004****Supply
      Segment**Off-site
      remediation of ash basin leak (Note 9)
    
    $
    (19
    )
    
    
    
    
    
    $
    (19
    )Sale
      of the Sundance plant (Note 8)
    
    
    
    
    
    
    
    
    
    
    (47
    )Acceleration
      of stock-based compensation expense for periods prior to 2005(Note
      2)
    
    
    
    
    
    
    
    
    
    
    (3
    )NorthWestern
      litigation (Note 9)
    
    
    
    
    
    
    
    
    
    
    (6
    )Impairment
      of investment in technology supplier (Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (6
    )(19
    )
    
    
    
    
    
    
    (75
    )
    
    
    (6
    )**International
      Delivery Segment**Sale
      of CGE (Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )Sale
      of CEMAR (Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Sale
      of Latin American telecommunications company (Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )14**Pennsylvania
      Delivery Segment**PJM
      billing dispute(Note
      9)
    
    
    
    
    
    
    
    
    
    
    (27
    )Acceleration
      of stock-based compensation expense for periods prior to 2005(Note
      2)
    
    
    
    
    
    
    
    
    
    
    (2
    )(29
    )Total
    
    $
    (19
    )
    
    
    
    
    
    $
    (104
    )
    
    $
    8





The
period-to-period changes in earnings components, including domestic gross energy
margins by region and income statement line items, are discussed following the
future earnings factors and segment results.





PPL's
2005 and future earnings could be, or will be, impacted by a number of key
factors, including the following:





Supply
Segment





·
    PPL's
      future energy margins can be impacted by changes in market prices and
      demand for electricity, as well as fluctuations in fuel prices, fuel
      transportation costs and emission allowance expenses. For instance,
      although PPL expects market prices for electricity in 2005 to continue to
      be higher than in 2004, PPL is not expecting an increase in its 2005
      energy margins due to expected increases in the cost of fuel, fuel
      transportation and emissions allowances.·
    PPL's
      ability to manage operational risk with respect to its generation plants
      is critical to its financial performance. Specifically, depending on the
      timing and duration of both planned and unplanned outages (in particular,
      if such outages are during peak periods or during periods of, or caused
      by, severe weather), PPL's revenue from energy sales could be adversely
      affected and its need to purchase power at then-current market prices to
      satisfy its energy commitments could be significantly increased. For
      instance, in late-October 2005, PPL Susquehanna shut down its Unit 1
      nuclear reactor for a maintenance outage to improve the operation of the
      unit's control rods prior to the planned 2006 refueling outage. PPL
      expects this discretionary outage to last approximately three weeks, but
      PPL cannot predict with certainty the length of the outage or the final
      costs associated with it.·
    A
      key part of PPL's overall strategy has been to enter into long-term energy
      supply agreements in order to mitigate market price and supply risk.
      Whether PPL continues to enter into such agreements or renews existing
      energy supply agreements and the market conditions at that time will
      affect its future earnings. For example, based on current forward energy
      prices, PPL currently expects that, upon the expiration of certain of its
      existing supply agreements, it may be able to enter new supply agreements
      or arrangements at significantly higher market prices than the prices
      included in those existing supply agreements. See "Energy Purchases,
      Energy Sales and Other Commitments" in Note 9 to the Financial Statements
      for more information regarding PPL's wholesale energy commitments and "PLR
      Contracts" in Note 10 for more information regarding the PLR
      contracts.·
    Due
      to current electricity and natural gas price levels, there is a risk that
      PPL may be unable to recover its investment in certain gas-fired
      generation facilities. Under GAAP, PPL does not believe that there is an
      impairment charge to be recorded for these facilities at this time. PPL is
      unable to predict the earnings impact of this issue, based upon future
      energy and fuel price levels, applicable accounting rules and other
      factors, but such impact may be material.·
    In
      May 2005, a subsidiary of PPL Generation completed the sale of its 450 MW
      Sundance power plant located in Pinal County, Arizona to Arizona Public
      Service Company for approximately $190 million in cash. Proceeds of the
      sale were used to reduce PPL's outstanding debt and improve liquidity. PPL
      recognized a non-cash loss on the sale of approximately $47 million after
      tax (or $0.12 per share) in the second quarter of 2005 related to
      this transaction.·
    PPL
      has interests in two synthetic fuel facilities and receives tax credits
      pursuant to Section 29 of the Internal Revenue Code based on its sale of
      synthetic fuel to unaffiliated third-party purchasers. PPL has estimated
      that these facilities will contribute approximately $0.11 to annual EPS
      through 2007, when the availability of such tax credits is scheduled to
      expire. See "Regulatory Issues - IRS Synthetic Fuels Tax Credits" in Note
      9 to the Financial Statements for a discussion of the requirements to
      receive the Section 29 tax credits and the impact of higher oil prices on
      the Section 29 tax credits. Also see "Risk Management - Energy Marketing
      & Trading and Other - Synthetic Fuel Tax Credit Risk" for a discussion
      of PPL's risk management activities to mitigate the impact of a potential
      phase-out of the synthetic fuel tax credit due to high oil prices.·
    To
      comply with existing and future environmental requirements and as a result
      of pollution control measures it may take, PPL expects to spend
      significant amounts on environmental control and compliance in the future.
      The costs of such measures, in many cases, are not now determinable, but
      could be material. For instance, PPL's current cost estimates for sulfur
      dioxide reduction at its generating plants are preliminary and PPL could
      incur significantly higher capital and operating expenses due to more
      stringent environmental requirements, changing market conditions with
      respect to the cost of pollution control equipment or emissions
      allowances, delays in the installation of pollution control equipment or
      other factors. See "Environmental Matters - Domestic" in Note 9 to the
      Financial Statements for more information regarding current environmental
      requirements and initiatives, including those relating to air emissions,
      and PPL's anticipated capital expenditure program to meet the sulfur
      dioxide reduction requirements of the Clean Air Act.·
    In
      August 2005, a leak from one of two disposal basins containing fly ash and
      water used in connection with the operation of the coal-fired generating
      units at PPL's Martins Creek plant caused the discharge of approximately
      100 million gallons of water containing ash from the basin onto adjacent
      roadways and fields and into the Delaware River. See "Environmental
      Matters - Domestic - Water/Waste" in Note 9 to the Financial Statements
      for more information regarding the Martins Creek leak. In the third
      quarter of 2005, PPL Energy Supply recognized a charge of $22 million
      after tax (or $0.06 per share for PPL), in connection with the current
      expected on-site and off-site costs relating to the leak. PPL cannot
      predict the final costs to be incurred as a result of this
      matter.·
    In
      September 2005, PPL and NorthWestern reached a final agreement to settle
      litigation described under "Legal Matters - NorthWestern Corporation
      Litigation" in Note 9 to the Financial Statements. See Note 9 for more
      information regarding the settlement of this matter. In the first quarter
      of 2005, PPL recognized a charge of $6 million after tax (or $0.02 per
      share) related to the agreement in principle to settle the lawsuit that
      the parties reached in May 2005.





International
Delivery Segment





·
    Earnings
      in 2005 and beyond are expected to continue to be adversely affected by
      increased pension costs. Specifically, WPD will experience increased
      pension costs based upon an actuarial valuation of WPD's plans that
      reflects higher pension obligations. The increase in pension costs in 2005
      is forecasted to be approximately $24 million after tax and the increase
      in pension costs is expected to continue to be significant in 2006. An
      additional $4 million of after-tax expense was recognized in the first
      quarter of 2005 related to termination
benefits.





Pennsylvania
Delivery Segment





·
    In
      December 2004, the PUC approved an increase in PPL Electric's distribution
      rates of approximately $137 million (based on a return on equity of
      10.7%), and approved PPL Electric's proposed mechanism for collecting an
      additional $57 million in transmission-related charges, for a total annual
      increase of approximately $194 million, effective January 1,
      2005.·
    PPL
      Electric has agreed to provide electricity supply to its PLR customers at
      predetermined rates through 2009 and has entered into PUC-approved, full
      requirements energy supply agreements with PPL EnergyPlus to fulfill its
      PLR obligation. The predetermined charges for generation supply which PPL
      Electric collects from its PLR customers and pays to PPL EnergyPlus under
      the energy supply agreements provide for annual increases in each year
      commencing in 2006 and continuing through 2009. PPL Electric's PLR
      obligation after 2009 will be determined by the PUC pursuant to rules that
      have not yet been promulgated. See "PLR Contracts" in Note 10 to the
      Financial Statements for more information.·
    In
      January 2005, severe ice storms hit PPL Electric's service territory. As a
      result, PPL Electric had to restore service to approximately 238,000
      customers. The total cost of restoring service, excluding capitalized
      costs and regular payroll expenses, was approximately $16 million (or
      $0.02 per share for PPL).On
      February 11, 2005, PPL Electric filed a petition with the PUC for
      authority to defer and amortize for regulatory accounting and reporting
      purposes these storm costs. On August 26, 2005, the PUC issued an order
      granting PPL Electric's petition subject to certain conditions, including:
      (i) the PUC's authorization of deferred accounting is not an assurance of
      future rate recovery of the storm costs, (ii) PPL Electric must request
      recovery of the deferred storm costs in its next distribution base rate
      case, and (iii) PPL Electric must begin immediately to expense the
      deferred storm costs on a ten-year amortization schedule for regulatory
      accounting and reporting purposes. As a result of the PUC Order and in
      accordance with SFAS 71, "Accounting for the Effects of Certain Types of
      Regulation," in the third quarter of 2005, PPL Electric deferred
      approximately $12 million (or $0.02 per share for PPL) of the previously
      expensed storm costs. The deferral was based on its assessment of the
      timing and likelihood of recovering the deferred costs in PPL Electric's
      next distribution base rate case. At this time, PPL Electric cannot be
      certain that it will recover the storm costs, nor can it predict whether
      other incidents of severe weather will cause significant facility damage
      and service disruptions that would also result in significant costs.·
    As
      a result of the Order issued by the FERC in connection with the litigation
      described under "Regulatory Issues - PJM Billing" in Note 9 to the
      Financial Statements, PPL recognized an after-tax charge of $27 million
      (or $0.07 per share) in the first quarter of 2005 for a loss contingency
      related to the litigation. See Note 9 for information concerning the
      settlement agreement reached by PPL Electric and Exelon Corporation to
      settle this litigation, which is subject to approval by the FERC. PPL
      cannot be certain of the outcome of this matter or the impact on PPL and
      its subsidiaries.





All
Segments





·
    PPL
      is unable to predict whether future impairments of goodwill may be
      required for its domestic and international investments. While no goodwill
      impairments were required based on the annual review performed in the
      fourth quarter of 2004, future impairments may occur due to determinations
      of carrying value exceeding the fair value of these
      investments.·
    From
      time to time, PPL and its subsidiaries are involved in negotiations with
      third parties regarding acquisitions and dispositions of businesses and
      assets. Any such transactions may impact future
  earnings.·
    See
      Note 9 to the Financial Statements for other potential commitments and
      contingent liabilities that may impact future earnings.·
    See
      Note 16 to the Financial Statements for new accounting standards that have
      been issued but not yet adopted by PPL that may impact future
      earnings.





**Segment
Results**





Net
income by segment was as follows:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004**Supply
    
    $
    112
    
    
    $
    145
    
    
    $
    238
    
    
    $
    314International
      Delivery
    
    
    36
    
    
    
    38
    
    
    
    152
    
    
    
    152Pennsylvania
      Delivery
    
    
    49
    
    
    
    13
    
    
    
    103
    
    
    
    55Total
    
    $
    197
    
    
    $
    196
    
    
    $
    493
    
    
    $
    521





Supply
Segment





The
Supply segment o wns and
operates power plants to generate electricity, markets this electricity and
other power purchases to deregulated wholesale and retail markets and acquires
and develops domestic generation projects. The Supply segment primarily consists
of the activities of PPL Generation and PPL EnergyPlus.





Segment
net income was as follows:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004**Energy
      revenuesExternal
    
    $
    403
    
    
    $
    396
    
    
    $
    1,007
    
    
    $
    1,032Intersegment
    
    
    415
    
    
    
    373
    
    
    
    1,194
    
    
    
    1,129Energy
      related businesses
    
    
    154
    
    
    
    118
    
    
    
    424
    
    
    
    332Total
      operating revenues
    
    
    972
    
    
    
    887
    
    
    
    2,625
    
    
    
    2,493Fuel
      and energy purchasesExternal
    
    
    362
    
    
    
    290
    
    
    
    939
    
    
    
    870Intersegment
    
    
    42
    
    
    
    40
    
    
    
    113
    
    
    
    118Other
      operation and maintenance
    
    
    189
    
    
    
    145
    
    
    
    549
    
    
    
    482Depreciation
    
    
    36
    
    
    
    38
    
    
    
    109
    
    
    
    106Taxes,
      other than income
    
    
    10
    
    
    
    11
    
    
    
    32
    
    
    
    34Energy
      related businesses
    
    
    162
    
    
    
    135
    
    
    
    465
    
    
    
    376Total
      operating expenses
    
    
    801
    
    
    
    659
    
    
    
    2,207
    
    
    
    1,986Other
      Income - net
    
    
    (3
    )
    
    
    8
    
    
    
    (2
    )
    
    
    6Interest
      Expense
    
    
    32
    
    
    
    29
    
    
    
    89
    
    
    
    82Income
      Taxes
    
    
    24
    
    
    
    61
    
    
    
    37
    
    
    
    105Minority
      Interest
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    2Loss
      from Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    51
    
    
    
    10Total
    
    $
    112
    
    
    $
    145
    
    
    $
    238
    
    
    $
    314





The
after-tax change in net income was due to the following factors, including the
unusual items presented in the "Earnings" section:





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended**Eastern
      U.S. non-trading margins
    
    $
    (23
    )
    
    $
    (12
    )Northwestern
      U.S. non-trading margins
    
    
    2
    
    
    
    (4
    )Southwestern
      U.S. non-trading margins
    
    
    (1
    )
    
    
    (4
    )Net
      energy trading margins
    
    
    8
    
    
    
    10Operation
      and maintenance expenses
    
    
    (7
    )
    
    
    (15
    )Earnings
      from synfuel projects
    
    
    10
    
    
    
    29Depreciation
    
    
    2Interest
      expense
    
    
    (3
    )
    
    
    (2
    )Interest
      income on 2004 IRS tax settlement
    
    
    (9
    )
    
    
    (9
    )Reversal
      of certain state income tax credits in 2004
    
    
    6Realized
      loss in 2004 on available-for-sale investment
    
    
    3
    
    
    
    3Other
    
    
    (2
    )
    
    
    (3
    )Total
    
    
    (14
    )
    
    
    (7
    )Unusual
      items
    
    
    (19
    )
    
    
    (69
    )$
    (33
    )
    
    $
    (76
    )





·
    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
      operation and maintenance expenses for both periods were primarily due to
      outage costs at the Brunner Island facility and the on-site Martins Creek
      remediation costs of the ash basin leak. The nine months ended
      September 30, 2005, was further impacted by outage costs at the
      Colstrip Unit 2 and Corette facilities and the accelerated amortization of
      stock-based compensation for retirement-eligible employees, which resulted
      from additional guidance. See Note 2 to the financial statements for
      information on the additional accounting guidance.·
    The
      improved earnings contribution from synfuel projects for both periods
      resulted primarily from unrealized gains on options purchased to hedge the
      risk associated with synthetic fuel tax credits for 2006 and 2007 and
      higher synthetic fuel tax credits, due to higher output, primarily related
      to the Tyrone facility that went into commercial operation in August
      2004.





International
Delivery Segment





The
International Delivery segment owns and operates international energy businesses
that are focused on the distribution of electricity. The segment primarily
consists of the operations of the regulated international energy businesses of
PPL Global. The majority of PPL Global's international businesses are located in
the U.K., Chile, El Salvador and Bolivia.





Segment
net income was as follows:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004**Utility
      revenues
    
    $
    265
    
    
    $
    237
    
    
    $
    842
    
    
    $
    771Energy
      related businesses
    
    
    18
    
    
    
    16
    
    
    
    55
    
    
    
    50Total
      operating revenues
    
    
    283
    
    
    
    253
    
    
    
    897
    
    
    
    821Fuel
      and energy purchases
    
    
    69
    
    
    
    54
    
    
    
    197
    
    
    
    159Other
      operation and maintenance
    
    
    56
    
    
    
    45
    
    
    
    180
    
    
    
    154Depreciation
    
    
    41
    
    
    
    37
    
    
    
    117
    
    
    
    109Taxes,
      other than income
    
    
    15
    
    
    
    14
    
    
    
    44
    
    
    
    41Energy
      related businesses
    
    
    7
    
    
    
    5
    
    
    
    20
    
    
    
    32Total
      operating expenses
    
    
    188
    
    
    
    155
    
    
    
    558
    
    
    
    495Other
      Income - net
    
    
    3
    
    
    
    (1
    )
    
    
    10
    
    
    
    27Interest
      Expense
    
    
    50
    
    
    
    51
    
    
    
    152
    
    
    
    153Income
      Taxes
    
    
    11
    
    
    
    7
    
    
    
    41
    
    
    
    42Minority
      Interest
    
    
    1
    
    
    
    1
    
    
    
    4
    
    
    
    4Loss
      from Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Total
    
    $
    36
    
    
    $
    38
    
    
    $
    152
    
    
    $
    152





The
after-tax change in net income was due to the following factors, including the
unusual items presented in the "Earnings" section:





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended**U.K.Delivery
      margins
    
    $
    10
    
    
    $
    12Operation
      and maintenance expenses
    
    
    (9
    )
    
    
    (20
    )Interest
      expense
    
    
    2
    
    
    
    5Impact
      of changes in foreign currency exchange rates
    
    
    (1
    )
    
    
    4U.K.
      income taxes
    
    
    (7
    )
    
    
    (3
    )Latin
      America
    
    
    (1
    )U.S.
      income taxes
    
    
    4
    
    
    
    14Other
    
    
    
    
    
    
    2Total
    
    
    (2
    )
    
    
    14Unusual
      items
    
    
    
    
    
    
    (14
    )$
    (2
    )
    
    $





·
    The
      U.K.'s earnings were positively impacted in both periods by higher
      delivery margins primarily due to favorable customer mix and an incentive
      revenue award for outstanding customer service. These favorable variances
      were offset by higher operation and maintenance expenses, primarily due to
      increased pension costs in both periods.·
    U.S.
      income taxes decreased, primarily due to greater utilization of foreign
      tax credits in both periods.





Pennsylvania
Delivery Segment





The
Pennsylvania Delivery segment includes the regulated electric and gas delivery
operations of PPL Electric and PPL Gas Utilities.





Segment
net income was as follows:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004**Operating
      revenuesExternal
    
    $
    803
    
    
    $
    687
    
    
    $
    2,393
    
    
    $
    2,146Intersegment
    
    
    42
    
    
    
    40
    
    
    
    113
    
    
    
    118Total
      operating revenues
    
    
    845
    
    
    
    727
    
    
    
    2,506
    
    
    
    2,264Fuel
      and energy purchasesExternal
    
    
    74
    
    
    
    65
    
    
    
    293
    
    
    
    238Intersegment
    
    
    415
    
    
    
    373
    
    
    
    1,194
    
    
    
    1,129Other
      operation and maintenance
    
    
    86
    
    
    
    98
    
    
    
    297
    
    
    
    284Amortization
      of recoverable transition costs
    
    
    71
    
    
    
    64
    
    
    
    199
    
    
    
    192Depreciation
    
    
    30
    
    
    
    28
    
    
    
    89
    
    
    
    85Taxes,
      other than income
    
    
    48
    
    
    
    42
    
    
    
    138
    
    
    
    111Energy
      related businesses
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    1Total
      operating expenses
    
    
    725
    
    
    
    670
    
    
    
    2,211
    
    
    
    2,040Other
      Income - net
    
    
    5
    
    
    
    11
    
    
    
    15
    
    
    
    12Interest
      Expense
    
    
    45
    
    
    
    48
    
    
    
    146
    
    
    
    147Income
      Taxes
    
    
    30
    
    
    
    6
    
    
    
    59
    
    
    
    32Dividends
      on Preferred Stock
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    2Total
    
    $
    49
    
    
    $
    13
    
    
    $
    103
    
    
    $
    55





The
after-tax change in net income was due to the following factors, including the
unusual items presented in the "Earnings" section:





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended**Delivery
      revenues (net of CTC/ITC amortization, interest expense on transition
      bonds and ancillary charges)
    
    $
    34
    
    
    $
    92Operation
      and maintenance expenses
    
    
    7
    
    
    
    (6
    )Taxes,
      other than income (excluding gross receipts tax)
    
    
    
    
    
    
    (8
    )Interest
      income on 2004 IRS tax settlement
    
    
    (5
    )
    
    
    (5
    )Other
    
    
    
    
    
    
    4Total
    
    
    36
    
    
    
    77Unusual
      items
    
    
    
    
    
    
    (29
    )$
    36
    
    
    $
    48





·
    Delivery
      revenues increased for both periods as a result of higher transmission and
      distribution customer rates effective January 1, 2005, and a 7.4% and
      a 3.9% increase in electricity delivery sales volumes for the three and
      nine months ended September 30, 2005, compared to the same periods in
      2004.·
    The
      decrease in operation and maintenance expenses for the three months ended
      September 30, 2005, was primarily due to the deferral, based on a PUC
      Order, of costs incurred in January 2005 to restore electric service to
      customers as a result of severe ice storms that affected portions of PPL
      Electric's service territory. The increase for the nine months ended
      September 30, 2005, was primarily due to $4 million of storm-related costs
      that were not deferred and the accelerated amortization of stock-based
      compensation for retirement-eligible employees, which resulted from
      additional guidance. See Note 2 to the financial statements for
      information on the additional accounting guidance.·
    Taxes,
      other than income, benefited in 2004 from the reversal of 1998 and 1999
      PURTA tax accruals related to the PPL Susquehanna tax
    appeals.





**Consolidated
Statement of Income Line Item Discussion --**





**Domestic
Gross Energy Margins**





The
following table provides pre-tax changes in the income statement line items that
comprise domestic gross energy margins:





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended**Utility
    
    $
    145
    
    
    $
    318Unregulated
      retail electric
    
    
    (2
    )
    
    
    (14
    )Wholesale
      energy marketing
    
    
    (5
    )
    
    
    (28
    )Net
      energy trading margins
    
    
    14
    
    
    
    17Other
      revenue adjustments (a)
    
    
    (101
    )
    
    
    (223
    )Total
      revenues
    
    
    51
    
    
    
    70Fuel
    
    
    93
    
    
    
    120Energy
      purchases
    
    
    3
    
    
    
    42Other
      cost adjustments (a)
    
    
    (22
    )
    
    
    (75
    )Total
      cost of sales
    
    
    74
    
    
    
    87Domestic
      gross energy margins
    
    $
    (23
    )
    
    $
    (17
    )





(a)
    
    Adjusted
      to exclude the impact of any revenues and costs not associated with
      domestic gross energy margins, in particular, revenues and energy costs
      related to the international operations of PPL Global, the domestic
      delivery operations of PPL Electric and PPL Gas Utilities and an accrual
      for the loss contingency related to the PJM billing dispute in March 2005
      (see Note 9 to the Financial Statements for additional information). Also
      adjusted to include the margins of PPL's Sundance plant, which are
      included in "Loss from Discontinued Operations," and gains or losses on
      sales of emission allowances, which are included in "Other operation and
      maintenance" expenses, on the Statement of
Income.





Changes
in Domestic Gross Energy Margins By Region





Domestic
gross energy margins are generated through PPL's normal hedging (non-trading)
activities, as well as trading activities. PPL manages its non-trading energy
business on a geographic basis that is aligned with its generation assets. In
the second quarter of 2005, PPL also began participating in the Midwest ISO
(MISO), an independent transmission system operator that serves the electric
transmission needs of much of the Midwest. PPL records its business activities
within MISO consistent with its accounting for activities in other
RTOs.








**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended**Eastern
      U.S.
    
    $
    (39
    )
    
    $
    (21
    )Northwestern
      U.S.
    
    
    3
    
    
    
    (6
    )Southwestern
      U.S.
    
    
    (1
    )
    
    
    (7
    )Net
      energy trading
    
    
    14
    
    
    
    17Domestic
      gross energy margins
    
    $
    (23
    )
    
    $
    (17
    )





Eastern
U.S.





Eastern
U.S. non-trading margins were lower for the three and nine months ended
September 30, 2005, compared with the same periods in 2004, due primarily to
supplying higher PLR sales volumes, which increased by 10% and 5%, respectively,
with higher-priced generation and power purchases. The average consumed cost of
fuel in those periods increased by 42% and 21%, respectively, due to increases
in fossil fuel prices and increased utilization of PPL's oil and gas generating
units. Average purchased power costs in those periods increased 31% and 16%,
respectively, reflecting current market conditions. Partially offsetting the
effects of higher supply costs were gains on the sales of emission allowances,
as well as a 2% increase in PLR sales prices, in accordance with a schedule
established by the PUC.





Northwestern
U.S.





Northwestern
U.S. non-trading margins were higher for the three months ended September 30,
2005, compared with the same period in 2004, primarily due to an 8% increase in
sales volumes. Improved hydroelectric and coal generation resulted in less
reliance on higher cost purchased power. Partially offsetting the increased
generation was a 14% increase in the average consumed cost of fuel and an 18%
increase in power purchase prices.





Northwestern
U.S. non-trading margins were lower for the nine months ended September 30,
2005, compared with the same period in 2004, due to lower wholesale sales
resulting from extended outages at coal-fired stations, compounded by higher
purchased power prices. Sales volumes decreased 3%, while purchased power prices
increased 9%. Partially offsetting this margin decrease was a 2004 charge of $6
million for a retroactive coal price increase, resulting from an unfavorable
arbitration ruling effective April 2004 that increased coal costs for purchases
back to 2001.





Southwestern
U.S.





Southwestern
U.S. non-trading margins decreased for the three and nine months ended September
30, 2005, compared to the same periods in 2004. The lower margins were primarily
due to the sale of PPL's Sundance plant in May 2005 and the cost to terminate a
tolling arrangement on the Griffith plant during the second quarter of
2005.





Net
Energy Trading





PPL
enters into certain energy contracts that meet the criteria of trading
derivatives as defined by EITF Issue 02-3, "Issues Involved in Accounting for
Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy
Trading and Risk Management Activities." These physical and financial contracts
cover trading activity associated with electricity, gas and oil.





The $14
million increase for the three months ended September 30, 2005, compared with
the same period in 2004, was primarily due to an increase in realized gains on
physical gas positions as well as the inclusion of FTRs in "Net energy trading
margins" on the Statement of Income. As of July 1, 2005, FTRs were deemed
to meet the definition of a derivative and were accounted for as such
prospectively. Therefore, the forward and realized value for FTRs entered into
for speculative purposes are accounted for as part of "Net energy trading
margins." From July 1 through September 30, 2005, gains on speculative FTRs
totaled $7 million. The physical volumes associated with energy trading for the
three months ended September 30, 2005, were 1,457 GWh and 2.2 Bcf, compared with
1,616 GWh and 3.3 Bcf for the three months ended September 30,
2004.





The $17
million increase for the nine months ended September 30, 2005, compared
with the same period in 2004, was primarily due to an increase in realized gains
on physical gas positions and the inclusion of speculative FTRs in "Net energy
trading margins." The physical volumes associated with energy trading for the
nine months ended September 30, 2005, were 3,722 GWh and 9.7 Bcf, compared with
3,796 GWh and 7.6 Bcf for the nine months ended September 30,
2004.





**Utility
Revenues**





The
increases in utility revenues were attributable to the following:





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended****Domestic:**Retail
      electric revenue (PPL Electric)Electric
      delivery
    
    $
    67
    
    
    $
    149PLR
      electric generation supply
    
    
    50
    
    
    
    91Gas
      revenue (PPL Gas Utilities)
    
    
    (1
    )
    
    
    10Wholesale
      electric revenue (PPL Electric)
    
    
    
    
    
    
    (2
    )Other
    
    
    1
    
    
    
    (1
    )








**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended****International:**Retail
      electric delivery (PPL Global)Chile
    
    
    15
    
    
    
    36U.K.
    
    
    10
    
    
    
    27El
      Salvador
    
    
    1
    
    
    
    6Bolivia
    
    
    2
    
    
    
    2$
    145
    
    
    $
    318





The
increases for both periods were primarily due to:





·
    higher
      domestic delivery revenues resulting from higher transmission and
      distribution customer rates effective January 1, 2005, and increases
      in volumes of 7.4% and 3.9% for the three and nine months ended September
      30, 2005, compared with the same periods in 2004;·
    higher
      PLR revenues due to higher energy and capacity rates in 2005 compared with
      2004, and increases in volumes of 8.9% and 5.7% for the three and nine
      months ended September 30, 2005, compared with the same periods in
      2004, in part due to the return of customers previously served by
      alternate suppliers;·
    higher
      revenues in Chile, primarily due to a 7% increase in sales volumes and
      higher average prices overall; and·
    higher
      U.K. revenues, primarily due to favorable customer mix and an incentive
      revenue award for outstanding customer
service.





The
increase in U.K. revenues for the three months ended September 30, 2005,
compared with the same period in 2004, was partially offset by an unfavorable
change in foreign currency exchange rates. The increase in U.K. revenues for the
nine months ended September 30, 2005, compared with the same period in
2004, was positively impacted by a favorable change in foreign currency exchange
rates.





The
increase in PPL Gas Utilities revenues for the nine months ended September 30,
2005, was primarily due to the increase in natural gas prices, which are a
pass-through to customer rates, and an increase in volumes.





**Energy
Related Businesses**





Energy
related businesses contributed $7 million more to operating income for the three
months ended September 30, 2005, compared with the same period in 2004. The
increase was primarily attributable to:





·
    a
      $3 million increase from PPL Telcom due to an increase in
      transport-related sales, as well as reduced spending on a product line;
      and·
    a
      $4 million higher pre-tax contribution from synfuel projects. This
      reflects a $12 million net unrealized gain on options purchased to hedge
      the risk associated with synthetic fuel tax credits for 2006 and 2007,
      offset by $8 million of additional expenses due to higher production
      levels.





Energy
related businesses contributed $20 million more to operating income for the nine
months ended September 30, 2005, compared with the same period in 2004. The
increase was primarily attributable to:





·
    a
      $15 million pre-tax loss in 2004, related to the sale of CGE (see Note 8
      to the Financial Statements);·
    an
      aggregate increase of $5 million from various international subsidiary
      businesses;·
    a
      $4 million increase from PPL Telcom due to an increase in
      transport-related sales, as well as reduced spending on a product line;
      and·
    a
      $2 million increase from energy services subsidiaries due to a favorable
      closeout on a major project and an increase in business; partially offset
      by·
    additional
      pre-tax losses in 2005 of $8 million on synfuel projects. This reflects
      $25 million of additional expenses due to higher production levels, offset
      by a $17 million net unrealized gain on options purchased to hedge the
      risk associated with synthetic fuel tax credits for 2006 and
      2007.





**Other
Operation and Maintenance**





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





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended**Increase
      in domestic and international pension costs
    
    $
    10
    
    
    $
    38Martins
      Creek ash basin remediation (Note 9)
    
    
    33
    
    
    
    33Costs
      associated with severe ice storms in January 2005
    
    
    
    
    
    
    16Subsequent
      deferral of a portion of costs associated with January 2005 ice storms
      (Note 2)
    
    
    (12
    )
    
    
    (12
    )Accelerated
      amortization of stock-based compensation (Note 2)
    
    
    
    
    
    
    18NorthWestern
      litigation accrual (Note 9)
    
    
    
    
    
    
    9Outage
      costs at Brunner Island and Lower Mt. Bethel plants
    
    
    5
    
    
    
    8Outage
      costs at the Colstrip Unit 2 and Corette facilities
    
    
    
    
    
    
    4Change
      in foreign currency exchange rates
    
    
    (1
    )
    
    
    2Reduction
      in WPD costs that are a pass-through to customers
    
    
    
    
    
    
    (6
    )Gain
      on sales of emission allowances
    
    
    
    
    
    
    (11
    )Other
    
    
    8
    
    
    
    7$
    43
    
    
    $
    106





The
increases in net pension costs were primarily attributable to a reduction in the
discount rate assumptions for PPL's domestic pension plans at December 31, 2004,
increased amortization of prior year actuarial losses for WPD's pension plans
and termination benefits. These events will result in PPL's recognition of
increased net pension costs in 2005. See Note 13 to the Financial Statements for
details of the costs of PPL's pension plans.





**Depreciation**





The
increases in depreciation expense were due to:





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended**Lower
      Mt. Bethel generation facility, which began commercial operation in May
      2004
    
    
    
    
    
    $
    6Other
      additions to PP&E
    
    $
    3
    
    
    
    10Reduction
      of useful lives of certain assets (Note 2)
    
    
    5
    
    
    
    5Foreign
      currency exchange rates
    
    
    (1
    )
    
    
    2Extension
      of useful lives of certain generation assets (Note 2)
    
    
    (3
    )
    
    
    (8
    )$
    4
    
    
    $
    15





**Taxes,
Other Than Income**





Taxes,
other than income, increased by $6 million during the three months ended
September 30, 2005, compared with the same period in 2004, primarily due to a $7
million increase in domestic gross receipts tax expense, which is a result of
higher transmission and distribution customer rates effective January 1,
2005.





In the
first quarter of 2004, PPL Electric reversed a $14 million accrued liability for
1998 and 1999 PURTA taxes that had been accrued based on potential exposure in
the proceedings regarding the Susquehanna nuclear station tax assessment. The
rights of third-party intervenors to further appeal expired in 2004. The
reversal, and a $14 million increase in domestic gross receipts tax expense in
2005, are the primary reasons for the $28 million increase in taxes, other than
income, for the nine months ended September 30, 2005, compared with the same
period in 2004.





**Other
Income - net**





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





**Interest
Expense**





The
increase (decrease) in interest expense was due to:





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended**Interest
      expense related to the Lower Mt. Bethel generation facility, which began
      commercial operation in May 2004 (a)
    
    
    
    
    
    $
    14Increase
      in interest expense due to hedging activities accounted for under SFAS
      133, "Accounting for Derivative Instruments and Hedging
      Activities"
    
    $
    9
    
    
    
    19Interest
      accrued for PJM billing dispute (Note 9)
    
    
    
    
    
    
    8Write-off
      of financing costs associated with PPL Energy Supply's 2-5/8% Convertible
      Senior Notes (Note 7)
    
    
    6
    
    
    
    6Increase
      in short-term debt interest expense
    
    
    1
    
    
    
    4Change
      in foreign currency exchange rates
    
    
    (1
    )
    
    
    2Decrease
      in interest expense due to the repayment in June 2004 of financing related
      to the University Park generation facility (b)
    
    
    
    
    
    
    (7
    )Financing
      costs associated with the repayment of the consolidated trust's debt for
      the University Park generation facility (b)
    
    
    
    
    
    
    (6
    )Decrease
      in other long-term debt interest expense due to lower debt levels
    
    
    (17
    )
    
    
    (37
    )Other
    
    
    1
    
    
    
    2$
    (1
    )
    
    $
    5





(a)
    
    Prior
      to commercial operation, interest related to the Lower Mt. Bethel
      financing was capitalized as part of the cost of the
    facility.(b)
    
    In
      June 2004, a subsidiary of PPL Energy Supply purchased the University Park
      generation facility from the lessor that was consolidated by PPL Energy
      Supply under FIN 46 (revised December 2003), "Consolidation of Variable
      Interest Entities, an Interpretation of ARB No. 51." In connection with
      the purchase, the related financing was
repaid.





**Income
Taxes**





Income
taxes decreased by $9 million and $42 million for the three and nine months
ended September 30, 2005, compared with the same periods in 2004. The decreases
were primarily attributable to:





·
    tax
      benefits of $6 million and $31 million for the three and nine months ended
      September 30, 2005, related to additional nonconventional fuel tax credits
      in excess of credits recognized for the same periods in
    2004;·
    decreases
      of $5 million and $13 million in income tax expense due to lower pre-tax
      book income for the three and nine months ended September 30, 2005,
      relative to the same periods in 2004; offset by·
    a
      $2 million increase in tax expense on foreign earnings for the three
      months ended September 30, 2005, relative to the same period in
      2004.





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





**Discontinued
Operations**





In the
second quarter of 2005, PPL recorded a $47 million loss, net of a tax benefit of
$26 million, on the sale of its Sundance power plant. See Note 8 to the
Financial Statements for information on the sale, along with information
regarding operating losses recorded in 2004 and 2005 for the Sundance plant
prior to the sale and for losses recorded in 2004 related to the sale of PPL
Global's investment in a Latin American telecommunications company.





**Financial
Condition**





**Liquidity**





At
September 30, 2005, PPL had $237 million of cash, cash equivalents and
short-term investments and $112 million of short-term debt. At December 31,
2004, PPL had $682 million in cash, cash equivalents and short-term investments
and $42 million of short-term debt. The decrease in PPL's cash, cash equivalents
and short-term investment position was primarily the net result of:





·
    the
      retirement of $1.2 billion of long-term debt;·
    the
      payment of $254 million of common and preferred
  dividends;·
    a
      $20 million net increase in restricted cash; and·
    $538
      million of capital expenditures; offset by·
    $1
      billion of cash provided by operating activities;·
    the
      issuance of $224 million of tax-exempt long-term debt at PPL
      Electric;·
    $190
      million of proceeds from the sale of the Sundance power plant;
      and·
    a
      $70 million net increase in short-term debt (includes the impact of
      currency translation adjustments).





In May
2003, PPL Energy Supply issued $400 million of 2-5/8% Convertible Senior Notes
due 2023. Based on the terms at the time of issuance, the Convertible Senior
Notes could be settled entirely in cash or shares of PPL common stock. The notes
were modified in November 2004 to require cash settlement of the principal
amount, permit settlement of any conversion premium in cash or stock and
eliminate a provision that required settlement in stock in the event of
default.





The terms
of the Convertible Senior Notes include a market price trigger that permits
holders to convert the notes during any fiscal quarter if the closing sale price
of PPL's common stock exceeds $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. This market price trigger was met in the third quarter of 2005.
Therefore, holders of the Convertible Senior Notes are entitled to convert their
notes at any time during the fourth quarter of 2005. As indicated above, if
holders elect to convert the Convertible Senior Notes, PPL Energy Supply would
be required to settle the principal amount in cash and any conversion premium in
cash or PPL common stock. PPL and PPL Energy Supply have, and expect to continue
to have, sufficient liquidity sources to fund any such conversions.





Rating
Agency Decisions





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





The
ratings of S&P, Moody's 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 their
securities.





*S&P*





In
January 2005, S&P affirmed PPL Electric's A-/A-2 corporate credit ratings
and favorably revised its outlook on the company to stable from negative
following the authorization of a $194 million rate increase by the PUC. S&P
indicated that the outlook revision reflects its expectations that the rate
increase, effective January 1, 2005, will allow for material improvement in
PPL Electric's financial profile, which had lagged S&P's expectations in
recent years. S&P indicated that the stable outlook reflects its
expectations that PPL Electric "will rapidly improve and then maintain financial
metrics more consistent with its ratings." S&P indicated that it expects PPL
Electric's operations to remain stable through the expiration of the PLR
agreement.





Additionally,
in January 2005, S&P revised its outlooks on the WPD companies to stable
from negative. S&P attributes this positive change to financial profile
improvements resulting from the final regulatory outcome published by Ofgem in
November 2004. At the same time, S&P affirmed the WPD companies' long-term
and short-term credit ratings.





In
October 2005, S&P affirmed its BBB corporate credit rating of PPL and also
affirmed its ratings of PPL Energy Supply, PPL Electric and PPL Montana. All
outlooks are stable. The ratings affirmation is the result of S&P's annual
review of PPL, including its business and financial risk profiles.





*Fitch*





In
January 2005, Fitch announced that it downgraded the WPD companies' senior
unsecured credit ratings by one notch as follows:





·
    WPDH
      Limited to BBB- from BBB·
    WPD
      LLP to BBB from BBB+·
    WPD
      (South West) and WPD (South Wales) to BBB+/F2 from
A-/F1





Fitch has
a stable outlook on all of the WPD companies.





Fitch
stated that its downgrade was prompted by the high level of pension-adjusted
leverage at WPD. Fitch acknowledged that WPD's funding plan should reduce its
pension deficit over time, and it expects WPD to proceed with its de-leveraging
program. However, Fitch indicated that it is not certain enough, due to the
unpredictability in future pension valuations, that pension-adjusted leverage
will support a BBB rating at WPDH Limited. Fitch indicated that WPD (South West)
and WPD (South Wales) have been downgraded to maintain a two-notch differential
with WPDH Limited because Fitch does not believe that WPD's financial
ring-fencing is restrictive enough to support a three-notch
differential.





*Moody's*





In June
2005, Moody's revised its outlooks to stable from negative on the senior
unsecured debt and issuer ratings of WPDH Limited, the senior unsecured debt
ratings of WPD LLP and the subordinated unsecured debt ratings of WPD LLP's
subsidiary SIUK Capital Trust I. Moody's indicated that this positive change to
the financial profiles resulted from a reduction in consolidated adjusted
leverage at the WPD companies as a result of the redeployment to WPD of surplus
cash from Latin American subsidiaries of PPL and from PPL's commitment to
suspend its dividend from WPDH Limited in the current fiscal year. At the same
time, Moody's affirmed the WPD companies' long-term and short-term credit
rating. The outlook on the debt ratings of WPD (South Wales) and WPD (South
West) was already stable.





For
additional information on PPL's liquidity, see "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations," in PPL's 2004
Form 10-K.





**Capital
Expenditure Requirements**





The
schedule below shows PPL's current capital expenditure projections for the years
2005-2009:





**Projected****2005**
    
    **2006**
    
    **2007**
    
    **2008**
    
    **2009**Generating
      facilities
    
    $
    195
    
    $
    231
    
    $
    208
    
    $
    150
    
    $
    138Transmission
      and distribution facilities
    
    
    481
    
    
    505
    
    
    521
    
    
    511
    
    
    532Environmental
    
    
    53
    
    
    349
    
    
    500
    
    
    376
    
    
    150Other
    
    
    73
    
    
    77
    
    
    56
    
    
    30
    
    
    9Total
      Construction Expenditures (a) (b)
    
    
    802
    
    
    1,162
    
    
    1,285
    
    
    1,067
    
    
    829Nuclear
      fuel
    
    
    68
    
    
    69
    
    
    76
    
    
    76
    
    
    78Total
      Capital Expenditures
    
    $
    870
    
    $
    1,231
    
    $
    1,361
    
    $
    1,143
    
    $
    907





(a)
    
    Construction
      expenditures include AFUDC and capitalized interest, which are expected to
      be approximately $98 million for the 2005-2009 period.(b)
    
    This
      information excludes any potential investments by PPL Global and PPL
      Development Company for new projects.





PPL's
capital expenditure projections for the years 2005-2009 total approximately $5.5
billion. Capital expenditure plans are revised periodically to reflect changes
in market and asset regulatory conditions. The above schedule has been revised
from that which was presented in PPL's 2004 Form 10-K primarily to reflect the
installation costs of sulfur dioxide scrubbers and other pollution control
equipment. See Note 9 to the Financial Statements for additional information.
PPL also leases vehicles, personal computers and other equipment, as described
in Note 10 to the Financial Statements of PPL's 2004 Form 10-K.





**Risk
Management - Energy Marketing & Trading and Other**





Market
Risk





*Commodity
Price Risk (Non-Trading)*





PPL's
commodity derivative contracts that hedge its commodity price risk mature at
various times through 2010. The following table sets forth PPL's net fair value
of these contracts:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004**Fair
      value of contracts outstanding at the beginning of the
    period
    
    $
    (129
    )
    
    $
    88
    
    
    $
    (11
    )
    
    $
    86Contracts
      realized or otherwise settled during the period
    
    
    (8
    )
    
    
    (11
    )
    
    
    (31
    )
    
    
    (56
    )Fair
      value of new contracts at inception
    
    
    9
    
    
    
    
    
    
    
    22Other
      changes in fair values
    
    
    (147
    )
    
    
    (15
    )
    
    
    (255
    )
    
    
    32Fair
      value of contracts outstanding at the end of the period
    
    $
    (275
    )
    
    $
    62
    
    
    $
    (275
    )
    
    $
    62





The
following table segregates estimated fair values of PPL's commodity derivative
contracts that qualify for hedge accounting treatment at September 30, 2005,
based on whether the fair values are determined by quoted market prices or other
more subjective means:





**Fair
      Value of Contracts at Period-End**
      **Gains
      (Losses)****Maturity**
      **Less
      Than**
      **1
      Year**
    
    **Maturity**
      **1-3
      Years**
    
    **Maturity**
      **4-5
      Years**
    
    **Maturity**
      **in
      Excess**
      **of
      5 Years**
    
    **Total
      Fair**
      **Value****Source
      of Fair Value**Prices
      actively quoted
    
    $
    21
    
    
    $
    18
    
    
    $
    2
    
    
    
    
    
    
    $
    41Prices
      provided by other external sources
    
    
    (77
    )
    
    
    (238
    )
    
    
    (42
    )
    
    
    
    
    
    
    (357
    )Prices
      based on models and other valuation methods
    
    
    18
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    41Fair
      value of contracts outstanding at the end of the period
    
    $
    (38
    )
    
    $
    (197
    )
    
    $
    (40
    )
    
    
    
    
    
    $
    (275
    )





The
"Prices actively quoted" category includes the fair value of exchange-traded
energy commodity futures contracts quoted on the NYMEX. The NYMEX has currently
quoted prices through 2010.





The
"Prices provided by other external sources" category includes PPL's forward
positions and options in natural gas and power and natural gas basis swaps at
points for which over-the-counter (OTC) broker quotes are available. The fair
value of electricity positions recorded above use the midpoint of the bid/ask
spreads obtained through OTC brokers. On average, OTC quotes for forwards and
swaps of natural gas and power extend one and two years into the
future.





The
"Prices based on models and other valuation methods" category includes the value
of transactions for which a price curve was developed by PPL due to the
long-dated nature of the transaction or the illiquidity of the market point, or
the value of options not quoted by an exchange or OTC broker.





As of
September 30, 2005, PPL estimated that a 10% adverse movement in market prices
of both electricity and fuel across all geographic areas and time periods would
have decreased the value of the commodity contracts in its non-trading portfolio
by approximately $282 million. For purposes of this calculation, an increase in
the market price for electricity is considered an adverse movement because PPL's
electricity portfolio is generally in a net sales position, and a decrease in
the market price for fuel is considered an adverse movement because PPL's
commodity fuels portfolio is generally in a net purchase position. PPL enters
into these commodity contracts to reduce the market risk inherent in the
generation of electricity.





In
accordance with its marketing strategy, PPL does not completely hedge its
generation output or fuel requirements. PPL estimates that for its entire
portfolio, including all generation and physical and financial energy positions,
a 10% adverse change in power prices across all geographic zones and time
periods would decrease expected 2005 gross margins by $8 million. Similarly, a
10% adverse movement in all fossil fuel prices would decrease expected 2005
gross margins by $15 million.





The data
in the above tables includes the activity for PPL's synthetic fuel tax credit
hedges. Additional information regarding these hedges can be found in the
"Synthetic Fuel Tax Credit Risk" section below.





*Commodity
Price Risk (Trading)*





PPL also
executes 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 shown in the
Statement of Income as "Net energy trading margins."





PPL's
trading contracts mature at various times through 2008. The following table sets
forth PPL's net fair value of trading contracts:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004**Fair
      value of contracts outstanding at the beginning of the
    period
    
    $
    11
    
    
    $
    12
    
    
    $
    10
    
    
    $
    3Contracts
      realized or otherwise settled during the period
    
    
    (10
    )
    
    
    (3
    )
    
    
    (17
    )
    
    
    (10
    )Fair
      value of new contracts at inception
    
    
    (2
    )
    
    
    
    
    
    
    2
    
    
    
    4Other
      changes in fair values
    
    
    11
    
    
    
    3
    
    
    
    15
    
    
    
    15Fair
      value of contracts outstanding at the end of the period
    
    $
    10
    
    
    $
    12
    
    
    $
    10
    
    
    $
    12





PPL will
reverse $5 million of the $10 million unrealized trading gains over the next
three months of 2005 as the transactions are realized.





The
following table segregates estimated fair values of PPL's trading portfolio at
September 30, 2005, based on whether the fair values are determined by quoted
market prices or other more subjective means:





**Fair
      Value of Contracts at Period-End**
      **Gains
      (Losses)****Maturity**
      **Less
      Than**
      **1
      Year**
    
    **Maturity**
      **1-3
      Years**
    
    **Maturity**
      **4-5
      Years**
    
    **Maturity**
      **in
      Excess**
      **of
      5 Years**
    
    **Total
      Fair**
      **Value****Source
      of Fair Value**Prices
      actively quoted
    
    $
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6Prices
      provided by other external sources
    
    
    9
    
    
    $
    1
    
    
    
    
    
    
    
    
    
    
    
    10Prices
      based on models and other valuation methods
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Fair
      value of contracts outstanding at the end of the period
    
    $
    9
    
    
    $
    1
    
    
    
    
    
    
    
    
    
    
    $
    10





See
"Commodity Price Risk (Non-trading)" for information on the various sources of
fair value.





As of
September 30, 2005, PPL estimated that a 10% adverse movement in market prices
across all geographic areas and time periods would have decreased the value of
the commodity contracts in its trading portfolio by $5 million.





*Interest
Rate Risk*





PPL and
its subsidiaries have issued debt to finance their operations. 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 U.S. 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
September 30, 2005, PPL's potential annual exposure to increased interest
expense, based on a 10% increase in interest rates, was estimated at $6
million.





PPL is
also exposed to changes in the fair value of its domestic and international debt
portfolios. At September 30, 2005, PPL estimated that its potential exposure to
a change in the fair value of its debt portfolio, through a 10% adverse movement
in interest rates, was approximately $184 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 September
30, 2005, the market value of these instruments, representing the amount PPL
would receive upon their termination, was approximately $16 million. At
September 30, 2005, PPL estimated that its potential exposure to a change in the
fair value of these instruments, through a 10% adverse movement in the hedged
exposure, was approximately $8 million.





PPL also
utilizes various risk management instruments to adjust the mix of fixed and
floating interest rates in its debt portfolio. While PPL is exposed to changes
in the fair value of these instruments, any change in market value is recorded
with an equal and offsetting change in the value of the debt being hedged. At
September 30, 2005, PPL estimated that its potential exposure to a change in the
fair value of these instruments, through a 10% adverse movement in interest
rates, was approximately $11 million.





*Foreign
Currency Risk*





PPL is
exposed to foreign currency risk, primarily through investments in affiliates in
Latin America and Europe. In addition, PPL 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 and net investments. In addition, PPL enters into financial
instruments to protect against foreign currency translation risk.





To
protect expected income denominated in British pounds sterling, PPL entered into
average rate options for £32 million. These options terminate in November 2005.
At September 30, 2005, the market value of these positions, representing the
amount PPL would receive upon their termination, was approximately $1
million.





To
protect expected income in Chilean pesos, PPL entered into an average rate
forward for 4 billion Chilean pesos. The settlement date of this forward is
November 2005. At September 30, 2005, the market value of this position,
representing the amount PPL would pay upon its termination, was
insignificant.





PPL
executed net forward sale transactions for £10 million to hedge a portion of its
net investment in WPDH Limited. In May 2005, PPL entered into an offsetting
transaction effectively closing this hedge. Both trades are scheduled to expire
in December 2005. The net amount PPL will owe upon settlement of these trades is
approximately $1 million.





WPDH
Limited held a net position in cross-currency swaps totaling $1.1 billion to
hedge the interest payments and value of its U.S. dollar-denominated bonds with
maturity dates ranging from December 2006 to December 2028. The estimated value
of this position at September 30, 2005, being the amount PPL would pay to
terminate it, including accrued interest, was approximately $175
million.





On the
Statement of Income, gains and losses associated with hedges of interest
payments denominated in foreign currencies are reflected in "Interest Expense."
Gains and losses associated with the purchase of equipment are reflected in
"Depreciation." Gains and losses associated with net investment hedges remain in
"Accumulated other comprehensive loss" on the Balance Sheet until the investment
is disposed.





*Nuclear
Decommissioning Fund - Securities Price Risk*





In
connection with certain NRC requirements, PPL Susquehanna maintains trust funds
to fund certain costs of decommissioning the Susquehanna station. As of
September 30, 2005, 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 to be used 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 in the trusts are exposed to
changes in interest rates. PPL Susquehanna actively monitors the investment
performance and periodically reviews asset allocation in accordance with its
nuclear decommissioning trust policy statement. At September 30, 2005, a
hypothetical 10% increase in interest rates and a 10% decrease in equity prices
would have resulted in an estimated $32 million reduction in the fair value of
the trust assets. See the "Nuclear Decommissioning" Note in the 2004 Form 10-K
for more information regarding the nuclear decommissioning trust
funds.





*Synthetic
Fuel Tax Credit Risk*





Recent
increases in and the volatility of crude oil prices threaten to reduce the
amount of synthetic fuel tax credits that PPL expects to receive through its
synthetic fuel production. The tax credits are reduced if the annual average
wellhead price of domestic crude oil falls within a phase-out range. The tax
credits are eliminated if this reference price exceeds the phase-out range. See
"Regulatory Issues - IRS Synthetic Fuels Tax Credits" in Note 9 to the Financial
Statements for more information regarding the phase-out of the tax
credits.





PPL
implemented a risk management objective to hedge the variability of cash flows
associated with its 2006 and 2007 synthetic fuel tax credits by hedging the risk
that the 2006 and 2007 annual average wellhead price for domestic crude oil will
be within the phase-out range.





PPL
purchased options in the second and third quarters of 2005 to mitigate
reductions in synthetic fuel tax credits if the annual average wellhead price
for 2006 and 2007 falls within the applicable phase-out range. These positions
did not qualify for cash flow hedge accounting treatment. The mark-to-market
value of these positions for the three and nine months ended September 30, 2005,
was a gain of $12 million and $17 million, and is reflected in "Energy related
businesses" revenues on the Statement of Income.





As of
September 30, 2005, PPL estimated that a 10% adverse movement in market prices
of crude oil would have decreased the value of the synthetic fuel hedges by $17
million. For purposes of this calculation, a decrease in the market price for
crude oil is considered an adverse movement.





**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 10 to the
Financial Statements.





**Acquisitions,
Development and Divestitures**





From time
to time, PPL and its subsidiaries are involved in negotiations with third
parties regarding acquisitions, joint ventures and other arrangements which may
or may not result in definitive agreements. See Note 8 to the Financial
Statements for information regarding recent development and divestiture
activities.





PPL is
currently planning incremental capacity increases of 255 MW at several existing
domestic generating facilities.





PPL is
continuously reexamining development projects based on market conditions and
other factors to determine whether to proceed with these projects, sell them,
cancel them, expand them, execute tolling agreements or pursue other
opportunities.





**Environmental
Matters**





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





**New
Accounting Standards**





See Note
16 to the Financial Statements for information on 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, pension
and other postretirement benefits, asset impairment, leasing, loss accruals and
asset retirement obligations.





See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations," in PPL's 2004 Form 10-K for a discussion of each critical
accounting policy. The potential impairment of the Sundance power plant is no
longer a consideration, due to its sale in May 2005. See Note 8 to the Financial
Statements for additional information. 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.





**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, PA. In PPL
Energy Supply's 2004 Form 10-K, a description of PPL Energy Supply's domestic
and international businesses is found in "Item 1. Business - Background" and a
listing of its principal subsidiaries is shown in Exhibit 99. 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. and Latin America. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in PPL Energy Supply's 2004 Form 10-K for an overview of PPL Energy
Supply's strategy and the risks and the challenges that it faces in its
business.





PPL
Energy Supply's reportable segments are Supply and International Delivery. See
Note 3 to the Financial Statements for further segment information.





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





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





**Results
of Operations**





The
following discussion begins with a review of PPL Energy Supply's earnings and a
description of key factors by segment that management expects may impact future
earnings. "Results of Operations" continues with a summary of results by
reportable segment and ends with explanations of significant changes in
principal items on PPL Energy Supply's Statement of Income, comparing the three
and nine months ended September 30, 2005, to the comparable periods in
2004.





WPD's
results, as consolidated in PPL Energy Supply's Statement of Income, are
impacted by changes in foreign currency exchange rates. WPD's portion of revenue
and expense line items decreased by about 2% for the three months ended
September 30, 2005, and increased by about 2% for the nine months ended
September 30, 2005, compared with the same periods in 2004, due to changes
in foreign currency exchange rates.





PPL
Energy Supply's results in 2005 and 2004 were impacted by the reclassification
of the operating losses of the Sundance plant prior to its sale in the second
quarter of 2005. See Note 1 to the Financial Statements for further
discussion.





The
Statement of Income reflects the results of past operations and is not intended
as any indication of future operating results. Future operating results will
necessarily be affected by various and diverse factors and developments.
Furthermore, because results for interim periods can be disproportionately
influenced by various factors and developments and by seasonal variations, the
results of operations for interim periods do not necessarily indicate results or
trends for the year.





**Earnings**





Net
income was as follows:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004**$
    159
    
    
    $
    192
    
    
    $
    418
    
    
    $
    495





The
after-tax changes in net income were due to:





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended****Domestic:**Eastern
      U.S. non-trading margins
    
    $
    (23
    )
    
    $
    (12
    )Northwestern
      U.S. non-trading margins
    
    
    2
    
    
    
    (4
    )Southwestern
      U.S. non-trading margins
    
    
    (1
    )
    
    
    (4
    )Net
      energy trading margins
    
    
    8
    
    
    
    10Operation
      and maintenance expenses
    
    
    (8
    )
    
    
    (13
    )Interest
      expense
    
    
    (2
    )
    
    
    (8
    )Interest
      income on 2004 IRS tax settlement
    
    
    (9
    )
    
    
    (9
    )Interest
      income on loans to affiliates
    
    
    2
    
    
    
    5Reversal
      of certain state income tax credits in 2004
    
    
    6Earnings
      from synfuel projects
    
    
    10
    
    
    
    29Other
    
    
    3
    
    
    
    4Total
      Domestic
    
    
    (12
    )
    
    
    (2
    )**International:**U.K.Delivery
      margins
    
    
    10
    
    
    
    12Operation
      and maintenance expenses
    
    
    (9
    )
    
    
    (20
    )Interest
      expense
    
    
    2
    
    
    
    5Impact
      of changes in foreign currency exchange rates
    
    
    (1
    )
    
    
    4U.K.
      income taxes
    
    
    (7
    )
    
    
    (3
    )Latin
      America
    
    
    (1
    )U.S.
      income taxes
    
    
    4
    
    
    
    14Other
    
    
    
    
    
    
    2Total
      International
    
    
    (2
    )
    
    
    14Unusual
      items
    
    
    (19
    )
    
    
    (89
    )$
    (33
    )
    
    $
    (77
    )





The
changes in net income from period to period were, in part, attributable to
several items that management considers unusual and that had significant
earnings impacts. The after-tax impacts of these items were as
follows:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004****Supply
      Segment**Off-site
      remediation of ash basin leak (Note 9)
    
    $
    (19
    )
    
    
    
    
    
    $
    (19
    )Sale
      of the Sundance plant (Note 8)
    
    
    
    
    
    
    
    
    
    
    (47
    )Acceleration
      of stock-based compensation expense for periods prior to 2005(Note
      2)
    
    
    
    
    
    
    
    
    
    
    (3
    )NorthWestern
      litigation (Note 9)
    
    
    
    
    
    
    
    
    
    
    (6
    )(19
    )
    
    
    
    
    
    
    (75
    )**International
      Delivery Segment**Sale
      of CGE (Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (7
    )Sale
      of CEMAR (Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Sale
      of Latin American telecommunications company (Note 8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )14Total
    
    $
    (19
    )
    
    
    
    
    
    $
    (75
    )
    
    $
    14





The
period-to-period changes in earnings components, including domestic gross energy
margins by region and income statement line items, are discussed following the
future earnings factors and segment results.





PPL
Energy Supply's 2005 and future earnings could be, or will be, impacted by a
number of key factors, including the following:





Supply
Segment





·
    PPL
      Energy Supply's future energy margins can be impacted by changes in market
      prices and demands for electricity, as well as fluctuations in fuel
      prices, fuel transportation costs and emission allowance expenses. For
      instance, although PPL Energy Supply expects market prices for electricity
      in 2005 to continue to be higher than in 2004, PPL Energy Supply is not
      expecting an increase in its 2005 energy margins due to expected increases
      in the cost of fuel, fuel transportation and emissions
      allowances.·
    PPL
      Energy Supply's ability to manage operational risk with respect to its
      generation plants is critical to its financial performance. Specifically,
      depending on the timing and duration of both planned and unplanned outages
      (in particular, if such outages are during peak periods or during periods
      of, or caused by, severe weather), PPL Energy Supply's revenue from energy
      sales could be adversely affected and its need to purchase power at
      then-current market prices to satisfy its energy commitments could be
      significantly increased. For instance, in late-October 2005, PPL
      Susquehanna shut down its Unit 1 nuclear reactor for a maintenance outage
      to improve the operation of the unit's control rods prior to the planned
      2006 refueling outage. PPL Energy Supply expects this discretionary outage
      to last approximately three weeks, but PPL Energy Supply cannot predict
      with certainty the length of the outage or the final costs associated with
      it.·
    A
      key part of PPL Energy Supply's overall strategy has been to enter into
      long-term energy supply agreements in order to mitigate market price and
      supply risk. Whether PPL Energy Supply continues to enter into such
      agreements or renews existing energy supply agreements and the market
      conditions at that time will affect its future earnings. For example,
      based on current forward energy prices, PPL Energy Supply currently
      expects that, upon the expiration of certain of its existing supply
      agreements, it may be able to enter new supply agreements or arrangements
      at significantly higher market prices than the prices included in those
      existing supply agreements. See "Energy Purchases, Energy Sales and Other
      Commitments" in Note 9 to the Financial Statements for more information
      regarding PPL Energy Supply's wholesale energy commitments and "PLR
      Contracts" in Note 10 for more information regarding the PLR
      contracts.·
    PPL
      Electric has agreed to provide electricity supply to its PLR customers at
      predetermined rates through 2009 and has entered into PUC-approved, full
      requirements energy supply agreements with PPL EnergyPlus to fulfill its
      PLR obligation. The predetermined charges for generation supply which PPL
      Electric collects from its PLR customers and pays to PPL EnergyPlus under
      the energy supply agreements provide for annual increases in each year
      commencing in 2006 and continuing through 2009. PPL Electric's PLR
      obligation after 2009 will be determined by the PUC pursuant to rules that
      have not yet been promulgated. See Note 10 to the Financial Statements for
      more information regarding the PLR contracts.·
    Due
      to current electricity and natural gas price levels, there is a risk that
      PPL Energy Supply may be unable to recover its investment in certain
      gas-fired generation facilities. Under GAAP, PPL Energy Supply does not
      believe that there is an impairment charge to be recorded for these
      facilities at this time. PPL Energy Supply is unable to predict the
      earnings impact of this issue, based upon future energy and fuel price
      levels, applicable accounting rules and other factors, but such impact may
      be material.·
    In
      May 2005, a subsidiary of PPL Generation completed the sale of its 450 MW
      Sundance power plant located in Pinal County, Arizona to Arizona Public
      Service Company for approximately $190 million in cash. Proceeds of the
      sale were used to reduce PPL Energy Supply's outstanding debt and improve
      liquidity. PPL Energy Supply recognized a non-cash loss on the sale of
      approximately $47 million after tax in the second quarter of 2005 related
      to this transaction.·
    PPL
      Energy Supply has interests in two synthetic fuel facilities and receives
      tax credits pursuant to Section 29 of the Internal Revenue Code based on
      its sale of synthetic fuel to unaffiliated third-party purchasers. PPL
      Energy Supply has estimated that these facilities will contribute
      approximately $40 million per year to earnings through 2007, when the
      availability of such tax credits is scheduled to expire. See "Regulatory
      Issues - IRS Synthetic Fuels Tax Credits" in Note 9 to the Financial
      Statements for a discussion of the requirements to receive the Section 29
      tax credits and the impact of higher oil prices on the Section 29 tax
      credits. Also see "Risk Management - Energy Marketing & Trading and
      Other - Synthetic Fuel Tax Credit Risk" for a discussion of PPL Energy
      Supply's risk management activities to mitigate the impact of a potential
      phase-out of the synthetic fuel tax credit due to high oil
      prices.·
    To
      comply with existing and future environmental requirements and as a result
      of pollution control measures it may take, PPL Energy Supply expects to
      spend significant amounts on environmental control and compliance in the
      future. The costs of such measures, in many cases, are not now
      determinable, but could be material. For instance, PPL Energy Supply's
      current cost estimates for sulfur dioxide reduction at its generating
      plants are preliminary and PPL Energy Supply could incur significantly
      higher capital and operating expenses due to more stringent environmental
      requirements, changing market conditions with respect to the cost of
      pollution control equipment or emissions allowances, delays in the
      installation of pollution control equipment or other factors. See
      "Environmental Matters - Domestic" in Note 9 to the Financial Statements
      for more information regarding current environmental requirements and
      initiatives, including those relating to air emissions, and PPL Energy
      Supply's anticipated capital expenditure program to meet the sulfur
      dioxide reduction requirements of the Clean Air Act.·
    In
      August 2005, a leak from one of two disposal basins containing fly ash and
      water used in connection with the operation of the coal-fired generating
      units at PPL Energy Supply's Martins Creek plant caused the discharge of
      approximately 100 million gallons of water containing ash from the basin
      onto adjacent roadways and fields and into the Delaware River. See
      "Environmental Matters - Domestic - Water/Waste" in Note 9 to the
      Financial Statements for more information regarding the Martins Creek
      leak. In the third quarter of 2005, PPL Energy Supply recognized a charge
      of $22 million after tax, in connection with the current expected on-site
      and off-site costs relating to the leak. PPL Energy Supply cannot predict
      the final costs to be incurred as a result of this
  matter.·
    In
      September 2005, PPL Energy Supply and NorthWestern reached a final
      agreement to settle litigation described under "Legal Matters -
      NorthWestern Corporation Litigation" in Note 9 to the Financial
      Statements. See Note 9 for more information regarding the settlement of
      this matter. In the first quarter of 2005, PPL Energy Supply recognized a
      charge of $6 million after tax related to the agreement in principle to
      settle the lawsuit that the parties reached in May
2005.





International
Delivery Segment





·
    Earnings
      in 2005 and beyond are expected to continue to be adversely affected by
      increased pension costs. Specifically, WPD will experience increased
      pension costs based upon an actuarial valuation of WPD's plans that
      reflects higher pension obligations. The increase in pension costs in 2005
      is forecasted to be approximately $24 million after tax and the increase
      in pension costs is expected to continue to be significant in 2006. An
      additional $4 million of after-tax expense was recognized in the first
      quarter of 2005 related to termination
benefits.





All
Segments





·
    PPL
      Energy Supply is unable to predict whether future impairments of goodwill
      may be required for its domestic and international investments. While no
      goodwill impairments were required based on the annual review performed in
      the fourth quarter of 2004, future impairments may occur due to
      determinations of carrying value exceeding the fair value of these
      investments.·
    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. Any such transactions may impact future
      earnings.·
    See
      Note 9 to the Financial Statements for other potential commitments and
      contingent liabilities that may impact future earnings.·
    See
      Note 16 to the Financial Statements for new accounting standards that have
      been issued but not yet adopted by PPL Energy Supply that may impact
      future earnings.





**Segment
Results**





Net
income by segment was as follows:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004**Supply
    
    $
    123
    
    
    $
    154
    
    
    $
    266
    
    
    $
    343International
      Delivery
    
    
    36
    
    
    
    38
    
    
    
    152
    
    
    
    152Total
    
    $
    159
    
    
    $
    192
    
    
    $
    418
    
    
    $
    495





Supply
Segment





The
Supply segment o wns and
operates power plants to generate electricity, markets this electricity and
other power purchases to deregulated wholesale and retail markets and acquires
and develops domestic generation projects. The Supply segment primarily consists
of the activities of PPL Generation and PPL EnergyPlus.





Segment
net income was as follows:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004**Energy
      revenues
    
    $
    818
    
    
    $
    769
    
    
    $
    2,201
    
    
    $
    2,161Energy
      related businesses
    
    
    145
    
    
    
    115
    
    
    
    404
    
    
    
    319Total
      operating revenues
    
    
    963
    
    
    
    884
    
    
    
    2,605
    
    
    
    2,480Fuel
      and energy purchases
    
    
    401
    
    
    
    330
    
    
    
    1,050
    
    
    
    986Other
      operation and maintenance
    
    
    199
    
    
    
    155
    
    
    
    579
    
    
    
    510Depreciation
    
    
    35
    
    
    
    36
    
    
    
    103
    
    
    
    102Taxes,
      other than income
    
    
    10
    
    
    
    12
    
    
    
    31
    
    
    
    33Energy
      related businesses
    
    
    155
    
    
    
    128
    
    
    
    443
    
    
    
    356Total
      operating expenses
    
    
    800
    
    
    
    661
    
    
    
    2,206
    
    
    
    1,987Other
      Income - net
    
    
    6
    
    
    
    16
    
    
    
    18
    
    
    
    25Interest
      Expense
    
    
    24
    
    
    
    20
    
    
    
    65
    
    
    
    42Income
      Taxes
    
    
    22
    
    
    
    64
    
    
    
    34
    
    
    
    121Minority
      Interest
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    2Loss
      from Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    51
    
    
    
    10Total
    
    $
    123
    
    
    $
    154
    
    
    $
    266
    
    
    $
    343





The
after-tax change in net income was due to the following factors, including the
unusual items presented in the "Earnings" section:





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended**Eastern
      U.S. non-trading margins
    
    $
    (23
    )
    
    $
    (12
    )Northwestern
      U.S. non-trading margins
    
    
    2
    
    
    
    (4
    )Southwestern
      U.S. non-trading margins
    
    
    (1
    )
    
    
    (4
    )Net
      energy trading margins
    
    
    8
    
    
    
    10Operation
      and maintenance expenses
    
    
    (8
    )
    
    
    (13
    )Interest
      expense
    
    
    (2
    )
    
    
    (8
    )Interest
      income on 2004 IRS tax settlement
    
    
    (9
    )
    
    
    (9
    )Interest
      income on loans to affiliates
    
    
    2
    
    
    
    5Reversal
      of certain state income tax credits in 2004
    
    
    6Earnings
      from synfuel projects
    
    
    10
    
    
    
    29Other
    
    
    3
    
    
    
    4Total
    
    
    (12
    )
    
    
    (2
    )Unusual
      items
    
    
    (19
    )
    
    
    (75
    )$
    (31
    )
    
    $
    (77
    )





·
    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
      operation and maintenance expenses for both periods were primarily due to
      outage costs at the Brunner Island facility and the on-site Martins Creek
      remediation costs of the ash basin leak. The nine months ended
      September 30, 2005, was further impacted by outage costs at the
      Colstrip Unit 2 and Corette facilities and the accelerated amortization of
      stock-based compensation for retirement-eligible employees, which resulted
      from additional guidance. See Note 2 to the financial statements for
      information on the additional accounting guidance.·
    The
      improved earnings contribution from synfuel projects for both periods
      resulted primarily from unrealized gains on options purchased to hedge the
      risk associated with synthetic fuel tax credits for 2006 and 2007 and
      higher synthetic fuel tax credits, due to higher output, primarily related
      to the Tyrone facility that went into commercial operation in August
      2004.





International
Delivery Segment





The
International Delivery segment owns and operates international energy businesses
that are focused on the distribution of electricity. The segment primarily
consists of the operations of the regulated international energy businesses of
PPL Global. The majority of PPL Global's international businesses are located in
the U.K., Chile, El Salvador and Bolivia.





Segment
net income was as follows:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004**Utility
      revenues
    
    $
    265
    
    
    $
    237
    
    
    $
    842
    
    
    $
    771Energy
      related businesses
    
    
    18
    
    
    
    16
    
    
    
    55
    
    
    
    50Total
      operating revenues
    
    
    283
    
    
    
    253
    
    
    
    897
    
    
    
    821Fuel
      and energy purchases
    
    
    69
    
    
    
    54
    
    
    
    197
    
    
    
    159Other
      operation and maintenance
    
    
    56
    
    
    
    45
    
    
    
    180
    
    
    
    154Depreciation
    
    
    41
    
    
    
    37
    
    
    
    117
    
    
    
    109Taxes,
      other than income
    
    
    15
    
    
    
    14
    
    
    
    44
    
    
    
    41Energy
      related businesses
    
    
    7
    
    
    
    5
    
    
    
    20
    
    
    
    32Total
      operating expenses
    
    
    188
    
    
    
    155
    
    
    
    558
    
    
    
    495Other
      Income - net
    
    
    3
    
    
    
    (1
    )
    
    
    10
    
    
    
    27Interest
      Expense
    
    
    50
    
    
    
    51
    
    
    
    152
    
    
    
    153Income
      Taxes
    
    
    11
    
    
    
    7
    
    
    
    41
    
    
    
    42Minority
      Interest
    
    
    1
    
    
    
    1
    
    
    
    4
    
    
    
    4Loss
      from Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Total
    
    $
    36
    
    
    $
    38
    
    
    $
    152
    
    
    $
    152





The
after-tax change in net income was due to the following factors, including the
unusual items presented in the "Earnings" section:





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended**U.K.Delivery
      margins
    
    $
    10
    
    
    $
    12Operation
      and maintenance expenses
    
    
    (9
    )
    
    
    (20
    )Interest
      expense
    
    
    2
    
    
    
    5Impact
      of changes in foreign currency exchange rates
    
    
    (1
    )
    
    
    4U.K.
      income taxes
    
    
    (7
    )
    
    
    (3
    )Latin
      America
    
    
    (1
    )U.S.
      income taxes
    
    
    4
    
    
    
    14Other
    
    
    
    
    
    
    2Total
    
    
    (2
    )
    
    
    14Unusual
      items
    
    
    
    
    
    
    (14
    )$
    (2
    )
    
    $





·
    The
      U.K.'s earnings were positively impacted in both periods by higher
      delivery margins primarily due to favorable customer mix and an incentive
      revenue award for outstanding customer service. These favorable variances
      were offset by higher operation and maintenance expenses, primarily due to
      increased pension costs in both periods.·
    U.S.
      income taxes decreased, primarily due to greater utilization of foreign
      tax credits in both periods.





**Consolidated
Statement of Income Line Item Discussion --**





**Domestic
Gross Energy Margins**





The
following table provides pre-tax changes in the income statement line items that
comprise domestic gross energy margins:





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended**Wholesale
      energy marketing
    
    $
    (5
    )
    
    $
    (28
    )Wholesale
      energy marketing to affiliate
    
    
    42
    
    
    
    65Unregulated
      retail electric
    
    
    (2
    )
    
    
    (14
    )Net
      energy trading margins
    
    
    14
    
    
    
    17Other
      revenue adjustments (a)
    
    
    2
    
    
    
    30Total
      revenues
    
    
    51
    
    
    
    70Fuel
    
    
    89
    
    
    
    105Energy
      purchases
    
    
    (4
    )
    
    
    2Energy
      purchases from affiliate
    
    
    1
    
    
    
    (5
    )Other
      cost adjustments (a)
    
    
    (12
    )
    
    
    (15
    )Total
      cost of sales
    
    
    74
    
    
    
    87Domestic
      gross energy margins
    
    $
    (23
    )
    
    
    (17
    )





(a)
    
    Adjusted
      to exclude the impact of any revenues and costs not associated with
      domestic gross energy margins, in particular, revenues and energy costs
      related to the international operations of PPL Global.Also
      adjusted to include the margins of PPL's Sundance plant, which are
      included in "Loss from Discontinued Operations," and gains or losses on
      sales of emission allowances, which are included in "Other operation and
      maintenance" expenses, on the Statement of
Income.





Changes
in Domestic Gross Energy Margins By Region





Domestic
gross energy margins are generated through PPL Energy Supply's normal hedging
(non-trading) activities, as well as trading activities. PPL Energy Supply
manages its non-trading energy business on a geographic basis that is aligned
with its generation assets. In the second quarter of 2005, PPL Energy Supply
also began participating in the Midwest ISO (MISO), an independent transmission
system operator that serves the electric transmission needs of much of the
Midwest. PPL Energy Supply records its business activities within MISO
consistent with its accounting for activities in other RTOs.





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended**Eastern
      U.S.
    
    $
    (39
    )
    
    $
    (21
    )Northwestern
      U.S.
    
    
    3
    
    
    
    (6
    )Southwestern
      U.S.
    
    
    (1
    )
    
    
    (7
    )Net
      energy trading
    
    
    14
    
    
    
    17Domestic
      gross energy margins
    
    $
    (23
    )
    
    $
    (17
    )





Eastern
U.S.





Eastern
U.S. non-trading margins were lower for the three and nine months ended
September 30, 2005, compared with the same periods in 2004, due primarily to
supplying higher PLR sales volumes, which increased by 10% and 5%, respectively,
with higher-priced generation and power purchases. The average consumed cost of
fuel in those periods increased by 42% and 21%, respectively, due to increases
in fossil fuel prices and increased utilization of PPL Energy Supply's oil and
gas generating units. Average purchased power costs in those periods increased
31% and 16%, respectively, reflecting current market conditions. Partially
offsetting the effects of higher supply costs were gains on the sales of
emission allowances, as well as a 2% increase in PLR sales prices, in accordance
with a schedule established by the PUC.





Northwestern
U.S.





Northwestern
U.S. non-trading margins were higher for the three months ended September 30,
2005, compared with the same period in 2004, primarily due to an 8% increase in
sales volumes. Improved hydroelectric and coal generation resulted in less
reliance on higher cost purchased power. Partially offsetting the increased
generation was a 14% increase in the average consumed cost of fuel and an 18%
increase in power purchase prices.





Northwestern
U.S. non-trading margins were lower for the nine months ended September 30,
2005, compared with the same period in 2004, due to lower wholesale sales
resulting from extended outages at coal-fired stations, compounded by higher
purchased power prices. Sales volumes decreased 3%, while purchased power prices
increased 9%. Partially offsetting this margin decrease was a 2004 charge of $6
million for a retroactive coal price increase, resulting from an unfavorable
arbitration ruling effective April 2004 that increased coal costs for purchases
back to 2001.





Southwestern
U.S.





Southwestern
U.S. non-trading margins decreased for the three and nine months ended September
30, 2005, compared to the same periods in 2004. The lower margins were primarily
due to the sale of PPL Energy Supply's Sundance plant in May 2005 and the cost
to terminate a tolling arrangement on the Griffith plant during the second
quarter of 2005.





Net
Energy Trading





PPL
Energy Supply enters into certain energy contracts that meet the criteria of
trading derivatives as defined by EITF Issue 02-3, "Issues Involved in
Accounting for Derivative Contracts Held for Trading Purposes and Contracts
Involved in Energy Trading and Risk Management Activities." These physical and
financial contracts cover trading activity associated with electricity, gas and
oil.





The $14
million increase for the three months ended September 30, 2005, compared with
the same period in 2004, was primarily due to an increase in realized gains on
physical gas positions as well as the inclusion of FTRs in "Net energy trading
margins" on the Statement of Income. As of July 1, 2005, FTRs were deemed to
meet the definition of a derivative and were accounted for as such
prospectively. Therefore, the forward and realized value for FTRs entered into
for speculative purposes are accounted for as part of "Net energy trading
margins." From July 1 through September 30, 2005, gains on speculative FTRs
totaled $7 million. The physical volumes associated with energy trading for the
three months ended September 30, 2005, were 1,457 GWh and 2.2 Bcf, compared with
1,616 GWh and 3.3 Bcf for the three months ended September 30,
2004.





The $17
million increase for the nine months ended September 30, 2005, compared
with the same period in 2004, was primarily due to an increase in realized gains
on physical gas positions and the inclusion of speculative FTRs in "Net energy
trading margins." The physical volumes associated with energy trading for the
nine months ended September 30, 2005, were 3,722 GWh and 9.7 Bcf, compared with
3,796 GWh and 7.6 Bcf for the nine months ended September 30,
2004.





**Utility
Revenues**





The
increases in utility revenues were attributable to the following:





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended****International:**Retail
      electric delivery (PPL Global)Chile
    
    $
    15
    
    
    $
    36U.K.
    
    
    10
    
    
    
    27El
      Salvador
    
    
    1
    
    
    
    6Bolivia
    
    
    2
    
    
    
    2$
    28
    
    
    $
    71





The
increases for both periods were primarily due to:





·
    higher
      revenues in Chile, primarily due to a 7% increase in sales volumes and
      higher average prices overall; and·
    higher
      U.K. revenues, primarily due to favorable customer mix and an incentive
      revenue award for outstanding customer
service.





The
increase in U.K. revenues for the three months ended September 30, 2005,
compared with the same period in 2004, was partially offset by an unfavorable
change in foreign currency exchange rates. The increase in U.K. revenues for the
nine months ended September 30, 2005, compared with the same period in
2004, was positively impacted by a favorable change in foreign currency exchange
rates.





**Energy
Related Businesses**





Energy
related businesses contributed $3 million more to operating income for the three
months ended September 30, 2005, compared with the same period in 2004. The
increase was primarily attributable to a $4 million higher pre-tax contribution
from synfuel projects. This reflects a $12 million net unrealized gain on
options purchased to hedge the risk associated with synthetic fuel tax credits
for 2006 and 2007, offset by $8 million of additional expenses due to higher
production levels.





Energy
related businesses contributed $15 million more to operating income for the nine
months ended September 30, 2005, compared with the same period in 2004. The
increase was primarily attributable to:





·
    a
      $15 million pre-tax loss in 2004, related to the sale of CGE (see Note 8
      to the Financial Statements);·
    an
      aggregate increase of $5 million from various international subsidiary
      businesses; and·
    a
      $2 million increase from energy services subsidiaries due to a favorable
      closeout on a major project and an increase in business; partially offset
      by·
    additional
      pre-tax losses in 2005 of $8 million on synfuel projects. This reflects
      $25 million of additional expenses due to higher production levels, offset
      by a $17 million net unrealized gain on options purchased to hedge the
      risk associated with synthetic fuel tax credits for 2006 and
      2007.





**Other
Operation and Maintenance**





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





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended**Increase
      in domestic and international pension costs
    
    $
    9
    
    
    $
    34Martins
      Creek ash basin remediation (Note 9)
    
    
    33
    
    
    
    33Accelerated
      amortization of stock-based compensation (Note 2)
    
    
    
    
    
    
    13Increase
      in allocation of corporate service costs (Note 10)
    
    
    3
    
    
    
    13NorthWestern
      litigation accrual (Note 9)
    
    
    
    
    
    
    9Outage
      costs at Brunner Island and Lower Mt. Bethel plants
    
    
    5
    
    
    
    8Outage
      costs at the Colstrip Unit 2 and Corette facilities
    
    
    
    
    
    
    4Change
      in foreign currency exchange rates
    
    
    (1
    )
    
    
    2Reduction
      in WPD costs that are a pass-through to customers
    
    
    
    
    
    
    (6
    )Gain
      on sales of emission allowances
    
    
    
    
    
    
    (11
    )Other
    
    
    6
    
    
    
    (4
    )$
    55
    
    
    $
    95





The
increases in net pension costs were primarily attributable to a reduction in the
discount rate assumptions for PPL Energy Supply's domestic pension plans at
December 31, 2004, increased amortization of prior year actuarial losses for
WPD's pension plans and termination benefits. These events will result in PPL
Energy Supply's recognition of increased net pension costs in 2005. See Note 13
to the Financial Statements for details of the costs of PPL Energy Supply's
pension plans.





**Depreciation**





The
increases in depreciation expense were due to:





**Sept.****30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended**Lower
      Mt. Bethel generation facility, which began commercial operation in May
      2004
    
    
    
    
    
    $
    6Other
      additions to PP&E
    
    $
    2
    
    
    
    4Reduction
      of useful lives of certain assets (Note 2)
    
    
    5
    
    
    
    5Foreign
      currency exchange rates
    
    
    (1
    )
    
    
    2Extension
      of useful lives of certain generation assets (Note 2)
    
    
    (3
    )
    
    
    (8
    )$
    3
    
    
    $
    9





**Other
Income - net**





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





**Interest
Expense**





The
increase in interest expense, including interest with affiliates, was due
to:





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended**Interest
      expense related to the Lower Mt. Bethel generation facility, which began
      commercial operation in May 2004 (a)
    
    
    
    
    
    $
    14Write-off
      of financing costs associated with PPL Energy Supply's 2-5/8% Convertible
      Senior Notes (Note 7)
    
    $
    6
    
    
    
    6Increase
      in short-term debt interest expense
    
    
    1
    
    
    
    4Increase
      (decrease) in other long-term debt interest expense
    
    
    (2
    )
    
    
    1Increase
      (decrease) in interest expense with affiliate
    
    
    (1
    )
    
    
    5Change
      in foreign currency exchange rates
    
    
    (1
    )
    
    
    2Decrease
      in interest expense due to the repayment in June 2004 of financing related
      to the University Park generation facility (b)
    
    
    
    
    
    
    (7
    )Financing
      costs associated with the repayment of the consolidated trust's debt for
      the University Park generation facility (b)
    
    
    
    
    
    
    (6
    )Other
    
    
    
    
    
    
    3$
    3
    
    
    $
    22





(a)
    
    Prior
      to commercial operation, interest related to the Lower Mt. Bethel
      financing was capitalized as part of the cost of the
    facility.(b)
    
    In
      June 2004, a subsidiary of PPL Energy Supply purchased the University Park
      generation facility from the lessor that was consolidated by PPL Energy
      Supply under FIN 46 (revised December 2003), "Consolidation of Variable
      Interest Entities, an Interpretation of ARB No. 51." In connection with
      the purchase, the related financing was
repaid.





**Income
Taxes**





Income
taxes decreased by $38 million and $88 million for the three and nine months
ended September 30, 2005, compared with the same periods in 2004. The decreases
were primarily attributable to:





·
    decreases
      of $31 million and $57 million in income tax expense due to lower pre-tax
      book income for the three and nine months ended September 30, 2005,
      relative to the same periods in 2004;·
    tax
      benefits of $6 million and $31 million for the three and nine months ended
      September 30, 2005, related to additional nonconventional fuel tax credits
      in excess of credits recognized for the same periods in 2004; offset by·
    a
      $2 million increase in tax expense on foreign earnings for the three
      months ended September 30, 2005, relative to the same period in
      2004.





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





**Discontinued
Operations**





In the
second quarter of 2005, PPL Energy Supply recorded a $47 million loss, net of a
tax benefit of $26 million, on the sale of its Sundance power plant. See Note 8
to the Financial Statements for information on the sale, along with information
regarding operating losses recorded in 2004 and 2005 for the Sundance plant
prior to the sale and for losses recorded in 2004 related to the sale of PPL
Global's investment in a Latin American telecommunications company.





**Financial
Condition**





**Liquidity**





At
September 30, 2005, PPL Energy Supply had $110 million of cash, cash equivalents
and short-term investments and $70 million of short-term debt. At December 31,
2004, PPL Energy Supply had $408 million in cash, cash equivalents and
short-term investments and no short-term debt. The decrease in PPL Energy
Supply's cash, cash equivalents and short-term investment position was primarily
the net result of:





·
    the
      retirement of $209 million of foreign long-term debt;·
    distributions
      to Member of $206 million;·
    the
      retirement of $495 million in note payable to affiliate;
    and·
    $387
      million of capital expenditures; offset by·
    $707
      million of cash provided by operating activities;·
    $190
      million of proceeds from the sale of the Sundance power plant;·
    a
      $70 million net increase in short-term debt (includes the impact of
      currency translation adjustments); and·
    a
      $50 million capital contribution from
Member.





In May
2003, PPL Energy Supply issued $400 million of 2-5/8% Convertible Senior Notes
due 2023. Based on the terms at the time of issuance, the Convertible Senior
Notes could be settled entirely in cash or shares of PPL common stock. The notes
were modified in November 2004 to require cash settlement of the principal
amount, permit settlement of any conversion premium in cash or stock and
eliminate a provision that required settlement in stock in the event of
default.





The terms
of the Convertible Senior Notes include a market price trigger that permits
holders to convert the notes during any fiscal quarter if the closing sale price
of PPL's common stock exceeds $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. This market price trigger was met in the third quarter of 2005.
Therefore, holders of the Convertible Senior Notes are entitled to convert their
notes at any time during the fourth quarter of 2005. As indicated above, if
holders elect to convert the Convertible Senior Notes, PPL Energy Supply would
be required to settle the principal amount in cash and any conversion premium in
cash or PPL common stock. PPL Energy Supply has, and expects to continue to
have, sufficient liquidity sources to fund any such conversions.





Rating
Agency Decisions





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





The
ratings of S&P, Moody's 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 their securities.





*S&P*





In
January 2005, S&P revised its outlooks on the WPD companies to stable from
negative. S&P attributes this positive change to financial profile
improvements resulting from the final regulatory outcome published by Ofgem in
November 2004. At the same time, S&P affirmed the WPD companies' long-term
and short-term credit ratings.





In
October 2005, S&P affirmed its ratings of PPL Energy Supply and PPL Montana.
All outlooks are stable. The ratings affirmation is the result of S&P's
annual review of PPL Energy Supply, including its business and financial risk
profiles.





*Fitch*





In
January 2005, Fitch announced that it downgraded the WPD companies' senior
unsecured credit ratings by one notch as follows:





·
    WPDH
      Limited to BBB- from BBB·
    WPD
      LLP to BBB from BBB+·
    WPD
      (South West) and WPD (South Wales) to BBB+/F2 from
A-/F1





Fitch has
a stable outlook on all of the WPD companies.





Fitch
stated that its downgrade was prompted by the high level of pension-adjusted
leverage at WPD. Fitch acknowledged that WPD's funding plan should reduce its
pension deficit over time, and it expects WPD to proceed with its de-leveraging
program. However, Fitch indicated that it is not certain enough, due to the
unpredictability in future pension valuations, that pension-adjusted leverage
will support a BBB rating at WPDH Limited. Fitch indicated that WPD (South West)
and WPD (South Wales) have been downgraded to maintain a two-notch differential
with WPDH Limited because Fitch does not believe that WPD's financial
ring-fencing is restrictive enough to support a three-notch
differential.





*Moody's*





In June
2005, Moody's revised its outlooks to stable from negative on the senior
unsecured debt and issuer ratings of WPDH Limited, the senior unsecured debt
ratings of WPD LLP and the subordinated unsecured debt ratings of WPD LLP's
subsidiary SIUK Capital Trust I. Moody's indicated that this positive change to
the financial profiles resulted from a reduction in consolidated adjusted
leverage at the WPD companies as a result of the redeployment to WPD of surplus
cash from Latin American subsidiaries of PPL Energy Supply and from PPL Energy
Supply's commitment to suspend its dividend from WPDH Limited in the current
fiscal year. At the same time, Moody's affirmed the WPD companies' long-term and
short-term credit rating. The outlook on the debt ratings of WPD (South Wales)
and WPD (South West) was already stable.





For
additional information on PPL Energy Supply's liquidity, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," in PPL Energy Supply's 2004 Form 10-K.





**Capital
Expenditure Requirements**





The
schedule below shows PPL Energy Supply's current capital expenditure projections
for the years 2005-2009:





**Projected****2005**
    
    **2006**
    
    **2007**
    
    **2008**
    
    **2009**Generating
      facilities
    
    $
    195
    
    $
    231
    
    $
    208
    
    $
    150
    
    $
    138Transmission
      and distribution facilities
    
    
    287
    
    
    292
    
    
    283
    
    
    286
    
    
    293Environmental
    
    
    51
    
    
    347
    
    
    498
    
    
    374
    
    
    148Other
    
    
    37
    
    
    52
    
    
    38
    
    
    17
    
    
    18Total
      Construction Expenditures (a) (b)
    
    
    570
    
    
    922
    
    
    1,027
    
    
    827
    
    
    597Nuclear
      fuel
    
    
    68
    
    
    69
    
    
    76
    
    
    76
    
    
    78Total
      Capital Expenditures
    
    $
    638
    
    $
    991
    
    $
    1,103
    
    $
    903
    
    $
    675





(a)
    
    Construction
      expenditures include capitalized interest, which are expected to be
      approximately $85 million for the 2005-2009 period.(b)
    
    This
      information excludes any potential investments by PPL Global for new
      projects.





PPL
Energy Supply's capital expenditure projections for the years 2005-2009 total
approximately $4.3 billion. Capital expenditure plans are revised periodically
to reflect changes in market and asset regulatory conditions. The above schedule
has been revised from that which was presented in PPL Energy Supply's 2004 Form
10-K primarily to reflect the installation costs of sulfur dioxide scrubbers and
other pollution control equipment. See Note 9 to the Financial Statements for
additional information. PPL Energy Supply also leases vehicles, personal
computers and other equipment as described in Note 10 to the Financial
Statements of PPL Energy Supply's 2004 Form 10-K.





**Risk
Management - Energy Marketing & Trading and Other**





Market
Risk





*Commodity
Price Risk (Non-Trading)*





PPL
Energy Supply's commodity derivative contracts that hedge its commodity price
risk mature at various times through 2010. The following table sets forth PPL
Energy Supply's net fair value of these contracts:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004**Fair
      value of contracts outstanding at the beginning of the
    period
    
    $
    (127
    )
    
    $
    85
    
    
    $
    (9
    )
    
    $
    86Contracts
      realized or otherwise settled during the period
    
    
    (9
    )
    
    
    (11
    )
    
    
    (33
    )
    
    
    (55
    )Fair
      value of new contracts at inception
    
    
    9
    
    
    
    
    
    
    
    22Other
      changes in fair values
    
    
    (145
    )
    
    
    (12
    )
    
    
    (252
    )
    
    
    31Fair
      value of contracts outstanding at the end of the period
    
    $
    (272
    )
    
    $
    62
    
    
    $
    (272
    )
    
    $
    62





The
following table segregates estimated fair values of PPL Energy Supply's
commodity derivative contracts that qualify for hedge accounting treatment at
September 30, 2005, based on whether the fair values are determined by quoted
market prices or other more subjective means:





**Fair
      Value of Contracts at Period-End**
      **Gains
      (Losses)****Maturity**
      **Less
      Than**
      **1
      Year**
    
    **Maturity**
      **1-3
      Years**
    
    **Maturity**
      **4-5
      Years**
    
    **Maturity**
      **in
      Excess**
      **of
      5 Years**
    
    **Total
      Fair**
      **Value****Source
      of Fair Value**Prices
      actively quoted
    
    $
    21
    
    
    $
    18
    
    
    $
    2
    
    
    
    
    
    
    $
    41Prices
      provided by other external sources
    
    
    (75
    )
    
    
    (238
    )
    
    
    (41
    )
    
    
    
    
    
    
    (354
    )Prices
      based on models and other valuation methods
    
    
    18
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    41Fair
      value of contracts outstanding at the end of the period
    
    $
    (36
    )
    
    $
    (197
    )
    
    $
    (39
    )
    
    
    
    
    
    $
    (272
    )





The
"Prices actively quoted" category includes the fair value of exchange-traded
energy commodity futures contracts quoted on the NYMEX. The NYMEX has currently
quoted prices through 2010.





The
"Prices provided by other external sources" category includes PPL Energy
Supply's forward positions and options in natural gas and power and natural gas
basis swaps at points for which over-the-counter (OTC) broker quotes are
available. The fair value of electricity positions recorded above use the
midpoint of the bid/ask spreads obtained through OTC brokers. On average, OTC
quotes for forwards and swaps of natural gas and power extend one and two years
into the future.





The
"Prices based on models and other valuation methods" category includes the value
of transactions for which a price curve was developed by PPL Energy Supply due
to the long-dated nature of the transaction or the illiquidity of the market
point, or the value of options not quoted by an exchange or OTC
broker.





As of
September 30, 2005, PPL Energy Supply estimated that a 10% adverse movement in
market prices of both electricity and fuel across all geographic areas and time
periods would have decreased the value of the commodity contracts in its
non-trading portfolio by approximately $282 million. For purposes of this
calculation, an increase in the market price for electricity is considered an
adverse movement because PPL Energy Supply's electricity portfolio is generally
in a net sales position, and a decrease in the market price for fuel is
considered an adverse movement because PPL Energy Supply's commodity fuels
portfolio is generally in a net purchase position. PPL Energy Supply enters into
these commodity contracts to reduce the market risk inherent in the generation
of electricity.





In
accordance with its marketing strategy, PPL Energy Supply does not completely
hedge its generation output or fuel requirements. PPL Energy Supply estimates
that for its entire portfolio, including all generation and physical and
financial energy positions, a 10% adverse change in power prices across all
geographic zones and time periods would decrease expected 2005 gross margins by
$8 million. Similarly, a 10% adverse movement in all fossil fuel prices would
decrease expected 2005 gross margins by $15 million.





The data
in the above tables includes the activity for PPL Energy Supply's synthetic fuel
tax credit hedges. Additional information regarding these hedges can be found in
the "Synthetic Fuel Tax Credit Risk" section below.





*Commodity
Price Risk (Trading)*





PPL
Energy Supply also executes 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 shown in the Statement of Income as "Net energy trading margins."





PPL
Energy Supply's trading contracts mature at various times through 2008. The
following table sets forth PPL Energy Supply's net fair value of trading
contracts:





**Three
      Months Ended**
      **September
      30,**
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**
    
    **2005**
    
    **2004**Fair
      value of contracts outstanding at the beginning of the
    period
    
    $
    11
    
    
    $
    12
    
    
    $
    9
    
    
    $
    3Contracts
      realized or otherwise settled during the period
    
    
    (10
    )
    
    
    (3
    )
    
    
    (16
    )
    
    
    (10
    )Fair
      value of new contracts at inception
    
    
    (2
    )
    
    
    
    
    
    
    2
    
    
    
    4Other
      changes in fair values
    
    
    11
    
    
    
    3
    
    
    
    15
    
    
    
    15Fair
      value of contracts outstanding at the end of the period
    
    $
    10
    
    
    $
    12
    
    
    $
    10
    
    
    $
    12





PPL
Energy Supply will reverse $5 million of the $10 million unrealized trading
gains over the next three months of 2005 as the transactions are
realized.





The
following table segregates estimated fair values of PPL Energy Supply's trading
portfolio at September 30, 2005, based on whether the fair values are determined
by quoted market prices or other more subjective means:





**Fair
      Value of Contracts at Period-End**
      **Gains
      (Losses)****Maturity**
      **Less
      Than**
      **1
      year**
    
    **Maturity**
      **1-3
      years**
    
    **Maturity**
      **4-5
      years**
    
    **Maturity**
      **in
      Excess**
      **of
      5 Years**
    
    **Total
      Fair**
      **Value****Source
      of Fair Value**Prices
      actively quoted
    
    $
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6Prices
      provided by other external sources
    
    
    9
    
    
    $
    1
    
    
    
    
    
    
    
    
    
    
    
    10Prices
      based on models and other valuation methods
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Fair
      value of contracts outstanding at the end of the period
    
    $
    9
    
    
    $
    1
    
    
    
    
    
    
    
    
    
    
    $
    10





See
"Commodity Price Risk (Non-trading)" for information on the various sources of
fair value.





As of
September 30, 2005, PPL Energy Supply estimated that a 10% adverse movement in
market prices across all geographic areas and time periods would have decreased
the value of the commodity contracts in its trading portfolio by $5
million.





*Interest
Rate Risk*





PPL
Energy Supply and its subsidiaries have issued debt to finance their operations.
PPL manages interest rate risk for PPL Energy Supply by using 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 U.S.
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
September 30, 2005, PPL Energy Supply's potential annual exposure to increased
interest expense, based on a 10% increase in interest rates, was estimated at $2
million.





PPL
Energy Supply is also exposed to changes in the fair value of its domestic and
international debt portfolios. At September 30, 2005, PPL Energy Supply
estimated that its potential exposure to a change in the fair value of its debt
portfolio, through a 10% adverse movement in interest rates, was approximately
$141 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 September 30, 2005, the market
value of these instruments, representing the amount PPL Energy Supply would
receive upon their termination, was approximately $3 million. At September 30,
2005, PPL Energy Supply estimated that its potential exposure to a change in the
fair value of these instruments, through a 10% adverse movement in the hedged
exposure, was insignificant.





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.
While PPL Energy Supply is exposed to changes in the fair value of these
instruments, any change in market value is recorded with an equal and offsetting
change in the value of the debt being hedged. At September 30, 2005, PPL Energy
Supply estimated that its potential exposure to a change in the fair value of
these instruments, through a 10% adverse movement in interest rates, was
approximately $1 million.





*Foreign
Currency Risk*





PPL
Energy Supply is exposed to foreign currency risk, primarily through investments
in affiliates in Latin America and Europe. In addition, PPL Energy Supply 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 and net investments. In addition, PPL and PPL Energy Supply enter
into financial instruments to protect against foreign currency translation
risk.





To
protect expected income denominated in British pounds sterling, PPL entered into
average rate options for £32 million. These options terminate in November 2005.
At September 30, 2005, the market value of these positions, representing the
amount PPL would receive upon their termination, was approximately $1
million.





To
protect expected income in Chilean pesos, PPL entered into an average rate
forward for 4 billion Chilean pesos. The settlement date of this forward is
November 2005. At September 30, 2005, the market value of this position,
representing the amount PPL would pay upon its termination, was
insignificant.





PPL
executed net forward sale transactions for £10 million to hedge a portion of its
net investment in WPDH Limited. In May 2005, PPL entered into an offsetting
transaction effectively closing this hedge. Both trades are scheduled to expire
in December 2005. The net amount PPL will owe upon settlement of these trades is
approximately $1 million.





WPDH
Limited held a net position in cross-currency swaps totaling $1.1 billion to
hedge the interest payments and value of its U.S. dollar-denominated bonds with
maturity dates ranging from December 2006 to December 2028. The estimated value
of this position at September 30, 2005, being the amount PPL would pay to
terminate it, including accrued interest, was approximately $175
million.





On the
Statement of Income, gains and losses associated with hedges of interest
payments denominated in foreign currencies are reflected in "Interest Expense."
Gains and losses associated with the purchase of equipment are reflected in
"Depreciation." Gains and losses associated with net investment hedges remain in
accumulated other comprehensive loss, as a component of "Member's Equity" on the
Balance Sheet, until the investment is disposed.





*Nuclear
Decommissioning Fund - Securities Price Risk*





In
connection with certain NRC requirements, PPL Susquehanna maintains trust funds
to fund certain costs of decommissioning the Susquehanna station. As of
September 30, 2005, 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 to be used 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 in the
trusts are exposed to changes in interest rates. PPL Susquehanna actively
monitors the investment performance and periodically reviews asset allocation in
accordance with its nuclear decommissioning trust policy statement. At
September 30, 2005, a hypothetical 10% increase in interest rates and a 10%
decrease in equity prices would have resulted in an estimated $32 million
reduction in the fair value of the trust assets. See the "Nuclear
Decommissioning" Note in the 2004 Form 10-K for more information regarding the
nuclear decommissioning trust funds.





*Synthetic
Fuel Tax Credit Risk*





Recent
increases in and the volatility of crude oil prices threaten to reduce the
amount of synthetic fuel tax credits that PPL Energy Supply expects to receive
through its synthetic fuel production. The tax credits are reduced if the annual
average wellhead price of domestic crude oil falls within a phase-out range. The
tax credits are eliminated if this reference price exceeds the phase-out range.
See "Regulatory Issues - IRS Synthetic Fuels Tax Credits" in Note 9 to the
Financial Statements for more information regarding the phase-out of the tax
credits.





PPL
Energy Supply implemented a risk management objective to hedge the variability
of cash flows associated with its 2006 and 2007 synthetic fuel tax credits by
hedging the risk that the 2006 and 2007 annual average wellhead price for
domestic crude oil will be within the phase-out range.





PPL
Energy Supply purchased options in the second and third quarters of 2005 to
mitigate reductions in synthetic fuel tax credits if the annual average wellhead
price for 2006 and 2007 falls within the applicable phase-out range. These
positions did not qualify for cash flow hedge accounting treatment. The
mark-to-market value of these positions for the three and nine months ended
September 30, 2005, was a gain of $12 million and $17 million and is reflected
in "Energy related businesses" revenues on the Statement of Income.





As of
September 30, 2005, PPL Energy Supply estimated that a 10% adverse movement in
market prices of crude oil would have decreased the value of the synthetic fuel
hedges by $17 million. For purposes of this calculation, a decrease in the
market price for crude oil is considered an adverse movement.





**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 10 to the
Financial Statements.





**Acquisitions,
Development and Divestitures**





From time
to time, PPL Energy Supply  and its
subsidiaries are involved in negotiations with third parties regarding
acquisitions, joint ventures and other arrangements which may or may not result
in definitive agreements.  See Note 8 to the Financial Statements for
information regarding recent development and divestiture
activities.





PPL
Energy Supply is currently planning incremental capacity increases of 255 MW at
several existing domestic generating facilities.





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





**Environmental
Matters**





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





**New
Accounting Standards**





See Note
16 to the Financial Statements for information on 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, pension and other postretirement benefits,
asset impairment, leasing, loss accruals and asset retirement obligations.





See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations," in PPL Energy Supply's 2004 Form 10-K for a discussion of each
critical accounting policy. The potential impairment of the Sundance power plant
is no longer a consideration, due to its sale in May 2005. See Note 8 to the
Financial Statements for additional information. 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.





**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, PA. In PPL Electric's 2004 Form
10-K, a description of its business is found in "Item 1. Business - Background"
and an overview of its strategy and the risks and the challenges that it faces
in its business are discussed in "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations."





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





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





**Results
of Operations**





The
following discussion, which explains significant changes in principal items on
the Statement of Income, compares the three and nine months ended September 30,
2005, to the comparable periods in 2004.





The
Statement of Income reflects the results of past operations and is not intended
as any indication of future operating results. Future operating results will
necessarily be affected by various and diverse factors and developments.
Furthermore, because results for interim periods can be disproportionately
influenced by various factors and developments and by seasonal variations, the
results of operations for interim periods do not necessarily indicate results or
trends for the year.





**Earnings**





Income
available to PPL was as follows:





**Three
      Months Ended**
      **September
      30,**
    
    
    **Nine
      Months Ended**
      **September
      30,****2005**
    
    
    **2004**
    
    
    **2005**
    
    
    **2004**$
    52
    
    
    $
    15
    
    
    $
    103
    
    
    $
    51





The
after-tax changes in income available to PPL were due to:





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended**Delivery
      revenues (net of CTC/ITC amortization, interest expense on transition
      bonds and ancillary charges)
    
    $
    34
    
    
    $
    92Operation
      and maintenance expenses
    
    
    7
    
    
    
    (4
    )Taxes,
      other than income (excluding gross receipts taxes)
    
    
    (1
    )
    
    
    (9
    )Interest
      income on 2004 IRS tax settlement
    
    
    (5
    )
    
    
    (5
    )Interest
      income on loans to affiliates
    
    
    2
    
    
    
    5Other
    
    
    
    
    
    
    2Unusual
      items
    
    
    
    
    
    
    (29
    )$
    37
    
    
    $
    52





The
change in net income for the nine months ended September 30, 2005, compared with
the same period in 2004 was, in part, attributable to two unusual items in 2005
with significant earnings impacts. The after-tax impacts of these unusual items
were as follows:





**Nine
      Months Ended**
      **September
      30,****2005**
    
    **2004**PJM
      billing dispute (Note 9)
    
    $
    (27
    )Acceleration
      of stock-based compensation expense for periods prior to 2005 (Note
      2)
    
    
    (2
    )Total
    
    $
    (29
    )





The
period-to-period changes in earnings components are discussed following the
future earnings factors.





PPL
Electric's 2005 and future earnings could be, or will be, impacted by a number
of key factors, including the following:





·
    In
      December 2004, the PUC approved an increase in PPL Electric's distribution
      rates of approximately $137 million (based on a return on equity of
      10.7%), and approved PPL Electric's proposed mechanism for collecting an
      additional $57 million in transmission-related charges, for a total
      increase of approximately $194 million, effective January 1,
      2005.·
    PPL
      Electric has agreed to provide electricity supply to its PLR customers at
      predetermined rates through 2009 and has entered into PUC-approved, full
      requirements energy supply agreements with PPL EnergyPlus to fulfill its
      PLR obligation. The predetermined charges for generation supply which PPL
      Electric collects from its PLR customers and pays to PPL EnergyPlus under
      the energy supply agreements provide for annual increases in each year
      commencing in 2006 and continuing through 2009. PPL Electric's PLR
      obligation after 2009 will be determined by the PUC pursuant to rules that
      have not yet been promulgated. See "PLR Contracts" in Note 10 to the
      Financial Statements for more information.·
    In
      January 2005, severe ice storms hit PPL Electric's service territory. As a
      result, PPL Electric had to restore service to approximately 238,000
      customers. The total cost of restoring service, excluding capitalized
      costs and regular payroll expenses, was approximately $16 million.On
      February 11, 2005, PPL Electric filed a petition with the PUC for
      authority to defer and amortize for regulatory accounting and reporting
      purposes these storm costs. On August 26, 2005, the PUC issued an order
      granting PPL Electric's petition subject to certain conditions, including:
      (i) the PUC's authorization of deferred accounting is not an assurance of
      future rate recovery of the storm costs, (ii) PPL Electric must request
      recovery of the deferred storm costs in its next distribution base rate
      case, and (iii) PPL Electric must begin immediately to expense the
      deferred storm costs on a ten-year amortization schedule for regulatory
      accounting and reporting purposes. As a result of the PUC Order and in
      accordance with SFAS 71, "Accounting for the Effects of Certain Types of
      Regulation," in the third quarter of 2005, PPL Electric deferred
      approximately $12 million of the previously expensed storm costs. The
      deferral was based on its assessment of the timing and likelihood of
      recovering the deferred costs in PPL Electric's next distribution base
      rate case. At this time, PPL Electric cannot be certain that it will
      recover the storm costs, nor can it predict whether other incidents of
      severe weather will cause significant facility damage and service
      disruptions that would also result in significant costs.·
    As
      a result of the Order issued by the FERC in connection with the litigation
      described under "Regulatory Issues - PJM Billing" in Note 9 to the
      Financial Statements, PPL Electric recognized an after-tax charge of $27
      million in the first quarter of 2005 for a loss contingency related to the
      litigation. See Note 9 for information concerning the settlement agreement
      reached by PPL Electric and Exelon Corporation to settle this litigation,
      which is subject to approval by the FERC. PPL Electric cannot be certain
      of the outcome of this matter.·
    See
      Note 9 to the Financial Statements for other potential commitments and
      contingent liabilities that may impact future earnings.·
    See
      Note 16 to the Financial Statements for new accounting standards that have
      been issued but not yet adopted by PPL Electric that may impact future
      earnings.





**Operating
Revenues**





Retail
Electric





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





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended**Electric
      delivery
    
    $
    67
    
    
    $
    149PLR
      electric generation supply
    
    
    50
    
    
    
    91Other
    
    
    2
    
    
    
    1$
    119
    
    
    $
    241





The
increases in delivery revenues for both periods were primarily due to higher
transmission and distribution customer rates effective January 1, 2005, and
increases in volumes of 7.4% and 3.9% for the three and nine months ended
September 30, 2005, compared to the same periods in 2004.





Higher
PLR revenues for both periods were due to higher energy and capacity rates in
2005 compared with 2004, and increases in volumes of 8.9% and 5.7% for the three
and nine months ended September 30, 2005, compared with the same periods in
2004, in part due to the return of customers previously served by alternate
suppliers.





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 $5 million decrease in
wholesale revenue to affiliate for the nine months ended September 30, 2005,
compared with the same period in 2004, was primarily due to an unplanned outage
at a NUG facility during the second quarter of 2005. PPL Electric therefore had
less electricity to sell to PPL EnergyPlus.





**Energy
Purchases**





Energy
purchases increased by $11 million for the three months ended September 30,
2005, compared with the same period in 2004, primarily due to $5 million in
higher ancillary costs in connection with the power supply contracts with PPL
EnergyPlus and $3 million due to a charge to load-serving entities which began
in May 2005, retroactive to December 2004. This charge minimizes the revenue
impacts to transmission owners that result from the integration of the Midwest
ISO and PJM markets. This charge will continue until March 2006.





Energy
purchases increased by $44 million for the nine months ended September 30, 2005,
compared with the same period in 2004, primarily due to the $39 million pre-tax
accrual for the PJM billing dispute and $8 million due to the charge to
load-serving entities discussed above, offset by a $7 million decrease due to an
unplanned NUG outage in the second quarter of 2005. See Note 9 to the Financial
Statements for additional information regarding the loss accrual recorded for
the PJM billing dispute.





**Energy
Purchases from Affiliate**





Energy
purchases from affiliate increased by $42 million and $65 million for the three
and nine months ended September 30, 2005, compared with the same periods in
2004. The increases reflect higher prices for energy purchased under the power
supply contracts with PPL EnergyPlus needed to support PLR load, as well as
increases in that load for both periods.





**Other
Operation and Maintenance**





The
increase (decrease) in other operation and maintenance expenses was due
to:





**Sept.
      30, 2005 vs. Sept. 30, 2004****Three
      Months**
      **Ended**
    
    **Nine
      Months**
      **Ended**Costs
      associated with severe ice storms in January 2005
    
    
    
    
    
    $
    16Subsequent
      deferral of a portion of costs associated with January 2005 ice storms
      (Note 2)
    
    $
    (12
    )
    
    
    (12
    )Accelerated
      amortization of stock-based compensation (Note 2)
    
    
    
    
    
    
    5Increase
      in domestic pension costs
    
    
    
    
    
    
    2Other
    
    
    
    
    
    
    (2
    )$
    (12
    )
    
    $
    9





**Taxes,
Other Than Income**





Taxes,
other than income, increased by $7 million during the three months ended
September 30, 2005, compared with the same period in 2004, primarily due to a $7
million increase in domestic gross receipts tax expense, which is a result of
higher transmission and distribution customer rates effective January 1,
2005.





In the
first quarter of 2004, PPL Electric reversed a $14 million accrued liability for
1998 and 1999 PURTA taxes that had been accrued based on potential exposure in
the proceedings regarding the Susquehanna nuclear station tax assessment. The
rights of third-party intervenors to further appeal expired in 2004. The
reversal, and a $14 million increase in domestic gross receipts tax expense in
2005, are the primary reasons for the $28 million increase in taxes, other than
income, for the nine months ended September 30, 2005, compared with the same
period in 2004.





**Other
Income - net**





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





**Interest
Expense**





Interest
expense, including interest expense with affiliate, decreased by $5 million for
the three months ended September 30, 2005, compared with the same period in
2004, primarily due to the net impact of long-term debt retirements and new
issuances. This decrease was partially offset by $2 million of additional
interest paid on collateral held by PPL Electric relating to the PLR
contract.





Interest
expense, including interest expense with affiliate, decreased by $3 million for
the nine months ended September 30, 2005, compared with the same period in
2004, primarily due to the net impact of long-term debt retirements and new
issuances. This decrease was partially offset by $8 million of interest accrued
for the PJM billing dispute and $7 million of additional interest paid on
collateral held by PPL Electric relating to the PLR contract. Over the last 12
months, $558 million of long-term debt retirements have occurred, while new
issuances over the same period totaled $224 million. See Note 10 to the
Financial Statements for further discussion of collateral held under the PLR
contract.





**Income
Taxes**





Income
taxes increased by $26 million and $32 million for the three and nine months
ended September 30, 2005, compared with the same periods in 2004, primarily due
to higher pre-tax book income in 2005 relative to 2004.





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





**Financial
Condition**





**Liquidity**





At
September 30, 2005, PPL Electric had $53 million of cash, cash equivalents and
short-term investments and $42 million of short-term debt. At December 31, 2004,
PPL Electric had $161 million in cash, cash equivalents and short-term
investments and $42 million of short-term debt. The decrease in PPL Electric's
cash, cash equivalents and short-term investment position was primarily the net
result of:





·
    the
      retirement of $497 million of long-term debt;·
    the
      payment of $61 million of common and preferred dividends;
    and·
    $125
      million of capital expenditures; partially offset by·
    $361
      million of cash provided by operating activities; and·
    the
      issuance of $224 million of tax-exempt long-term
debt.





Rating
Agency Decisions





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





The
ratings of S&P, Moody's and Fitch are not a recommendation to buy, sell or
hold any securities of PPL Electric. 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 their
securities.





In
January 2005, S&P affirmed PPL Electric's A-/A-2 corporate credit ratings
and favorably revised its outlook on the company to stable from negative
following the authorization of a $194 million rate increase by the PUC. S&P
indicated that the outlook revision reflects its expectations that the rate
increase, effective January 1, 2005, will allow for material improvement in PPL
Electric's financial profile, which had lagged S&P's expectations in recent
years. S&P indicated that the stable outlook reflects its expectations that
PPL Electric "will rapidly improve and then maintain financial metrics more
consistent with its ratings." S&P indicated that it expects PPL Electric's
operations to remain stable through the expiration of the PLR
agreement.





In
October 2005, S&P affirmed its A-/A-2 ratings of PPL Electric. The outlook
is stable. The ratings affirmation is the result of S&P's annual review of
PPL Electric, including its business and financial risk profiles.





For
additional information on PPL Electric's liquidity, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations," in
PPL Electric's 2004 Form 10-K.





**Risk
Management**





Market
Risk





*Commodity
Price Risk - PLR Contracts*





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 10 to the Financial
Statements for information on the PLR contracts.





*Interest
Rate Risk*





PPL
Electric has issued debt to finance its operations, which increases its interest
rate risk. At September 30, 2005, PPL Electric's potential annual exposure to
increased interest expense, based on a 10% increase in interest rates, was
insignificant.





PPL
Electric is also exposed to changes in the fair value of its debt portfolio. At
September 30, 2005, PPL Electric estimated that its potential exposure to a
change in the fair value of its debt portfolio, through a 10% adverse movement
in interest rates, was approximately $37 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 10 to the
Financial Statements.





**Environmental
Matters**





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





**New
Accounting Standards**





See Note
16 to the Financial Statements for information on 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:
pension and other postretirement benefits and loss accruals.





See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations," in PPL Electric's 2004 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.








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





**Item
      4. Controls and Procedures**(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 September
      30, 2005, the registrants' disclosure controls and procedures are adequate
      and 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 chief executive and chief 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' third 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 Proceedings**For
      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
      2004 Form 10-K; and·
    
    Note
      9 of the registrants' "Combined Notes to Condensed Consolidated Financial
      Statements" in Part I of this report.








**Item
      6. Exhibits***3(a)
    -
    Amended
      and Restated Articles of Incorporation of PPL Corporation, effective
      August 17, 2005 (Exhibit 3.1 to PPL Corporation Form 8-K Report (File No.
      1-11459) dated August 19, 2005)*3(b)
    -
    Bylaws
      of PPL Corporation, as amended and restated effective August 17, 2005
      (Exhibit 3.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated
      August 19, 2005)*4(a)
    -
    Supplement,
      dated October 1, 2005, to Indenture, dated as of October 1, 2001, by PPL
      Energy Supply and JPMorgan Chase Bank, N.A., as Trustee (Exhibit 4(a) to
      PPL Energy Supply Form 8-K Report (File No. 333-74794) dated October 28,
      2005)*4(b)
    -
    Form
      of Note for PPL Energy Supply’s $300 million aggregate principal amount of
      5.70% REset Put Securities due 2035 (REPSSM)
      (Exhibit 4(b) to PPL Energy Supply Form 8-K Report (File No. 333-74794)
      dated October 28, 2005)10(a)
    -
    Second
      Amendment dated as of September 1, 2005, to Reimbursement Agreement, dated
      as of March 31, 2005, among PPL Energy Supply, LLC, The Bank of Nova
      Scotia, as Issuer and Administrative Agent, and the Lenders party thereto
      from time to time12(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 Fixed Charges*
    -
    previously
      filedCertifications
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for the
      quarterly period ended September 30, 2005, filed by the following officers
      for the following companies:31(a)
    -
    William
      F. Hecht for PPL Corporation31(b)
    -
    John
      R. Biggar for PPL Corporation31(c)
    -
    William
      F. Hecht for PPL Energy Supply, LLC31(d)
    -
    Paul
      A. Farr for PPL Energy Supply, LLC31(e)
    -
    John
      F. Sipics for PPL Electric Utilities Corporation31(f)
    -
    Paul
      A. Farr for PPL Electric Utilities CorporationCertifications
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for the
      quarterly period ended September 30, 2005, furnished by the following
      officers for the following companies:32(a)
    -
    William
      F. Hecht for PPL Corporation32(b)
    -
    John
      R. Biggar for PPL Corporation32(c)
    -
    William
      F. Hecht for PPL Energy Supply, LLC32(d)
    -
    Paul
      A. Farr for PPL Energy Supply, LLC32(e)
    -
    John
      F. Sipics for PPL Electric Utilities Corporation32(f)
    -
    Paul
      A. Farr 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:
      November 3, 2005
    /s/  John
      R. BiggarJohn
      R. BiggarExecutive
      Vice President andChief
      Financial Officer(PPL
      Corporation)(principal
      financial officer)/s/  Paul
      A. FarrPaul
      A. FarrVice
      President and Controller(PPL
      Energy Supply, LLC)Senior
      Vice President-Financial and Controller(PPL
      Electric Utilities Corporation)(principal
      financial officer)